AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 2002
REGISTRATION STATEMENT NO. 333-85634
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
(Exact name of Registrant as specified in its charter)
(SANITATION COMPANY OF PARANA -- SANEPAR)
(Translation of Registrant's name into English)
FEDERATIVE REPUBLIC OF BRAZIL 4941 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
---------------------
RUA ENGENHEIROS REBOUCAS, 1376 PUGLISI & ASSOCIATES
80215-900 CURITIBA -- PARANA 850 LIBRARY AVENUE, SUITE 204
BRAZIL NEWARK, DELAWARE 19715
55-41-330-3014 302-738-6680
(Address and telephone number of Registrant's (Name, address and telephone number of agent for
principal executive offices) service)
COPIES TO:
RAYMOND J. FISHER DAVID MERCADO
MILBANK, TWEED, HADLEY & MCCLOY LLP CRAVATH, SWAINE & MOORE
ONE CHASE MANHATTAN PLAZA 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10005 NEW YORK, NEW YORK 10019
(212) 530-5000 (212) 474-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER UNIT PRICE(2)
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Preferred shares, without par value(3)... 165,591,000 US$1.55 US$256,666,050
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AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
-------------------------------------------------- ----------------------
Preferred shares, without par value(3)... US$23,613.28(4)
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(1) Includes preferred shares (which may be represented by American Depositary
Shares) which the underwriters may purchase upon exercise of options solely
to cover over-allotments, if any, and preferred shares (which may be
represented by American Depositary Shares) which are to be initially offered
or sold outside the United States, but which may be resold from time to time
in the United States under circumstances requiring delivery of a prospectus.
(2) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457 under the Securities Act.
(3) A separate Registration Statement on Form F-6 (file No. 333- ) was filed
on April 12, 2002 and declared effective on regarding the
registration of American Depositary Shares issuable upon deposit of the
preferred shares registered hereby. Each American Depositary Share
represents ten preferred shares.
(4)US$20,534.40 was paid at the time of the initial filing of this registration
statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state or jurisdiction where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED APRIL 16, 2002
100,800,000 Preferred Shares
PROSPECTUS
[SANEPAR LOGO]
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
(SANITATION COMPANY OF PARANA -- SANEPAR)
in the form of American Depositary Shares
------------------
We are selling 100,800,000 non-voting preferred shares in the form of
American Depositary Shares, or ADSs. Each ADS represents ten preferred shares.
We are selling 10,080,000 ADSs in the United States and other countries
outside Brazil through international underwriters named in this prospectus. In
addition, we are simultaneously offering 43,200,000 preferred shares in Brazil
under a Portuguese-language offering circular.
We have applied to list the ADSs on the New York Stock Exchange under the
symbol "BRS" and our preferred shares on the Sao Paulo Stock Exchange under the
symbol "SAPR4". The initial offering price of the ADSs and the preferred shares
will be determined based on consideration of a range of factors, including our
results of operations and financial condition, the economic conditions in the
industry in which we operate and currently prevailing general conditions in the
equity securities markets, including current market valuations of traded
companies considered comparable to our company. The initial public offering
price of the ADSs is expected to be between $13.50 and $15.50 per ADS.
The international underwriters have an option to purchase a maximum of
2,159,100 additional ADSs to cover over-allotments.
INVESTING IN THE ADSs INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
7.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SANEPAR
------------------- ------------------- -------------------
Per ADS.............................................. $ $ $
Total................................................ $ $ $
Delivery of the ADSs will be made on or about , 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY
ABN AMRO ROTHSCHILD LLC
The date of this prospectus is , 2002.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 7
FORWARD-LOOKING STATEMENTS............. 17
USE OF PROCEEDS........................ 18
MARKET INFORMATION..................... 19
CAPITALIZATION......................... 20
DILUTION............................... 22
EXCHANGE RATES......................... 24
SELECTED FINANCIAL AND OTHER DATA...... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 28
BUSINESS............................... 46
REGULATION............................. 67
MANAGEMENT............................. 73
MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS......................... 80
PAGE
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DESCRIPTION OF SHARE CAPITAL........... 86
DESCRIPTION OF AMERICAN DEPOSITARY
SHARES............................... 96
DIVIDENDS AND DIVIDEND POLICY.......... 102
SHARES ELIGIBLE FOR FUTURE SALE........ 105
TAXATION............................... 107
UNDERWRITING........................... 114
NOTICE TO CANADIAN RESIDENTS........... 118
EXPENSES OF ISSUANCE AND
DISTRIBUTION......................... 119
VALIDITY OF SECURITIES................. 119
EXPERTS................................ 119
WHERE YOU CAN FIND MORE INFORMATION.... 119
SERVICE OF PROCESS AND ENFORCEMENT OF
JUDGMENTS............................ 120
INDEX TO FINANCIAL STATEMENTS.......... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 2002 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as an
underwriter and with respect to unsold allotments or subscriptions.
i
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all information that is important to you. Before investing
in the ADSs or preferred shares, you should read this entire prospectus
carefully for a more complete understanding of our business and this offering,
including the section entitled "Risk Factors" and our financial statements and
related notes.
SANEPAR
OVERVIEW
We operate a growing, profitable business with 39 years of operating
history. We provide two principal services in the state of Parana, Brazil: water
supply and wastewater collection, treatment and disposal. We are the principal
provider of these services in the state of Parana, where we operate in 342 out
of its 399 municipalities, including the state capital, Curitiba, which has a
population of approximately 1.6 million. As of December 31, 2001, the state of
Parana had a population of approximately 9.7 million people, based on
information derived from the Brazilian Institute of Geography and Statistics, or
IBGE. We estimate the population of our service areas to be approximately 7.7
million. Within our service areas, we estimate that we provide water to
approximately 7.6 million people, or approximately 99% of the population of our
service areas. We estimate that we provide wastewater collection, treatment and
disposal services to approximately 3.2 million people, or 42% of the population
of our service areas.
We have consistently expanded our customer base over the past five years,
with especially rapid growth in wastewater services. The following chart shows
the number of water and wastewater connections in our service areas at the end
of each year from 1997 to 2001:
AS OF DECEMBER 31,
-------------------------------------
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
(IN THOUSANDS)
Water connections.............................. 1,717 1,781 1,847 1,914 1,968
Wastewater connections......................... 433 497 600 676 720
Despite the rapid growth in wastewater connections, we estimate that
approximately 4.5 million people, or 58% of the population in our service areas,
do not have access to wastewater collection and disposal services. We plan to
continue rolling out our wastewater network at an aggressive pace in order to
increase our customer base. We believe this situation presents a significant
growth opportunity.
As of December 31, 2001, we had assets of R$2.89 billion. The following
chart shows our growth in revenue, net income and operating cash flow for the
past five years:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(IN MILLIONS OF REAIS)
Net operating revenue.............. R$469.2 R$504.2 R$561.1 R$647.6 R$749.9
Net income......................... 42.0 44.4 51.8 139.6 177.8
Net operating cash flows........... 136.5 153.3 212.4 272.3 308.5
Until 1998, we were wholly owned by the state of Parana. In June 1998,
Domino Holdings S.A., or Domino, a private consortium, acquired 39.71% of our
common shares. This private consortium currently consists of:
- Sanedo Ltda., an indirect subsidiary of Vivendi Environnement S.A., the
world's leading water company and one of the world's largest
waste-management service providers;
- Andrade Gutierrez Concessoes S.A., a subsidiary of Andrade Gutierrez
S.A., one of Brazil's largest conglomerates, which manages construction
services in Brazil and Portugal, public concessions for infrastructure
and telecommunications services;
1
- Opportunity Daleth S.A., a holding company for the water and sanitation
investments of CVC/Opportunity, a Brazilian private-equity fund; and
- Copel Participacoes S.A., a subsidiary of Companhia Paranaense de Energia
Eletrica -- COPEL, the principal power company of the state of Parana and
one of Brazil's largest state-owned utilities.
Under current state law, 60% of our common shares must be held by the state
of Parana.
KEY STRENGTHS
Our key strengths include the following:
- Stable, well established business. For the past 39 years we have
operated as a monopoly in our service areas, which include 78% of the
population of the state of Parana. We estimate that we provide services
to 7.6 million people. We have had rapid revenue and net income growth
since 1997. We have a track record of generating strong cash flows that
fund a significant portion of our capital expenditures, as well as
regular dividends to our shareholders. We have formal concession
contracts with 96% of the municipalities we serve (including the
municipality of Curitiba, Parana's state capital), representing
approximately 99% of our revenues in 2001.
- Significant opportunities for growth. Only 42% of the population in our
service areas, or 3.2 million people, receives wastewater services
(through approximately 720,000 wastewater connections). We plan to
increase this level to 60% over the next four years by adding more than
430,000 new wastewater connections. We are also implementing plans to
provide specialized water and wastewater services to major industries in
our service areas.
- High-quality, recognized operations. We believe that our company is well
known throughout Brazil and Latin America for quality and innovation. We
are the first company in Brazil to have received both the ISO 14001
certification for a complete water and wastewater system (at Foz do
Iguacu) and the ISO 9002 certification for a full water system (at Campo
Largo). We are the only company to have been awarded the Brazilian
National Sanitation Quality Award in each of the past four years. All of
our customers are metered, including our public-sector customers.
- Experienced, forward-looking partners. A private consortium holds 39.71%
of the common shares of our company. This consortium includes
subsidiaries of one of the world's leading water and wastewater companies
and one of the world's largest solid-waste-management service providers,
one of Brazil's largest infrastructure conglomerates, an investment
vehicle for a Brazilian private equity fund and the principal power
company in the state of Parana.
- Access to attractive financing. Our capital expenditure projects
historically have been financed in part by long-term loans from
development banks at attractive interest rates. A portion of our capital
expenditure plan for the next three years will be financed from an
existing, low-interest rate, long-term Yen facility.
- Operations in an economically progressive state. Parana has attracted a
wide range of industries through an aggressive incentive program.
According to Parana Business and Opportunities, a magazine published by
the state of Parana, almost US$29 billion of investments in private
industry and infrastructure will be made in the state from 1995 to 2003.
Parana is home to industrial plants of Trytech (a Mercedes/BMW joint
venture), Audi/Volkswagen, Renault, Volvo, Bosch, Coca-Cola and Siemens,
among others. Brazilian companies that either have operations or are in
the process of building plants in the state include Petrobras (the
national oil and gas company); AmBev (one of the world's largest
brewers); Companhia Siderurgica Nacional, or CSN (one of Brazil's leading
steel companies); and Ultrafertil S.A. (one of the largest fertilizer
producers in Brazil). The progressive policies of the state of Parana
have resulted in economic growth that has benefited us and other service
providers in the state.
You should consider these strengths together with the risks that we believe
are inherent in an investment in the ADSs and preferred shares. See the
discussion of "Risk Factors" beginning on page 7.
2
OUR STRATEGY
Our strategy is primarily focused on the expansion of our water and
wastewater services to the population of the state of Parana. We intend to focus
in particular on the expansion of wastewater services to existing water
customers. We believe the prospect of long-term growth in wastewater services in
the state of Parana is significant. Additionally, we are considering business
opportunities in other water and wastewater concessions outside of the state of
Parana, and have begun exploring related types of sanitation services.
In order to develop our business, we intend to pursue the following
strategic goals:
- Continue to expand and improve our business within our existing service
areas by expanding our wastewater network and maintaining nearly
universal water coverage in our service areas.
- Continue to maintain and improve our high level of operating efficiency
compared to other large Brazilian water and wastewater companies,
principally through improving our service quality, reducing physical
leaks and other losses, continuing investments in control systems and
developing human resources.
- Maintain our existing concessions and obtain new water and wastewater
concessions outside of the state of Parana. We believe that there are
substantial business opportunities in the water and wastewater
concessions in other states. Where it is profitable to do so, we intend
to compete for these concessions.
- Seek business opportunities in related sanitation concession
services. We are actively exploring business lines related to our core
water and wastewater services. We recently signed a 20-year solid-waste
agreement with the municipality of Cianorte, and are considering other
municipal solid-waste waste management concessions in Parana. We
currently offer water and wastewater consulting services throughout Latin
America. In addition, we are also considering offering specialized water
and wastewater services to large companies with specific needs that are
not currently being met in a cost-effective manner. We recently began
operating our first treatment plant for water for industrial use. At this
plant we capture water from a polluted, non-potable source, thus reducing
the cost to industrial customers.
CERTAIN TERMS AND CONVENTIONS
References to "Real" (singular), "Reais" (plural) or "R$" are to the
Brazilian Reais, the currency of Brazil since July 1, 1994. References to
"Dollar", "US$", "U.S. Dollars" or "$" are to United States Dollars. We maintain
our accounting records and prepare our primary financial statements in Reais in
accordance with Brazilian GAAP. The financial statements presented in this
prospectus have been prepared in Reais in accordance with U.S. GAAP.
Unless otherwise stated, we have translated certain Reais amounts shown in
the prospectus into Dollars at the rate of R$2.3204 = US$1.00, the commercial
selling rate published by the Central Bank of Brazil for December 31, 2001.
Unless otherwise stated, all share dividend and per share data are adjusted to
reflect the share dividend (bonificacao) of 82,816,436 preferred shares
distributed in respect of the common and preferred shares outstanding, at a
ratio of 0.25 preferred shares for each existing share, on March 22, 2002.
3
THE GLOBAL OFFERING
Preferred shares offered in
the global offering........ 144,000,000. The preferred shares are identical to
our common shares except the absence of voting
rights in most circumstances, rights to a greater
percentage of any distributions and a preference
over the holders of common shares if we are
liquidated. The preferred shares are not redeemable
and will entitle you to limited preemptive rights,
limited rights of withdrawal and no conversion
rights.
The global offering........ The global offering consists of the international
offering and the Brazilian offering.
International offering..... 10,080,000 ADSs, representing 100,800,000 preferred
shares, are being offered through the international
underwriters in the United States and in other
countries outside of Brazil. The international
underwriters may decide to deliver preferred shares
in lieu of ADSs'.
Brazilian offering......... Concurrently with the international offering,
43,200,000 preferred shares are being offered in a
public offering in Brazil.
The ADSs................... Each ADS will represent ten preferred shares. The
ADSs will be issued under a deposit agreement among
us, The Bank of New York, as depositary, and the
owners and holders from time to time of ADSs issued
thereunder.
Shares outstanding after
the offering............... Common shares.......................... 289,836,870
Preferred shares....................... 268,245,312
-----------
Total shares outstanding............... 558,082,182
-----------
-----------
Depositary................. The Bank of New York.
Voting..................... Holders of preferred shares and ADSs will generally
not be entitled to vote, except in a very limited
number of circumstances.
Use of proceeds............ We will use the proceeds to expand our wastewater
system under our capital expenditure program. In
addition, we will use a portion of the proceeds to
repay advances from the state of Parana and
outstanding commercial-paper indebtedness that have
already been incurred to fund past expansion.
Depending on the timing of new opportunities that
arise, we may use a portion of the proceeds of this
offering for acquisitions of new concessions,
related lines of business or other aspects of our
capital expenditure plan.
Over-allotment option...... We have granted the international underwriters an
option to purchase up to an additional 2,159,100
ADSs or 21,591,000 preferred shares, to be
delivered at the international underwriters' option
as either ADSs or preferred shares, within 30 days
from the date of this prospectus, solely to cover
over-allotments, if any.
Dividends.................. Brazilian law requires us to distribute at least
25% of our annual adjusted net income, as
calculated under Brazilian GAAP, and our
shareholders agreement between the state of Parana
and Domino requires us to distribute at least an
additional 25% of net income to holders of our
common and preferred shares, subject to adjustments
4
and exceptions. This additional distribution may be
waived or the method of calculation modified at any
time by the state of Parana and Domino. These
distributions constitute the aggregate amount to be
distributed. The per-share distributions to holders
of preferred shares must be, by law, 10% greater
than per-share distributions to holders of common
shares. These distributions can be made as either
dividends or interest on equity. We typically make
these payments in the form of interest on equity.
You are entitled to receive dividends or interest
on equity to the same extent as holders of
preferred shares underlying the ADSs, subject to
the deduction of any fees and charges of the
depositary. In addition, by virtue of the enactment
of Law No. 10,303, which amended the Brazilian
corporations law, we must amend our by-laws by
March 1, 2003, in order to ratify the rights
currently granted to the holders of our preferred
shares.
Payments of interest on equity (but generally not
dividends) are subject to, and will be paid net of,
the Brazilian withholding tax.
Listing.................... We have applied to list the ADSs on the New York
Stock Exchange.
New York Stock Exchange
symbol..................... "BRS".
Expected offering timetable (subject to change):
Commencement of marketing of the offering................... Week of April 15, 2002
Announcement of offer price................................. May 2, 2002
Allocation of ADSs and preferred shares..................... May 2, 2002
Listing of ADSs on the New York Stock Exchange.............. May 3, 2002
Settlement and delivery of ADSs and preferred shares........ May 8, 2002
Unless otherwise indicated, all information contained in this prospectus:
- assumes no exercise of the international underwriters' option to purchase
up to 2,159,100 additional ADSs to cover over-allotments, if any; and
- reflects an estimated initial public offering price of US$14.50 per ADS,
the mid-point of the range set forth on the cover page of this
prospectus.
The number of preferred shares to be outstanding after the global offering
is based on the 41,428,876 preferred shares outstanding as of December 31, 2001,
plus the share dividend (bonificacao) of 82,816,436 preferred shares issued on
March 22, 2002, resulting in 124,245,312 preferred shares issued and outstanding
prior to the global offering.
------------------
Our principal executive offices are located at Rua Engenheiros Reboucas,
1376, 80215-900, Curitiba, Parana, Brazil, and our telephone number is
011-55-41-330-3014.
5
SUMMARY FINANCIAL AND OTHER DATA
You should read the following summary data together with our financial
statements and notes thereto included elsewhere in this prospectus, "Selected
Financial and Other Data" and "Management Discussion and Analysis of Financial
Condition and Results of Operations". The financial statements from which the
summary financial data presented herein are derived have been prepared in Reais
in accordance with U.S. GAAP.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2001(2)
---------- ---------- ---------- ---------- ---------- -----------
(IN MILLIONS OF R$ OR US$, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
INCOME STATEMENT DATA
Net operating revenue.............................. R$ 469.2 R$ 504.2 R$ 561.1 R$ 647.6 R$ 749.9 US$ 323.2
Cost of operations................................. (151.4) (145.4) (153.9) (170.3) (184.3) (79.4)
General and administrative expenses................ (158.1) (177.8) (204.0) (216.2) (209.7) (90.4)
Depreciation and amortization...................... (49.2) (54.5) (55.3) (63.4) (70.4) (30.3)
Other income, net.................................. 0.6 1.1 1.9 2.5 2.5 1.1
Operating income................................... 111.1 127.6 149.8 228.6 288.0 124.2
Financial income (expenses), net................... (35.0) (67.7) (88.5) (56.5) (58.7) (25.3)
Income before income taxes......................... 75.1 56.2 58.7 170.1 226.4 97.6
Net income......................................... 42.0 44.4 51.9 139.6 177.8 76.7
BALANCE SHEET DATA
Accounts receivable, net of allowance for doubtful
accounts.......................................... 87.7 102.4 123.8 137.3 156.5 67.4
Property, plant and equipment, net................. 1,768.2 1,951.2 2,129.2 2,313.7 2,547.8 1,098.0
Total assets....................................... 1,907.1 2,119.2 2,336.2 2,557.9 2,892.7 1,246.6
Total current liabilities(3)....................... 171.9 209.6 268.9 403.5 578.5 249.3
Total long-term debt, less current portion......... 525.6 642.0 728.4 736.4 713.9 307.7
Long-term concession contract less current
portion........................................... -- -- -- -- 46.1 19.9
Total long-term liabilities........................ 948.8 1,100.6 1,229.8 1,253.8 1,309.1 564.2
Shareholders' equity............................... 786.4 809.2 837.5 900.6 1,005.0 433.1
OPERATING DATA
Water connections (thousands)...................... 1,717 1,781 1,847 1,914 1,968 --
Wastewater connections (thousands)................. 433 497 600 676 720 --
Total water and wastewater connections per
employee(4)....................................... 313 366 474 546 575 --
Average physical water loss(5)(%).................. 19.4 16.0 15.3 14.9 14.8 --
Average non-physical water loss(6)(%).............. 19.0 24.0 22.9 22.3 22.2 --
Volume of water billed during period(7)............ 368 381 398 406 408 --
Percentage of service areas served with water(%)... 98 98 99 99 99 --
Percentage of service areas served with
wastewater(%)..................................... 30 33 37 40 42 --
OTHER FINANCIAL DATA
Distributions per preferred share(8)(9)............ 0.0386 0.0660 0.0916 0.2511 0.2406 0.104
Distributions per common share(8)(9)............... 0.0386 0.0660 0.0916 0.2283 0.2188 0.094
Basic and fully diluted net income per preferred
share(9).......................................... 0.110 0.116 0.135 0.360 0.459 0.198
Basic and fully diluted net income per common
share(9).......................................... 0.100 0.105 0.122 0.327 0.417 0.180
Net cash provided by operating activities.......... 136.5 153.3 212.4 272.3 308.5 133.0
Net cash used in investing activities.............. (131.2) (196.9) (184.3) (211.1) (269.0) (115.9)
Net cash used in financing activities.............. 0.5 46.9 (22.3) (53.4) (38.6) (16.6)
Adjusted EBITDA(10)................................ 160.3 182.1 205.1 291.9 358.5 154.5
---------------
(1) Derived from unaudited U.S. GAAP financial statements.
(2) Translated at R$2.3204 = US$1.00, the commercial selling rate published by
the Central Bank of Brazil for December 31, 2001.
(3) The amount as of December 31, 2001 includes advances from shareholders of
R$179.5 million and R$68.1 million of short-term debt that are to be repaid
with the proceeds of this offering.
(4) Including direct and outsourced employees, but not employees of third-party
service providers as described in "Employees".
(5) Average physical water loss for the period represents our estimate of the
loss of water volume due to leakage and water used in the distribution
process. Physical loss is calculated based on an average of the excess of
nighttime water delivered to each network system over expected nighttime
usage for that network system.
(6) Average non-physical water loss for the period represents our estimate of
the water we deliver but are unable to bill customers for (not attributable
to physical loss) as a result of imprecisions in metering, billing losses,
meter fraud, unauthorized connections and similar losses. Non-physical loss
is calculated for each network system based on the difference between
actual water volumes metered and volumes expected to be metered. Fire
department usage and other authorized but unbilled official usage of water
are included in non-physical water loss.
(7) In millions of cubic meters.
(8) Includes cash dividends only. Cash distributions are paid as either
dividends or interest on equity. This data reflects the year in which the
distributions were declared.
(9) Stated in Reais and Dollars per share. Based on the average number of
shares outstanding for the period. Preferred shares outstanding is adjusted
to reflect the capitalization of reserves through the distribution of a
share dividend (bonificacao) of 82,816,436 preferred shares on March 22,
2002.
(10) We calculate earnings before interest, taxes, depreciation and
amortization, or EBITDA, as operating income plus depreciation. For 2000,
we have removed from EBITDA a one-time, non-cash net gain on settlement and
curtailment of defined benefit pension plan of R$28.4 million. We have
included information concerning EBITDA because we believe it is a standard
financial statistic commonly reported and widely used by analysts and
investors. We understand that EBITDA is also used by analysts and investors
as one measure of an issuer's ability to service or incur indebtedness.
EBITDA is not a measure recognized by U.S. GAAP, and each company uses its
own method of calculating EBITDA. EBITDA data thus cannot easily be
compared among companies. You should not rely on EBITDA as a substitute for
evaluating our cash flows or operating income.
6
RISK FACTORS
An investment in our ADSs or preferred shares involves a high degree of
risk. You should carefully consider the risks described below before making an
investment decision. Our business, financial condition and results of operations
could be seriously harmed by any of these risks or other factors. The trading
price of our ADSs or preferred shares could decline due to any of these risks or
other factors, and you could lose all or part of your investment.
RISKS RELATING TO OUR COMPANY
WE ARE CONTROLLED BY THE STATE OF PARANA. THE STATE'S PRIORITIES AND
OBJECTIVES FOR OUR COMPANY COULD DIFFER SIGNIFICANTLY FROM YOUR INTERESTS.
Our controlling shareholder is the state of Parana. The state of Parana is
entitled to elect five of the nine members of our board of directors and,
indirectly, it is also entitled to indicate four of our seven executive
officers. As a result, we are subject to political, economic and social actions
that the state government may take in furtherance of its own priorities and
objectives, which may not be aligned with ours or yours. Such objectives could
include, for instance, a political decision to subsidize water and wastewater
tariffs and could materially and adversely affect our revenues and
profitability. If the state of Parana intervenes in our operations in
furtherance of such priorities, these actions could, in certain cases, adversely
affect our business, results of operations and financial condition.
The state of Parana and Domino together hold 99.71% of our outstanding
common shares, allowing them elect eight of nine members of the board of
directors. Thus, these two shareholders alone can determine the outcome of
actions requiring shareholder approval, including corporate reorganizations and
the timing and payment of future dividends. Brazilian law requires us to
distribute at least 25% of our annual adjusted net income, as calculated under
Brazilian GAAP, and our shareholders agreement requires us to distribute at
least an additional 25% of net income to holders of our common and preferred
shares, subject to adjustments and exceptions. The state of Parana and Domino
are free to waive this agreement at any time and forgo the additional
distribution, in whole or in part, or change the method of calculation, both as
to themselves and as to all other holders of preferred shares and ADSs.
Accordingly, we are unable to assure you as to the amount of distributions that
will be made in any year.
In addition, the state of Parana will hold a gubernatorial election in
October 2002. A new governor typically makes significant changes in the board of
directors and executive officers of state-owned companies, such as our company.
A reconstituted board of directors and new executive officers for our company
may pursue a strategy or conduct operations in a manner that diverges
significantly from our current strategy and operations. Also, a new state
government may seek to revisit prior agreements with private shareholders, such
as our shareholders agreement. We cannot assure you that changes in government
or government policy will not have a material adverse effect on our business,
results of operations and financial condition.
THE RESULTS OF OUR OPERATIONS DEPEND ON CONCESSIONS FROM MUNICIPALITIES. WE
COULD LOSE THESE CONCESSIONS UNDER CERTAIN CONDITIONS, INCLUDING FAILURE TO
MEET SPECIFIED STANDARDS OR IF WE DO NOT PROVIDE COVERAGE TO REQUIRED AREAS.
We rely on concessions to provide water and wastewater services. Most of
our concessions are granted by the municipality responsible for ensuring that
these services are provided. Generally, the concession contracts have terms of
30 years. The loss of concessions could adversely affect our business, results
of operations and financial condition. Revenues derived from our three largest
concessions, for the cities of Curitiba, Londrina and Maringa, represented
approximately 29.0%, 8.5% and 5.0%, respectively, of our revenues for 2001.
Under our contracts with these municipalities, these concessions will expire in
2031, 2033 and 2010, respectively.
We could lose our concession contracts in the following ways:
- RESCISSION. In some instances, the conceding authority has the right, as
a matter of law, to rescind the concession contract prior to its
expiration. For example, the conceding authority has the right to
7
terminate the contract if specified quality standards are not met or if
we do not provide coverage to all densely populated areas or for reasons
of proven public interest.
- EXPIRATION AND SUBSEQUENT NON-RENEWAL. Of our 342 concessions in the
state of Parana, 26.3% will expire by the end of 2005 and an additional
20.2% will expire from 2006 to 2010. The remaining 53.5% will expire
after 2011. If these concessions are not renewed before they expire, we
may be required to take part in a public bidding process to reacquire
them if we so decide.
Of our 342 concessions, 14 are not evidenced by signed concession
contracts. This is as a result of larger municipalities for which we have
concessions splitting into smaller municipalities. We still operate in
these newly created smaller municipalities in accordance with the
concession contracts we had with the previous municipalities. These 14
municipalities represent 1.3% of our gross operating revenue. It is
possible that these new municipalities may decide to enter into
concession contracts and that we would be required to bid for those
contracts.
- COMPETITION. The entry of competitors could induce the municipalities to
rescind or forego renewal of our concession contracts. In addition, some
municipalities may choose to operate their own water and wastewater
operations.
Upon any such termination or non-renewal, the relevant governmental
authority must pay us the non-amortized net book value of our assets relating to
that concession and assume any related indebtedness, exclusive of any amounts
the relevant governmental authority has paid. In such an event, that termination
payment may not adequately compensate us for our investment and would deprive us
of expected future earnings.
WE DO NOT SET OUR OWN TARIFFS. AN INABILITY TO MAINTAIN TARIFFS SUFFICIENT TO
COVER OUR COSTS WOULD AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS AND MEET OUR
FINANCIAL OBLIGATIONS.
The tariffs we charge for our services have a direct impact on our cash
flows, results of operations and financial condition. Our tariffs result from an
annual negotiation with the Parana state government and are established by
governmental decree. If our tariffs were not increased in proportion to
increases in our costs and expenses (whether as a result of inflation generally
or factors attributable to our industry or company), our cash flows and results
of operations would decline and our financial condition would be adversely
impacted.
PUBLIC-SECTOR ENTITIES MAY DEFAULT ON THEIR OBLIGATIONS TO US. THIS COULD
REDUCE OUR RESULTS OF OPERATIONS AND AFFECT OUR FINANCIAL CONDITION.
Our largest customers include the state of Parana and its municipalities.
As of December 31, 2001, the total balance of our overdue accounts receivable
from the public sector was R$47.8 million, representing approximately 24.9% of
our total current and overdue receivables outstanding at that date. Our largest
debtor is the state of Parana, which owed us R$7.7 million at December 31, 2001.
We are not permitted to write-off amounts owed to us by the municipalities, the
state of Parana or entities controlled by the state of Parana. Amounts owed by
public-sector entities can often be partially recovered by offsetting our
accounts receivable against our accounts payable with these entities or, in the
case of the state of Parana, by offsetting our accounts receivable against the
dividends due to the state of Parana as a shareholder. Historically, however, we
have been unable to recover all amounts owed to us by various municipalities.
The Fiscal Responsibility Law of May 4, 2000 requires federal, state and
municipal governments in Brazil to repay their maturing debt installments prior
to the end of each administration's term. If the state and municipal governments
we service comply with this law, they will be required to pay us all past due
amounts by December 31, 2002. While this law has thus far improved the rate and
speed at which we collect from our public sector customers, we cannot assure you
that it will continue to have this effect. In spite of this and other
initiatives to collect outstanding public sector debt, we have had limited
success in collection. Failure to collect on this debt may adversely affect our
cash flows, results of operations and financial condition.
8
POTENTIAL COSTS RELATING TO COMPLIANCE WITH OR VIOLATIONS OF ENVIRONMENTAL
LAWS COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS.
Our operations are subject to stringent environmental and safety laws at
the federal, state and municipal levels. For example, some of these laws require
that we observe certain potability criteria for the water that we provide to the
public. The law also sets standards for installing and operating a basic
wastewater-treatment infrastructure and governs the release of effluents and the
final disposal of wastes. Our failure to observe these and other environmental
and safety mandates or the occurrence of any accidents or releases of hazardous
materials, whether by us or by third-parties, could result in:
- claims for property damage or personal injury;
- the obligation to clean up environmental damage;
- the imposition of civil or criminal sanctions and fines;
- the partial or total suspension of our operations;
- the loss or restriction of economic incentives;
- the loss of our existing concessions or our being unable to obtain new
concessions;
- the cancellation or the suspension of credit lines and the inability to
establish new lines; and
- a moratorium against any public entity entering into contracts with us.
Any of these events, if they were to occur, would reduce our revenues or
increase our costs and thus would reduce our profitability.
We are currently in negotiations with state environmental authorities to
extend the due date for compliance with certain environmental requirements. We
cannot assure you as to the satisfactory outcome of those negotiations.
There has been a trend in recent years toward stricter environmental
standards and enforcement. It is possible that new regulation or more aggressive
enforcement of existing regulations will adversely affect us. For instance, new
regulations or enforcement actions could impose restrictions on our activities,
create new requirements for the issuance or renewal of environmental licenses,
raise our costs or require us to engage in expensive reclamation efforts. Costs
that we incur to comply with existing or future environmental legislation, and
any judgments against us due to lack of compliance with this legislation, may
adversely affect our cash flows, results of operations and financial condition.
Additionally, Brazilian law might permit claims against our shareholders
for harm to the environment. Law No. 9,605 of February 12, 1998 provides that
the corporate structure of a company may be disregarded if that structure
impedes recovery for undue harm to the environment. We are unaware of any
instances in which the government or any private parties have attempted to use
this law to seek recovery from individual shareholders, and we have been advised
by our Brazilian counsel, Pinheiro Neto - Advogados, that this law appears to
contradict established principles of Brazilian corporations law and is unlikely
to be enforced against minority shareholders of a company. Pinheiro
Neto-Advogados has consented to the use of its name herein. However, there can
be no assurance that, in the case of claims for environmental damage pursuant to
this recent and untested law, liability would be limited to shareholders capable
of exercising control over the company at the time of the environmental damage.
Accordingly, if we were unable to redress claims against us for environmental
damage, which might happen if we were insolvent, our shareholders and the
members of our management might become liable for those claims.
WE FACE SPECIAL RULES THAT GOVERN THE EXTENSION OF CREDIT TO STATE-OWNED
COMPANIES. THIS MAY ADVERSELY AFFECT OUR ABILITY TO ACCESS CREDIT WHEN NEEDED.
Because we are controlled by the state of Parana, we are subject to special
credit rules for the public sector published by the Brazilian monetary
authorities. Under these rules, our options for raising funds, other than the
cash generated by our operations, consist principally of borrowing from
state-owned financial institutions or development agencies and issuing bonds and
other publicly traded obligations. Under these rules, our ability to obtain
credit from private financial institutions is controlled and limited.
9
These limitations on obtaining credit could adversely affect the development of
our business, our ability to meet our obligations or continue our capital
expenditure program, and our results of operations and financial condition. In
addition, the ability of any creditor to seize or compel a sale of our assets is
limited, which could dissuade creditors from lending to us.
EXISTING SOURCES OF FUNDING ARE SUBJECT TO CONDITIONS PRECEDENT. IF THESE
CONDITIONS ARE NOT MET, WE MAY NEED TO CURTAIL OUR CAPITAL EXPENDITURE PROGRAM
OR SEEK OTHER SOURCES OF CREDIT.
A significant portion of our capital expenditure program over the next
three years is to be financed by the Paranasan program, under which the Japanese
Bank for International Cooperation, or JBIC, is lending funds to the state of
Parana that will be on-lent to us. Under the JBIC loan documentation, JBIC's
obligation to provide funding is subject to it being provided adequate funds
under the Japanese government's annual budgetary appropriations. Thus, we cannot
assure you that the Paranasan funds will be available as contemplated. If we do
not receive the Paranasan funds, we may need to seek other sources of credit or
to curtail our capital expenditure program.
FURTHER DEVALUATION OF THE BRAZILIAN CURRENCY COULD AFFECT OUR ABILITY TO
REPAY INDEBTEDNESS, OUR FINANCIAL RESULTS AND THE VALUE OF OUR SECURITIES.
The exchange-rate environment for Brazilian currency has been unstable
during the past several years. Current Brazilian monetary policy has focused on
maintaining relatively stable rates of inflation and GDP growth while
occasionally allowing sharp levels of devaluation. We cannot assure you that the
exchange rate between the Real and the Dollar will stabilize at current levels
or that the Real will appreciate against the Dollar. Further devaluation of the
Real against the Dollar would reduce the Dollar value of distributions and
dividends on the ADSs and may also reduce the market price of our securities. In
addition, in the event of a significant devaluation of the Brazilian Real in
relation to the Dollar or other currencies, our ability to meet our
non-Real-denominated obligations could be adversely affected, since our tariff
revenues and other sources of income are denominated solely in Reais. We had
total foreign currency-linked indebtedness of R$87.5 million (US$37.7 million)
as of December 31, 2001, and we expect to incur Yen-linked long-term
indebtedness in an aggregate outstanding amount of up to Y15.24 billion over the
next four years (equivalent to R$269.8 million, or US$116.3 million, at the
commercial selling rates published by the Central Bank of Brazil for December
31, 2001). Continued devaluation of the Brazilian currency would increase the
amount of Reais that we need to service these obligations, which would have a
material adverse effect on our cash flows, results of operations and financial
condition.
RISKS RELATING TO THE BRAZILIAN WATER AND WASTEWATER INDUSTRIES
PROPOSED SANITATION LEGISLATION COULD ADVERSELY AFFECT OUR OPERATIONS AND
FINANCIAL RESULTS BY CHANGING OUR TARIFFS, REQUIRING US TO MAKE LARGE
INVESTMENTS IN EQUIPMENT OR REQUIRING US TO MAKE CONTRIBUTIONS TO A FEDERAL OR
STATE SANITATION FUND.
The Brazilian Federal Congress and the Parana state legislature are
currently debating proposed legislation that would establish new, stricter
guidelines for basic sanitation services. The proposed federal legislation, when
and if approved, might establish a new federal fund to be used to achieve
universal water and wastewater service coverage. The proposed state legislation
would establish a state-wide regulatory framework for the sanitation sector
which would supplant, in many respects, the standards under which we currently
operate.
If enacted, this proposed new regulatory regime could have a number of
adverse consequences for our cash flows, results of operations or financial
condition. Among other things, the following could occur:
- our tariffs could change substantially to require us to pass efficiency
gains on to customers;
- new sanitation standards could lead to large investments in equipment
being required; and
- if we are required to contribute a percentage of our sales to the federal
sanitation fund or to the new state regulatory agency, we may not be able
to pass on the entire amount of that contribution to our customers, and
thus our cost of operations could increase.
10
Any of these events, if it were to occur, could have a negative impact on our
cash flows, results of operations and financial condition. We are unable to
predict whether or when this proposed legislation will be passed.
WE EXPECT THE STATE OF PARANA TO IMPOSE A FEE ON WATER USAGE AND WASTEWATER
DISCHARGE. THESE FEES MAY REDUCE OUR RESULTS OF OPERATIONS.
Brazilian law permits the state to impose fees for using water resources as
well as for discharging treated wastewater into rivers and other water sources.
In the case of the state of Parana, such a decree was approved on February 26,
2002. The amount of this fee has not yet been established; thus, we cannot yet
determine the impact of this expected fee on our activities. The implementation
of a fee for water usage and wastewater disposal will increase our production
costs. While we believe that we will be able to pass much of these costs on to
our customers through tariff increases, we cannot guarantee that this will be
the case. Any inability to pass this cost on to customers could reduce our
profits.
PUBLIC AUTHORITIES MAY DISPUTE OUR METHODS OF CALCULATING THE MINIMUM WATER
TARIFF OR THE WASTEWATER TARIFF OR SEEK TO LIMIT OUR ABILITY TO TAKE REMEDIAL
ACTION FOR NON-PAYMENT OF CUSTOMER ACCOUNTS. ANY SUCH ACTION COULD REDUCE OUR
REVENUES.
Brazilian federal law requires that service providers charge only for
services actually rendered. We believe that this law is consistent with our
policy of charging a minimum tariff for any water volumes consumed up to 10
cubic meters per month, which we view as a minimum service charge. In the past,
some authorities have alleged, without success, that our minimum tariff
constitutes a charge for water not actually delivered. We cannot assure you that
there will not be future challenges to our minimum tariff structure or that
those challenges will not result in a reduction in our revenue.
We calculate each customer's invoice for wastewater as 80% of that
customer's monthly bill for water usage. The wastewater tariff has been
increased to 85% of the customer's bill for water usage in the municipalities of
Curitiba and Maringa, effective for all invoices with a due date of March 1,
2002 or later. Some municipalities in our service areas have announced
wastewater tariffs at lesser amounts. Although we believe that tariffs can only
be established by the state, and although we have generally not been required to
recognize these lower municipal tariffs, we cannot assure you that political
developments in the future will not require us to decrease our wastewater
tariffs.
From time to time, governmental authorities seek to limit our ability to
take remedial action for non-payment of customer accounts. In recent years,
court decisions and municipal laws have prohibited us from suspending service to
non-paying customers in certain municipalities, which has resulted in an
increased rate of delinquencies in those areas. For instance, the delinquency
rate in the city of Londrina, the second largest city we serve, before the
passage of such municipal law in March 2000, was 1.41%. After such a law was
passed, the delinquency rate temporarily increased to 17.2%. We have
aggressively contested such actions in court and have experienced some success
in recovering unpaid accounts. However, we cannot assure you that similar
situations will not arise in the future that could negatively affect our cash
flows, results of operations and financial condition.
WE MAY FACE REDUCED REVENUE OR INCREASED COSTS IN THE EVENT OF A WATER
SHORTAGE OR OTHER ADVERSE WEATHER CONDITIONS.
The maintenance of a water supply adequate to satisfy the consumption
demand of the regions that we serve depends on factors outside of our control.
One of these factors is the level of the local water table, which is dependent
on local rainfall, climactic conditions and demand by other users.
In the case of a prolonged shortfall in the water-table and reservoir
levels, we would not be able to find alternative sources of water to fully
supply our customers. Our capacity to meet the demand of our customers would
thus be compromised, reducing supply in the regions that we service. Any
impediment to providing water would result in reduced revenues and results of
operations and, potentially, result in our inability to make debt payments and
pay other costs and expenses.
11
WE MAY BE SUBJECT TO INCREASED COSTS IN THE EVENT OF POLLUTION OR ACCIDENTS.
Our business consists, in part, of collecting water from various sources,
treating it and then distributing it to customers. Significant pollution in the
sources of water that we utilize, or accidents or other damage to our water
supply lines, could increase our costs due to the additional water treatment
that would be required. In addition, we may be subject to fines or other
sanctions if, as a result of pollution or accidents, we cause harm to the
environment, our customers or their property. Under our current insurance
policies, all or a substantial portion of the losses attributable to pollution
and other environmental damage would not be covered. Any of these events could
negatively impact our business, results of operations and financial condition.
RISKS RELATING TO BRAZIL
THE BRAZILIAN ECONOMIC AND POLITICAL ENVIRONMENT HAS BEEN UNSTABLE AT TIMES IN
THE PAST. ANY FUTURE ECONOMIC OR POLITICAL INSTABILITY MAY ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS AND THE VALUE OF OUR ADSs.
Brazilian political and economic conditions have a direct impact on our
business and the market price of the preferred shares and the ADSs. Brazil has
had periods of economic and political instability that have negatively affected
the business, results of operations and financial condition of Brazilian
companies and the value of Brazilian securities. These include:
- restrictions for six months in 1989 and 1990 on the conversion of
Brazilian currency to foreign currencies and on the remittance of
payments to foreign investors;
- a period of hyper-inflation from the mid-1980s through June 1994,
reaching a peak, annualized rate of approximately 2,700% during 1994;
- frequent changes in currency, including the introduction of six different
currencies from 1986 through 1994;
- the resignation of a President in 1992 due to charges of corruption that
nearly led to his impeachment;
- public threats by two state governors in 1999 to default on state
indebtedness, which contributed to a significant devaluation of the Real;
- a refusal by a state government to honor its obligations under a
shareholders' agreement entered into with private investors;
- opposition by certain political parties to free-market and privatization
reforms enacted over the past eight years;
- frequent changes in tax rates and tax policy; and
- a volatile exchange-rate environment.
If any events similar to these were to recur in the future, they could adversely
affect our financial condition, our results of operations and the market price
of our preferred shares and ADSs.
Brazilian monetary policy in recent years has resulted in unstable exchange
rates and interest rates. In particular, the government has allowed the Real to
devalue and has imposed high interest rates in an effort to achieve stable rates
of inflation and stable growth rates. Future currency devaluations and future
fluctuations in exchange rates could adversely affect the economic environment
in Brazil and our customer base. Any such conditions could also increase our
borrowing costs.
Brazil faces national elections in 2002, including elections for a new
president. At least one prominent candidate has declared his opposition to a
number of recent free-market and privatization reforms. Regardless of the
outcome of the elections, we expect that there will continue to be moments of
political and economic instability in the years ahead that may have a negative
impact on our results of operations and the value of our securities.
The Brazilian government intends to enact a tax reform bill, principally
designed to reduce the public deficit by making the Brazilian tax framework more
efficient and by reducing the tax burden on industry.
12
However, we do not expect that the final tax reform bill will be submitted to
the Brazilian Congress for approval this year. Another tax reform bill currently
before the Brazilian Congress would establish a withholding income tax on
dividends distributable to Brazilian and foreign shareholders. If enacted, this
law would only apply prospectively. While the exact results of these tax
reforms, if enacted, are still uncertain, the amount of taxes we pay may
increase if the Brazilian Congress enacts these reforms.
DEVELOPMENTS IN OTHER COUNTRIES MAY AFFECT THE MARKET PRICE OF THE PREFERRED
SHARES AND THE ADSs. THESE DEVELOPMENTS COULD ALSO MAKE IT MORE DIFFICULT OR
EXPENSIVE FOR US TO OBTAIN ADDITIONAL FINANCING.
The securities of Brazilian issuers have been influenced by economic and
market conditions in other countries, especially other emerging-market
countries. Although economic conditions differ in each country, investors'
reactions to developments in one country may affect the value of securities of
issuers in other countries, including Brazil. Since the fourth quarter of 1997,
the international financial markets have experienced significant volatility, and
a large number of market indices, including those in Brazil, have declined
significantly. For example, the Asian economic crisis of 1997-1998, the 1998
Russian debt moratorium and devaluation of the Russian currency have triggered
volatility in the securities markets of Brazil and other emerging-market
countries. During the second half of 2001, volatility in the Brazilian
securities markets appeared to be exacerbated by threats of terrorism in the
United States, together with a recession in the U.S. Currently, Argentina is in
the midst of an economic and political crisis following the abrupt devaluation
of its currency in January 2002, its refusal to service its public debt and its
granting protections to private companies that fail to meet their obligations.
Argentina has historically been one of Brazil's largest trading partners. In
addition, the Argentine crisis may affect the perception of risk in Brazil by
foreign investors.
The market value of the preferred shares and the ADSs, as well as our
ability to obtain additional financing on acceptable terms or at all, may be
adversely affected by these or other events outside of Brazil.
BRAZIL HAS RECENTLY EXPERIENCED AN ENERGY CRISIS. SUCH A CRISIS, WERE IT TO
REOCCUR, COULD RESULT IN COST INCREASES OR A DECREASE IN DEMAND FOR OUR
SERVICES. SUCH A CRISIS COULD ALSO NEGATIVELY IMPACT OUR FINANCIAL CONDITION.
Brazil has recently experienced a crisis in the electric-energy sector. As
a result, Brazilian industrial, commercial and residential customers in certain
regions experienced energy rationing, which negatively affected economic growth
for the country as a whole. We rely on electric energy to distribute water to
our customers and to treat water and wastewater. Should it reoccur, future
electricity rationing could adversely affect our principal activities because of
shortages or price increases and, therefore, negatively impact our business,
results of operations and financial condition.
RISKS RELATING TO THE PREFERRED SHARES AND THE ADSs
THE RELATIVE VOLATILITY AND ILLIQUIDITY OF THE BRAZILIAN SECURITIES MARKETS
MAY SUBSTANTIALLY LIMIT YOUR ABILITY TO SELL THE PREFERRED SHARES UNDERLYING
THE ADSs AT THE PRICE AND TIME YOU DESIRE.
The Brazilian securities markets are substantially smaller, less liquid,
more concentrated and more volatile than major securities markets in the United
States and certain other jurisdictions, and are not as highly regulated or
supervised as some of these other markets. The relatively small market
capitalization and illiquidity of the Brazilian equity markets may substantially
limit your ability to sell the preferred shares underlying the ADSs at the price
and time you desire.
YOU MAY NOT BE ABLE TO RESELL YOUR ADSs AT OR ABOVE THE INITIAL PUBLIC
OFFERING PRICE. AS A RESULT, YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
The initial public offering price for the ADSs will be determined by
negotiations between us and the underwriters and may not be indicative of prices
that will prevail in the secondary trading market. You may not be able to resell
your ADSs at or above the initial public offering price.
13
RESTRICTIONS ON THE MOVEMENT OF CAPITAL OUT OF BRAZIL MAY HINDER YOUR ABILITY
TO RECEIVE DIVIDENDS AND DISTRIBUTIONS ON, AND THE PROCEEDS FROM ANY SALE OF,
THE PREFERRED SHARES.
The Brazilian government may impose restrictions on the conversion of
Brazilian currency into foreign currencies and/or on the remittance to foreign
investors of proceeds from their investments in Brazil. Brazilian law permits
the government to impose these restrictions whenever there is a serious
imbalance or reasons to foresee a serious imbalance in Brazil's balance of
payments.
The Brazilian government imposed remittance restrictions for approximately
six months in 1989 and early 1990. The Brazilian government may take similar
measures in the future. Restrictions like these would hinder or prevent the
conversion of dividends, distributions or the proceeds from the sale of
preferred shares, as the case may be, from Reais into Dollars and the remittance
of the Dollars abroad. In such a case, the depositary for the ADSs will hold the
Reais it cannot convert for the account of the ADS holders who have not been
paid. The depositary will not invest the Reais and it will not be liable for the
interest thereon. Furthermore, any Reais so held will be subject to devaluation
risks.
In addition, the Brazilian government could impose taxes on the movement of
capital out of Brazil. For instance, payment of interest on equity is subject to
the Brazilian withholding tax at the rate of 15% (or 25% for persons domiciled
in a tax haven jurisdiction). To the extent that distributions are made as
interest on equity rather than as dividends, you will receive those
distributions net of withholding tax. Also, the tax on interest on equity can be
increased or a new tax may be imposed on the payment or transfer of dividends.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR THE ADSs OR THE PREFERRED SHARES
UNDERLYING THE ADSs.
The ADSs and the preferred shares underlying the ADSs constitute a new
issue of securities, and the limited amount of preferred shares that is already
outstanding constitutes a limited market. We cannot assure you that an active
market for the ADSs or the preferred shares underlying the ADSs will develop or
that you will be able to sell your preferred shares or ADSs, or at what price.
If such a market were to develop, the ADSs and the preferred shares underlying
the ADSs could trade at prices that may be higher or lower than the initial
offering price, depending on many factors, including:
- our results of operations and financial condition;
- political and economic developments in and affecting Brazil; and
- the market for similar securities.
Our preferred shares are currently listed on the Brazilian over-the-counter
market, Sociedade Operadora de Mercado Ativos, or SOMA. However, trading on the
SOMA is generally limited. In particular, there has been a lack of liquidity on
the SOMA in respect of our preferred shares. Consequently, the initial public
offering price of the shares and the ADSs was determined by negotiations between
us and the representatives of the underwriters. Among the factors considered in
determining the initial public offering price were our record of operations, our
current financial conditions, our markets, the economic conditions for the
industry in which we compete, our management and currently prevailing general
conditions in the equity securities markets, including current market valuations
of traded companies considered comparable to our company. We believe that the
initial public offering price will exceed the prevailing price for our preferred
shares on the SOMA. We cannot assure you that the initial public offering price
will be indicative of the prices that will prevail in the secondary trading
market in the future, that you will be able to resell your ADSs at or above the
initial public offering price or an active trading market in the preferred
shares or the ADSs will develop and continue after this offering.
YOU MAY BE UNABLE TO EXERCISE PREEMPTIVE RIGHTS WITH RESPECT TO THE PREFERRED
SHARES.
You may not be able to exercise preemptive rights with respect to the
preferred shares unless the preemptive rights are registered on a registration
statement under the Securities Act or an exemption from the Securities Act
registration requirements is available. Because we are not required to file a
registration statement relating to preemptive rights with respect to our
preferred shares, your ability to exercise preemptive rights is not assured. If
a registration statement is not filed and an exemption from registration
14
does not exist, the depositary may attempt to sell the preemptive rights, and
you would only be entitled to receive the net proceeds of the sale. If the
depositary cannot sell these preemptive rights, they will expire without benefit
to you.
If a registration statement is not filed and an exemption from registration
does not exist, The Bank of New York, as depositary, may attempt to sell the
preemptive rights, and you will be entitled to receive the net proceeds of the
sale. However, preemptive rights will lapse if the rights are not distributed or
sold and you will not receive any payment for those lapsed rights.
WE ARE SUBJECT TO CORPORATE GOVERNANCE RULES AND REGULATIONS AS A BRAZILIAN
COMPANY THAT ARE DIFFERENT FROM THOSE OUTSIDE BRAZIL. THE ADSs PROVIDE YOU
WITH FEWER AND LESS DEFINED SHAREHOLDERS' RIGHTS THAN THOSE RELATING TO
SECURITIES OF ISSUERS ORGANIZED IN MANY OTHER JURISDICTIONS.
Our corporate affairs are governed by our by-laws and by Brazilian
corporations law. Our by-laws and Brazilian corporations law differ from the
legal principles that would apply if we were incorporated in a jurisdiction in
the United States, such as Delaware or New York, or in some other jurisdictions
outside Brazil. In addition, your rights or the rights of preferred shareholders
under the Brazilian corporations law to protect your interests relative to
actions by our board of directors may be fewer and less defined than under the
laws of jurisdictions outside Brazil.
The Brazilian securities markets are not as highly regulated and supervised
as the U.S. securities markets or markets in other jurisdictions. Brazilian law
and regulation, like U.S. law and regulation, addresses such concepts as
stabilization, inside trading and veracity and completeness of disclosure. As
with most other jurisdictions worldwide, however, the Brazilian government
infrastructure for trading compliance with and enforcing this body of law and
regulation is less developed and less well funded than in the United States. In
addition, rules and policies against self-dealing and regarding the preservation
of shareholder interests may be less defined and less stringently enforced in
Brazil than in the United States, putting holders of the preferred shares and
ADSs at a disadvantage. Corporate disclosure requirements may also be less
complete or informative than what may be expected of a U.S. public company.
IF YOU EXCHANGE THE ADSs FOR PREFERRED SHARES, YOU RISK LOSING THE ABILITY TO
REMIT FOREIGN CURRENCY ABROAD AND CERTAIN BRAZILIAN TAX ADVANTAGES.
Investors in the ADSs will have the ability to exchange their ADSs for
preferred shares. Any such exchange may expose you to Brazilian regulatory and
market risk, including limitations on repatriating capital and on trading in the
preferred shares. We strongly urge you to consult with Brazilian advisors prior
to undertaking any such exchange.
If you wish to hold preferred shares directly, you will be required to make
your own registration with the Central Bank of Brazil. This registration process
is necessary in order for you to be able to remit abroad amounts received upon
the disposition of, or as dividends, capital returns or other distributions on,
the preferred shares. If you attempt to obtain your own certificate of
registration, you may incur expenses or suffer delays in the application
process, which could delay your ability to receive dividends or distributions
relating to the preferred shares or the return of your capital in a timely
manner. This registration process may be affected by future legislative or
regulatory changes. Additional restrictions may be imposed in the future that
are applicable to you, the underlying preferred shares or the repatriation of
the proceeds from the preferred shares.
YOU MAY NOT BE ABLE TO ENFORCE A JUDGMENT AGAINST US OR OUR DIRECTORS AND
OFFICERS WITHOUT RELYING ON THE BRAZILIAN COURTS.
All of our directors and executive officers and some of the experts named
in this prospectus reside in Brazil. Substantially all of our assets, as well as
the assets of many of our officers and directors and some of the experts named
in this prospectus, are located in Brazil. If you seek judgments based on the
laws
15
and rules or, more specifically, on the civil-liability provisions of the
securities laws of the United States or other jurisdictions, it may not be
possible (or may be difficult) for you to:
- effect service of process within the United States or other jurisdictions
outside of Brazil against us or our officers and directors and some of
the experts named in this prospectus;
- attach our assets or their assets, to the extent these assets are located
in Brazil and to the extent these assets are used by us to render water
and wastewater services; or
- enforce judgments against us or our officers and directors and some of
the experts named in this prospectus in U.S. courts or the courts of
other jurisdictions outside Brazil.
We have been advised by our Brazilian counsel, Pinheiro Neto - Advogados,
that judgments of U.S. courts for civil liabilities based upon the federal
securities laws of the United States or otherwise may be, subject to certain
requirements, enforced in Brazil. We cannot assure you, however, that Brazilian
courts will enforce a monetary judgment for violation of the U.S. securities
laws or otherwise with respect to the ADSs or preferred shares.
We have been further advised by our Brazilian counsel that:
- original actions based on the federal securities laws of the United
States may be brought in Brazilian courts and that, subject to applicable
law, Brazilian courts may enforce liabilities in such actions against us,
our directors, our executive officers and the experts named in this
prospectus, provided that provisions of the federal securities laws of
the United States are not held to contravene Brazilian public policy,
good morals and Brazilian national sovereignty, and provided that
Brazilian courts can assert jurisdiction over the particular action; and
- Brazilian law limits the ability of a judgment creditor or other persons
to satisfy a judgment against us since the assets which are essential to
render the services provided by us may not be subject to attachment or
seizure.
Thus, we cannot assure you that any such action would be successful.
HOLDERS OF THE ADSs, WHICH REPRESENT THE UNDERLYING PREFERRED SHARES, HAVE
LIMITED VOTING RIGHTS.
In accordance with the Brazilian corporations law and our by-laws, holders
of preferred shares, and thus the ADSs, generally are not entitled to vote at
shareholders meetings. Thus, your ability as a holder of preferred shares, or
ADSs representing preferred shares, to influence our company policy and our
company decisions will be more limited than with many other companies.
ASSERTING YOUR DISTRIBUTION AND LIMITED VOTING RIGHTS AS A HOLDER OF ADSs MAY
PROVE MORE DIFFICULT THAN FOR HOLDERS OF PREFERRED SHARES.
It may not be possible, at certain times and for certain reasons outlined
in "Description of American Depositary Shares", for the depositary to make cash,
share or other distributions to ADS holders. You may encounter difficulties in
the exercise of some of your rights, including your limited voting rights, if
you hold our ADSs rather than preferred shares. For example, under some
circumstances, such as our failure to provide the depositary with voting
materials on a timely basis, you may not be able to vote by giving instructions
to the depositary on how to vote for you. For a detailed description of your
rights as an ADS holder, see "Description of American Depositary Shares".
16
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. When our
management makes assumptions for such forecasts, it makes them in light of the
information it currently has available.
These statements relate to the economy and sanitation industry in Brazil
and also relate to our future prospects, developments and business strategies.
Many of the forward-looking statements are identified by their use of terms and
phrases such as "anticipate", "believe", "could", "estimate", "expect",
"intend", "should", "may", "plan", "potential", "predict", "project", "will" and
similar terms and phrases, and may include references to assumptions. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks described in
"Risk Factors" and elsewhere in this prospectus. You are cautioned not to place
undue reliance on these forward-looking statements, which reflect our views only
as of the date of this prospectus. We undertake no obligation to update such
statements or publicly to release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this prospectus or to reflect the occurrence of unanticipated events.
Such forward-looking statements in this prospectus include, among others,
our current intent, belief or expectations regarding the following:
- our operations for the years 2002 to 2006;
- the growth of the Brazilian market for sanitation and related services;
- future competition in the cities where we expect to operate;
- the passage of federal legislation in Brazil relating to sanitation and
the establishment of federal and state regulatory regimes relating to
sanitation;
- our ability to develop our operations in accordance with our plans, which
principally means our capacity to generate and obtain funds to support
our investment plans;
- our ability to continue to enter into new concession contracts and to
renew our existing contracts;
- the declaration or payment of dividends or interest on equity;
- population and GDP growth projections;
- other factors or trends affecting our financial condition or results of
operations; and
- the factors discussed under "Risk Factors" beginning on page 7.
17
USE OF PROCEEDS
We estimate that our net proceeds from the global offering, after deducting
underwriting discounts and commissions and estimated offering expenses, will be
approximately US$202.7 million, or approximately US$233.4 million if the
international underwriters exercise their over-allotment option in full. This
estimate assumes an initial public offering price of US$14.50 per ADS, which is
the mid-point of the offering price range indicated on the cover of this
prospectus.
The global offering is an important component of our capital expenditure
program, through which we plan to invest approximately US$534.1 million (R$1.24
billion at the commercial selling rate published by the Central Bank of Brazil
for December 31, 2001) in the expansion of our operations over the next five
years. We intend to use the proceeds in the following manner:
- US$95.9 million (R$222.5 million at the commercial selling rate published
by the Central Bank of Brazil for December 31, 2001), or 47.3% of the net
proceeds, on capital expenditures, principally to expand our wastewater
system;
- US$77.4 million (R$179.5 million at the commercial selling rate published
by the Central Bank of Brazil for December 31, 2001), or 38.2% of the net
proceeds, to repay amounts due to the state of Parana as advances from
shareholders, with an interest rate based on the average interest rate of
borrowings obtained by us during the periods the advances have been
outstanding (i.e. the variation of the Taxa Referential (Reference Rate),
the Central Bank of Brazil's short term floating reference rate, plus
approximately 8% per annum). Since these amounts were contributed to us
by the state as advances they had no contractual due date, as further
described in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Advances from
shareholders"; and
- US$29.4 million (R$68.1 million at the commercial selling rate published
by the Central Bank of Brazil for December 31, 2001), or 14.5% of the net
proceeds, to repay our outstanding commercial paper with a fixed annual
interest rate of 18.56% scheduled to mature on June 28, 2002, as further
described the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Short-term debt".
We may use a portion of the amount dedicated to capital expenditures for
acquisitions of new concessions, related lines of business or other aspects of
our capital expenditure plan, depending on the timing and desirability of new
opportunities that arise. We do not, however, have any specific business
acquisitions planned or contemplated at this time.
We intend to invest a portion of the net proceeds in high-grade, Brazilian
short-term investments pending their use as described above.
18
MARKET INFORMATION
Our common shares do not currently have a public trading market. Our
preferred shares have been trading on the Sociedade Operadora do Mercado de
Ativos, or SOMA, from March 16, 2000 to the present, under the symbol "SAPR4".
SOMA is a very illiquid over-the-counter market in Brazil. We expect that, prior
to the closing of the global offering, our preferred shares will cease to trade
on the SOMA and will begin to trade on the Sao Paulo Stock Exchange, which is
referred to as the Bovespa, also under the symbol "SAPR4". We have applied to
list the ADSs (each representing ten preferred shares) offered in this offering
on the New York Stock Exchange under the symbol "BRS".
On March 22, 2002, we distributed 82,816,436 preferred shares as a share
dividend (bonificacao) to common and preferred shareholders at a rate of 0.25
preferred shares for each outstanding common or preferred share. The following
table details the trading of our preferred shares since the first full month
following their listing on the SOMA. This table has not been adjusted for the
dilution in price resulting from this share dividend.
Historically, only a small portion of our preferred shares have been
actively traded.
MONTHLY
TOTAL PREFERRED MONTHLY MONTHLY AVERAGE
MONTH SHARES TRADED LOW PRICE(1) HIGH PRICE(1) MONTHLY PRICE(1)
----- --------------- ------------ ------------- ----------------
(IN NOMINAL R$)
2000
April............................... 1,568,970 R$18.40 R$24.50 R$20.31
May................................. 446,127 16.85 23.50 17.40
June................................ 755,876 16.00 20.00 17.93
July................................ 606,146 17.00 21.00 17.66
August.............................. 1,517,509 15.00 23.00 18.74
September........................... 484,107 19.00 23.50 20.82
October............................. 1,388,242 17.60 22.45 18.87
November............................ 471,827 17.00 21.00 18.32
December............................ 1,271,213 17.00 23.00 19.17
2001
January............................. 585,198 19.00 27.00 21.96
February............................ 547,359 21.50 23.50 22.10
March............................... 470,500 20.00 23.50 21.78
April............................... 743,998 20.00 23.50 20.75
May(2).............................. 8,160,238 22.00 25.50 24.61
June................................ 924,342 24.00 25.00 24.66
July................................ 676,797 23.40 25.00 23.77
August.............................. 438,852 23.00 24.75 23.94
September........................... 134,601 20.00 24.00 22.32
October............................. 307,510 19.00 23.70 19.87
November............................ 440,980 20.00 23.00 21.24
December............................ 1,654,780 20.50 25.00 21.11
2002
January............................. 125,670 20.00 23.00 20.69
February............................ 256,430 21.50 25.00 22.40
March(3)............................ 2,051,410 18.00 25.00 23.77
---------------
(1) Per ten-share lot.
(2) In December 2000, a large institutional investment fund that held a
substantial number of our preferred shares was dissolved, and the fund's
assets, including its large holding in our preferred shares, were
distributed to the fund investors. As a result, the trading volume in the
preferred shares was substantially higher than normal in May 2001.
(3) On March 22, 2002, we issued and distributed 82,816,436 preferred shares as
a share dividend (bonificacao) to holders of common and preferred shares.
This table has not been adjusted to include the effects of the share
dividend.
19
CAPITALIZATION
The following table shows our short-term debt and capitalization as of
December 31, 2001:
- on a historical basis;
- as adjusted to reflect the capitalization of R$40.0 million of advances
from the state of Parana, recorded as short-term debt as of December 31,
2001, following the execution of an agreement between us and the state of
Parana on January 29, 2002, with the advances from the state being
recorded as additional paid-in capital;
- as further adjusted to reflect the capitalization of R$386.7 million in
reserves through the issuance of a share dividend (bonificacao) of
82,816,436 preferred shares on March 22, 2002, which were distributed to
common and preferred shareholders at the rate of 0.25 preferred shares per
share, and with the reserves being capitalized consisting of (a) the
additional paid-in capital from the state of Parana described above, (b)
all amounts recorded as appropriated retained earnings and (c) a portion
of unappropriated retained earnings;
- as further adjusted to reflect the issuance and sale of 144,000,000
preferred shares in the global offering, based on an assumed initial
public offering price of US$1.45 per preferred share, after deducting
underwriting discounts and commissions and estimated offering expenses,
and after applying US$77.4 million of the net proceeds of the offering to
repay amounts to the state of Parana that were incurred under the
Paranasan program and other amounts that were paid by the state or
companies owned and controlled by the state on our behalf, and US$29.4
million to the repayment of commercial paper. These amounts owed to the
state of Parana are accounted for as a current liability, representing
advances from shareholders. This adjustment assumes an exchange rate of
R$2.3204 = US$1.00, which was the commercial selling rate published by
the Central Bank of Brazil for December 31, 2001.
You should read this table together with the sections entitled "Use of
Proceeds", "Selected Financial and Other Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes included elsewhere in this prospectus.
AS OF DECEMBER 31, 2001
----------------------------------------------------------------
AS FURTHER
AS ADJUSTED FOR ADJUSTED FOR
HISTORICAL AS ADJUSTED(6) SHARE DIVIDEND THIS OFFERING
---------- -------------- --------------- -------------
(IN MILLIONS OF R$)
Short-term debt(1)..................... R$ 376.8 R$ 336.8 R$ 336.8 R$ 89.1
========= ========= ========= =========
Long-term debt(2)...................... R$ 713.9 R$ 713.9 R$ 713.9 R$ 713.9
Shareholders' equity
Preferred shares, no par value(3).... 55.7 55.7 442.4 912.0
Common shares, no par value(4)....... 389.3 389.3 389.3 389.3
Additional paid-in capital(5)(7)..... - 40.0 - -
Appropriated retained earnings(7).... 273.7 273.7 -- --
Unappropriated retained
earnings(7)....................... 286.3 286.3 213.3 213.3
Total shareholders' equity........ 1,005.0 1,045.0 1,045.0 1,514.6
--------- --------- --------- ---------
Total capitalization................... R$1,718.9 R$1,758.9 R$1,758.9 R$2,228.5
========= ========= ========= =========
---------------
(1) Including the current portion of the long-term debt, advances from the state
of Parana related to the Paranasan program, other advances from the state of
Parana or companies owned and controlled by it and other amounts which were
incurred to finance our capital expenditure program, which we expect to
repay out of the net proceeds of the global offering.
20
(2) Of this amount, R$713.4 million is secured by pledges of customer accounts
receivable. In addition, of the loans that are secured by customer accounts
receivable, R$287.4 million are also guaranteed by the state of Parana and
R$32.4 million are also secured by mortgages on property. Debt for these
purposes includes only obligations for borrowed money and does not include
installment payments or concession fees or other amounts.
(3) 289,836,870 preferred shares authorized and 124,245,312 preferred shares
issued and outstanding, as adjusted to reflect the capitalization of R$386.7
million of reserves through the share dividend (bonificacao) of 82,816,436
preferred shares on March 22, 2002.
(4) 289,836,870 common shares outstanding. There are no additional common shares
authorized for issuance.
(5) Consists principally of amounts paid by the state on our behalf, as provided
under "Related party transactions -- Transactions with the state of Parana"
under "Major Shareholders and Related Party Transactions".
(6)Adjusted to reflect the capitalization of R$40.0 million of advances from
shareholders to additional paid-in capital as a result of an agreement with
the state of Parana on January 29, 2002.
(7)Of the R$386.7 million of reserves that were capitalized through the share
dividend, R$273.7 million had been recorded as appropriated retained
earnings, R$40.0 million had temporarily been recorded as additional paid-in
capital following its capitalization on January 29, 2002 and the remaining
R$73.0 million has been recorded as unappropriated retained earnings.
If the international underwriters' exercise their over-allotment option in
full, after the global offering the number of preferred shares (including
preferred shares represented by ADSs) will increase by 165,591,000 preferred
shares, or approximately 57.1% of our then-outstanding preferred shares.
Except as set forth above, there has been no material change in the
capitalization of our company since December 31, 2001.
21
DILUTION
Our net tangible book value, which equals our total equity less our
intangible assets, as of December 31, 2001 was R$924.8 million, or R$2.79 per
share (common plus preferred). Net tangible book value per share is determined
by dividing the net tangible book value as of December 31, 2001 by the number of
outstanding common and preferred shares at that date. If this per-share amount
is adjusted to reflect the share dividend (bonificacao) of 82,816,436 preferred
shares on March 22, 2002 and the inclusion of R$40.0 million of advances from
shareholders into Additional paid-in capital on January 29, 2002, at a ratio of
0.25 preferred shares for each existing share, our net tangible book value per
share as of December 31, 2001 was R$2.33 per share.
Dilution in net tangible book value per preferred share represents the
difference between the amount per preferred share that you pay in the global
offering and the net tangible book value per share immediately after the global
offering.
Based on the issuance by us of 144,000,000 preferred shares in the global
offering (including preferred shares represented by ADSs), at an assumed initial
public offering price of US$1.45 (R$3.36) per preferred share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value as of December 31, 2001 would have been
R$1,434.4 million, or R$2.57 per preferred share. This represents an immediate
increase or decrease, depending upon the initial public offering share price, in
net tangible book value of R$0.24 per share to our existing shareholders and an
immediate dilution in net tangible book value of R$0.79 per share to new
investors. These calculations assume an exchange rate of R$2.3204 = US$1.00,
which was the commercial selling rate published by the Central Bank of Brazil
for December 31, 2001. The following table illustrates this per-share dilution:
PER
SHARE(2)
--------
Assumed initial public offering price per share............. R$ 3.36
Net tangible book value per share as of December 31,
2001(1)................................................... 2.33
Increase or decrease in net tangible book value per share
attributable to
new investors............................................. 0.24
Net tangible book value per share after the global
offering.................................................. 2.57
Dilution in net tangible book value per share to new
investors................................................. (0.79)
---------------
(1) Adjusted to reflect the share dividend (bonificacao) of 82,816,436 preferred
shares distributed in respect of the common and preferred shares outstanding
on March 22, 2002 and the inclusion of R$40.0 million of advances from
shareholders into Additional paid-in capital on January 29, 2002.
(2) The discussion and table above assume no exercise of share options. To the
extent that any share options are granted and exercised, it will likely
result in further dilution to new investors.
22
The following table summarizes, as of December 31, 2001, the total number
of shares purchased from us, the total consideration paid to us and the average
price paid per share by our existing shareholders and by our new public
investors in the offering at an assumed initial public offering price of US$1.45
per preferred share. These figures are calculated after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us and
have been adjusted to reflect the share dividend (bonificacao) of 82,816,436
preferred shares on March 22, 2002.
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------------ ------- -------------
Existing
shareholders......... 414,082,182 74.20 R $964,819,000.00 67.26 R$2.33
New public investors... 144,000,000 25.80 469,586,680.46 32.74 3.26
----------- ------ ------------------ ------
Total.................. 558,082,182 100.00 1,434,405,680.46 100.00 2.57
=========== ====== ================== ======
If the international underwriters' over-allotment option is exercised in
full, after the global offering the number of preferred shares (including
preferred shares represented by ADSs) will increase by 165,591,000 preferred
shares, or approximately 57.1% of our then-outstanding preferred shares.
Some of our executives have acquired preferred shares in the last five
years. Carlos Afonso Teixeira de Freitas, our Chief Executive Officer and a
board member, acquired 37,261 preferred shares in January 2000 for R$1.61 per
preferred share and 10,000 preferred shares in January 2000 for R$1.71 per
preferred share. Ricardo Del Guerra Perpetuo, our Chief Financial Officer,
acquired 10,000 preferred shares in January 2000 for R$1.61 per preferred share
and 10,000 preferred shares in January 2000 for R$1.77 per preferred share.
23
EXCHANGE RATES
There are two principal foreign exchange markets in Brazil: the commercial
market and the floating-rate market. Historically, Central Bank of Brazil rules
delineated who could access these markets and under what circumstances.
In 1999, the Central Bank of Brazil unified the operational limits
applicable to these markets, leading to a convergence in their pricing and
liquidity. However, each market remains subject to regulations specific to it.
Most trade and financial foreign exchange transactions are carried out on the
commercial exchange market. These transactions include the purchase or sale of
preferred shares or the remittance outside Brazil of dividends or interest on
equity with respect to preferred shares. The floating-rate market is the
prevailing selling rate for the Real into Dollars, as reported by the Central
Bank of Brazil, which applies to transactions not covered by the commercial
market. Foreign currencies may only be purchased through a Brazilian bank
authorized to operate in these markets. In both markets, rates are freely
negotiated but may be strongly influenced by Central Bank intervention.
From its introduction on July 1, 1994 through March 1995, the Real
depreciated against the Dollar. In 1995, the Central Bank of Brazil announced
that it would intervene in the market and buy or sell Dollars, establishing a
band in which the exchange rate between the Real and the Dollar could fluctuate.
This policy resulted in a gradual devaluation of the Real relative to the
Dollar. On January 13, 1999, due to monetary pressure, the band was set at
R$1.20 and R$l.32 per US$1.00. Two days later, on January 15, 1999, due to
market pressures, the Central Bank of Brazil abolished the band system and
allowed the Real-Dollar exchange rate to float freely. As a result, the exchange
rate dropped to R$2.1647 per US$1.00 on March 3, 1999. Since that time the
Real-Dollar exchange rate has been established by the interbank market and has
fluctuated considerably.
In the past, 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 following table shows the commercial selling rate for Dollars as
determined by the Central Bank of Brazil for the periods and dates indicated.
PERIOD LOW HIGH AVERAGE PERIOD-END
------ -------- -------- -------- ----------
(REAIS PER US$1.00)
YEAR ENDED
December 31, 1997(1)..................... R$1.0395 R$1.1164 R$1.0808 R$1.1164
December 31, 1998(1)..................... 1.1165 1.2087 1.1644 1.2087
December 31, 1999(1)..................... 1.2078 2.1647 1.8514 1.7890
December 31, 2000(1)..................... 1.7234 1.9847 1.8348 1.9554
December 31, 2001(1)..................... 1.9357 2.8007 2.3532 2.3204
2001.....................................
MONTH ENDED
January 31, 2001(2)...................... 1.9357 1.9753 1.9545 1.9711
February 28, 2001(2)..................... 1.9739 2.0452 2.0019 2.0452
March 31, 2001(2)........................ 2.0208 2.1616 2.0891 2.1616
April 30, 2001(2)........................ 2.1384 2.3011 2.1925 2.1847
May 31, 2001(2).......................... 2.1957 2.3600 2.2972 2.3600
June 30, 2001(2)......................... 2.2923 2.4748 2.3758 2.3049
July 31, 2001(2)......................... 2.3249 2.5979 2.4660 2.4313
August 31, 2001(2)....................... 2.4463 2.5585 2.5106 2.5517
24
PERIOD LOW HIGH AVERAGE PERIOD-END
------ -------- -------- -------- ----------
(REAIS PER US$1.00)
September 30, 2001(2).................... 2.5590 2.8007 2.6717 2.6713
October 31, 2001(2)...................... 2.6866 2.7828 2.7402 2.7071
November 30, 2001(2)..................... 2.4604 2.6820 2.5431 2.5287
December 31, 2001(2)..................... 2.2930 2.4672 2.3627 2.3204
2002.....................................
MONTH ENDED
January 31, 2002(2)...................... 2.2932 2.4384 2.3779 2.4138
February 28, 2002(2)..................... 2.3482 2.4691 2.4196 2.3482
March 31, 2002(2)........................ 2.3236 2.3663 2.3468 2.3236
---------------
Source: Central Bank of Brazil.
---------------
(1) "Average" represents the average of the exchange rates on the last day of
each month in the period.
(2) "Average" represents the monthly average of the daily averages.
On April 10, 2002, the commercial selling rate published by the Central
Bank of Brazil was R$2.2728 = US$1.00.
We will pay cash dividends and make any other cash distributions with
respect to the preferred shares in Brazilian Reais. The depositary will convert,
if able to do so, these Real amounts into Dollars and distribute them to ADS
holders. Accordingly, exchange rate fluctuations will affect the Dollar amounts
received by the holders of ADSs. Fluctuations in the exchange rate between the
Real and the Dollar may also affect the Dollar price of the ADSs on the New York
Stock Exchange and the Real price of the preferred shares on the Bovespa, where
the preferred shares will trade in Brazil. The Federal Reserve Bank of New York
has no buying rate for Reais.
25
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data should be read together
with, and are qualified by reference to, our financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The income
statement and cash flow data for the years ended December 31, 1999, 2000 and
2001 and the balance sheet data as of December 31, 1999, 2000 and 2001 have been
derived from our audited financial statements, which have been prepared in
Brazilian Reais in accordance with U.S. GAAP. The income statement and cash flow
data for the year ended December 31, 1997 and the balance sheet data as of
December 31, 1997 are derived from unaudited financial information.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001 2001(1)
-------- -------- -------- -------- -------- ---------
(IN MILLIONS OF R$ AND US$(2))
INCOME STATEMENT DATA
Gross operating revenue..................................... R$ 482.3 R$ 518.2 R$ 582.7 R$ 672.8 R$ 761.6 US$ 328.2
Sales taxes................................................. (13.1) (14.0) (21.6) (25.2) (11.7) (5.0)
Net operating revenue....................................... 469.2 504.2 561.1 647.6 749.9 323.2
Cost of operations.......................................... (151.4) (145.4) (153.9) (170.3) (184.3) (79.4)
General and administrative expenses......................... (158.1) (177.8) (204.0) (216.2) (209.7) (90.4)
Depreciation and amortization............................... (49.2) (54.5) (55.3) (63.4) (70.4) (30.3)
Net gain on settlement and curtailment of defined benefit
pension plan.............................................. -- -- -- 28.4 -- --
Other income, net........................................... 0.6 1.1 1.9 2.5 2.5 1.1
Operating income............................................ 111.1 127.6 149.8 228.6 288.0 124.2
Financial income (expenses), net............................ (35.0) (67.7) (88.5) (56.5) (58.7) (25.3)
Income before income taxes.................................. 75.1 56.2 58.7 170.1 226.4 97.6
Provision for income taxes.................................. (33.1) (11.8) (6.8) (30.5) (48.6) (20.9)
Net income.................................................. 42.0 44.4 51.9 139.6 177.8 76.7
SHARE DATA(3)
Weighted average no. of shares outstanding.................. 327.3 327.3 328.3 331.3 331.3 -
Weighted average no. of preferred shares outstanding........ 37.5 37.5 38.4 41.4 41.4 -
Basic and fully diluted net income per preferred share(4)... 0.110 0.116 0.135 0.360 0.459 0.198
Basic and fully diluted net income per common share(4)...... 0.100 0.105 0.122 0.327 0.417 0.180
BALANCE SHEET DATA
Cash and cash equivalents................................... 7.8 11.0 16.8 24.6 25.6 11.0
Accounts receivable, net of allowance for doubtful
accounts.................................................. 87.7 102.4 123.8 137.3 156.5 67.4
Total current assets........................................ 133.4 156.6 187.6 221.2 238.0 102.6
Property, plant and equipment, net.......................... 1,768.2 1,951.2 2,129.2 2,313.7 2,547.8 1,098.0
Total assets................................................ 1,907.1 2,119.2 2,336.2 2.557.9 2,892.7 1,246.6
Total short-term debt and current portion of long-term
debt...................................................... 29.3 48.5 67.7 79.9 157.3 67.8
Advances from shareholders.................................. 24.3 46.7 74.7 123.5 219.5 94.6
Total current liabilities(5)................................ 171.9 209.7 268.9 403.5 578.5 249.3
Total long-term debt, less current portion.................. 525.6 642.0 728.4 736.4 713.9 307.7
Long-term concession contract less current portion.......... -- -- -- -- 46.1 19.9
Total long-term liabilities................................. 948.8 1,100.4 1,229.8 1,253.8 1,309.1 564.2
Shareholders' equity........................................ 786.4 809.2 837.5 900.6 1,005.0 433.1
OPERATING DATA
Water connections (thousands)............................... 1,717 1,781 1,847 1,914 1,968 --
Wastewater connections (thousands).......................... 433 497 600 676 720 --
Total water and wastewater connections per employee(6)...... 313 366 474 546 575 --
Average physical water loss(7)(%)........................... 19.4 16.0 15.3 14.9 14.8 --
Average non-physical water loss(8)(%)....................... 19.0 24.0 22.9 22.3 22.2 --
Volume of water billed during period(9)..................... 368 381 398 406 408 --
No. of employees(10)........................................ 4,216 4,001 3,869 3,784 3,933 --
No. of outsourced employees................................. 2,656 2,214 1,292 953 736 --
Percentage of service areas served with water(%)............ 98 98 99 99 99 --
Percentage of service areas served with wastewater(%)....... 30 33 37 40 42 --
OTHER FINANCIAL DATA
Distributions per preferred share(5)(11).................... 0.0386 0.0660 0.0916 0.2511 0.2406 0.1037
Distributions per common share(5)(11)....................... 0.0386 0.0660 0.0916 0.2283 0.2188 0.0943
Net cash provided by operating activities................... 136.5 153.3 212.4 272.3 308.5 133.0
Net cash used in investing activities....................... (131.2) (196.9) (184.3) (211.1) (269.0) (115.9)
26
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001 2001(1)
-------- -------- -------- -------- -------- ---------
(IN MILLIONS OF R$ AND US$(2))
Net cash used in financing activities....................... 0.5 46.9 (22.3) (53.4) (38.6) (16.6)
Adjusted EBITDA(12)......................................... 160.3 182.1 205.1 291.9 358.5 154.5
Ratio of debt to shareholders' equity(13)%.................. 70.6% 85.3% 95.1% 90.1% 86.7% --
Ratio of total current assets to debt(13)%.................. 24.0% 22.7% 23.6% 27.1% 27.3% --
---------------
(1) Translated at R$2.3204 = US$1.00, the commercial selling rate published by
the Central Bank of Brazil for December 31, 2001.
(2) Except financial ratios and per-share, per-ADS and operating data.
(3) Adjusted for all periods to reflect the capitalization of reserves via a
share dividend (bonificacao) of 82,816,436 preferred shares distributed to
holders of common and preferred shares on March 22, 2002.
(4) Stated in Reais and Dollars per share. Based on the average number of
shares outstanding for the period. Preferred shares outstanding is adjusted
to reflect the capitalization of reserves via a share dividend
(bonificacao) of 82,816,436 preferred shares distributed to holders of
common and preferred shares on March 22, 2002.
(5) The amount as of December 31, 2001 includes advances from shareholders of
R$179.5 million and R$68.1 million of short-term debt that are expected to
be repaid with the proceeds of this offering.
(6) Including both direct and outsourced employees, but not employees of
third-party service providers as described in "Employees".
(7) Average physical water loss for the period represents our estimate of the
loss of water volume due to leakage and water used in the distribution
process. Physical loss is calculated based on an average of the excess of
nighttime water delivered to each network system over expected nighttime
usage for that network system.
(8) Average non-physical water loss for the period represents our estimate of
the water we deliver but are unable to bill customers for (not attributable
to physical loss) as a result of imprecisions in metering, billing losses,
meter fraud, unauthorized connections and similar losses. Non-physical loss
is calculated for each network system based on the difference between
actual water volumes metered and volumes expected to be metered. Fire
department usage and other authorized but unbilled official usage of water
are included in non-physical water loss.
(9) In millions of cubic meters.
(10) Does not include outsourced employees or the employees of third-party
service providers as described in "Employees".
(11)Includes cash distributions only. This data reflects the year in which the
distributions were declared. Cash distributions are paid as either dividends
or interest on equity. Interest on equity is subject to withholding tax,
which is not reflected here. Dividend payments are not subject to
withholding tax. Historically, our distributions have principally been made
as interest on equity. On March 22, 2002, we issued a share dividend
(bonificacao) of 82,816,436 preferred shares to holders of common and
preferred shares.
(12) We calculate earnings before interest, taxes, depreciation and
amortization, or EBITDA, as operating income plus depreciation. For 2000,
we have removed from EBITDA the one-time, non-cash net gain on settlement
and curtailment of defined benefit pension plan of R$28.4 million. We have
included information concerning EBITDA because we believe it is a standard
financial statistic commonly reported and widely used by analysts and
investors. We understand that EBITDA is also used by analysts and investors
as one measure of an issuer's ability to service or incur indebtedness.
EBITDA is not recognized by U.S. GAAP, and each company uses its own method
of calculating EBITDA. EBITDA data thus cannot easily be compared among
companies. You should not rely on EBITDA as a substitute for evaluating our
cash flows or operating income.
(13)For purposes of these ratios, debt includes short-term and long-term debt
and has not been netted against cash and cash equivalents. Debt for these
purposes includes only obligations for borrowed money and does not include
installment payments or concession fees or other amounts.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion in conjunction with our financial
statements and notes thereto and other financial information included elsewhere
in this prospectus. All financial data in this section, unless otherwise stated,
was prepared in accordance with U.S. GAAP.
INTRODUCTION
We are a leading provider of water supply services and wastewater
collection, treatment and disposal services in Brazil in terms of net profits,
gross profits and net revenues, according to the July 2001 Balanco Anual. We
operate almost exclusively in the state of Parana, where we provide services
under concessions that are granted to us by each municipality that we serve. We
hold concessions for water and wastewater services that cover 342 of the 399
municipalities in the state. Our service areas encompass 7.7 million people.
Sixty percent of our common shares are held by the state of Parana.
ECONOMIC ENVIRONMENT IN BRAZIL
The Brazilian economic environment has at times been volatile and unstable.
Brazil experienced a period of hyper-inflation from the mid-1980s through June
1994, with inflation levels exceeding 2,700% on an annualized basis in the first
half of 1994. During this same period, the country had six different currencies.
The introduction of the Real in July 1994, combined with some basic
economic reforms, brought about a period of relative stability that lasted until
early 1999. Inflation during this period was reduced to as low as 1.7% for 1998,
as measured by the Indice Nacional de Precos ao Consumidor Amplo (the General
National Consumer Price Index, or IPCA). The Real-Dollar exchange rate during
this period was allowed to fluctuate within a slowly shifting band and moved
from R$0.845 = $1.00 on January 2, 1995 to R$1.2087 = US$1.00 at December 31,
1998.
In mid-January 1999, the Real, which had come under pressure for a variety
of reasons, was allowed to float. Over the ensuing seven weeks, the Real-Dollar
exchange rate increased from R$1.3193 = $1.00 to R$2.1647 = US$1.00. As of
December 31, 2001, the Real-Dollar exchange rate was R$2.3204 = US$1.00. The
rate of inflation increased markedly following the devaluation but returned to
8.9% for the full year in 1999. Inflation was 6.0% for 2000 and 7.67% for 2001,
as measured by IPCA.
The Brazilian GDP has increased since 1991, with an annually compounded
growth rate of 2.66% per year for the ten-year period ended December 31, 2000,
according to our calculations based on information obtained for 1998 to 2000
from the Instituto Brasileiro de Geografia e Estatistica -- IBGE (Brazilian
Institute of Geography and Statistics) and for 1991 to 1997 from the Instituto
Paranaense de Desenvolvimento Economico e Social -- IPARDES (Parana Institute of
Economic and Social Development). With the exception of 1992, in which the
Brazilian GDP decreased slightly, the GDP has risen each year and has risen by
as much as 5.85% per year, as it did in 1994. The GDP of the state of Parana has
generally grown at a rate slightly higher than the Brazilian GDP. For the same
ten-year period ended December 31, 2000, we have calculated the annually
compounded growth rate for the state of Parana as 3.7% per year.
FOREIGN CURRENCY EXPOSURE
All of our revenues and most of our expenses are denominated in Reais. In
2001, approximately 100% of our operating expenses were denominated in Reais,
although the pricing of certain raw materials used in our water production
plants and wastewater treatment centers is sensitive to fluctuations in exchange
rates. Likewise, most of our debt is denominated in Reais. As of December 31,
2001, only R$87.5 million, or 10.0% of our debt was linked to a currency other
than the Real. However, we expect that this percentage will increase
significantly as a result of the Yen-linked loans that we expect to incur under
the Paranasan program. We expect these loans to reach an aggregate outstanding
amount of up to Y15.24 billion over the
28
next three years (equivalent to R$269.8 million at the commercial selling rate
published by the Central Bank of Brazil for December 31, 2001).
INFLATION
Brazil has experienced modest rates of inflation over the past five years.
The following table shows the inflation rates for each such year as measured by
IPCA.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Rate of inflation..................................... 5.2% 1.7% 8.9% 6.0% 7.7%
Our financial results are not adjusted to remove the effects of inflation.
Thus, real growth rates results from year to year will be less than the nominal
growth rates derived from our financial statements, which include inflationary
distortion. Likewise, we do not use inflationary accounting when calculating net
losses or gains caused by foreign currency fluctuations.
RESULTS OF OPERATIONS
OVERVIEW
Our results of operations have generally improved over the past five years.
Our results of operations are principally a function of:
- our tariff rates;
- our number of connections;
- customer water consumption levels;
- capital investments and improvements in productivity;
- defaults and late payments;
- cost of operations; and
- financing costs.
TARIFFS. As a public utility concessionaire, we are subject to state
tariff regulation. Under current state policy, our tariffs are set at levels
sufficient to cover our costs of operations and maintenance, depreciation,
provisions for doubtful accounts and amortization of expenses and to provide a
return on our investment. We submit our tariff rates to the governor of the
state of Parana annually for review, typically in October. After review, the
governor establishes the new tariff by decree which typically becomes effective
in bills which have a due date of December 1 or later. The state of Parana is
considering establishing a new regulatory agency that would set tariffs. We do
not know if or when the state will create such an agency.
In general, we seek to propose tariff increases at least equal to the
inflation rate, and in the past we have generally been successful at keeping
pace with inflation. Since our incorporation in 1963, each governor has
promulgated our proposed tariff structure, with only minor adjustments. Based on
information collected and published by the Brazilian Association of Sanitation
Companies, we believe that our tariff rates are close to the average of the
other Brazilian state-owned water companies operating in the more prosperous
southern and southeastern regions of Brazil, although our rates are higher than
the average rates for Brazil as a whole.
Our tariff rate applies to the entire state, with limited exceptions
described below. Our rate structure differentiates between type of customer and
level of consumption. Customers that consume no more than 10 cubic meters of
water per month, who live in a house no larger than 60 square meters and who
earn, as a household, no more than double the minimum wage per month, are
charged a discounted minimum amount, which we call the social tariff. Other
residential users who consume no more than 10 cubic
29
meters of water per month are charged a fixed minimum-consumption tariff.
Residential customers who use 10 to 30 cubic meters of water per month are
charged for consumption in excess of 10 cubic meters per month at the regular
tariff rate. For usage levels higher than 30 cubic meters per month, the
residential customer pays a higher tariff. Commercial, industrial and
public-sector customers are similarly billed by customer category at different
rates. Our tariff for wastewater is calculated as 80% of a customer's monthly
water bill, regardless of volumes collected. In the municipalities of Curitiba
and Maringa, for invoices due March 1, 2002 or later, the wastewater tariff was
increased to 85% of the customer's bill for water usage.
The following chart summarizes our tariff structure for each of the past
five years, stated in Reais per cubic meter:
WATER SUPPLY
---------------------------------------------------------------------------------------
JANUARY - MARCH -
FEBRUARY DECEMBER
CUSTOMER CATEGORY 1998 1999 2000 2001 2002(1) 2002(1)
----------------- ------ ------ ------ ------ --------- --------
SOCIAL TARIFF(2)............. R$3.14 R$3.28 R$3.43 R$3.80 R$4.30 R$4.50
RESIDENTIAL
0 - 10 m(3)(2)............. 7.86 8.21 9.26 10.25 11.55 12.55
11 - 30 m(3)(3)............ 1.18 1.23 1.42 1.55 1.75 1.85
over 30 m(3)(3)............ 1.93 2.02 2.33 2.65 2.95 3.15
NON-RESIDENTIAL
(Commercial, industrial,
governmental)
0 - 10 m(3)(2)............. 14.14 14.78 16.67 18.50 21.00 22.00
over 10 m(3)............... 1.54 1.61 1.86 2.10 2.38 2.50
---------------
(1) Based on the tariff schedules issued by decree of the governor of the state
of Parana on October 10, 2001.
(2) Between 0 and 10 cubic meters, we charge a single fixed rate, regardless of
the volume consumed in this range.
(3) Since March 2002, the customer has been charged R$1.85 for each additional
cubic meter over 10 cubic meters per month and less than 30 cubic meters per
month. For each additional cubic meter over 30 cubic meters per month, the
customer has been charged R$3.15 per cubic meter.
With one of our key customers, Companhia de Bebidas das Americas -- AmBev,
we have established different tariff levels for daytime and nighttime usage.
Under our arrangements with AmBev, we charge a reduced industrial tariff for
consumption from 9:00 p.m. to 7:00 a.m., when the demand for water in the
Curitiba metropolitan region is lower than during the day, and a higher
industrial tariff the remainder of the day. We will seek to explore similar
arrangements with other major industrial customers in the future in order to
greater equalize levels of demand at different times of day. A time-based tariff
structure would not currently be feasible on a system-wide basis, due to the
costs of putting in place a meter infrastructure that is sufficiently
sophisticated.
NUMBER OF CONNECTIONS. Our strategy includes maintaining nearly universal
coverage of water service in our service areas, and aggressively expanding
wastewater collection, treatment and disposal services. To accomplish these
goals, we have been expanding both our water and wastewater networks over the
past five
30
years. The following chart shows the recent growth in the number of our water
and wastewater connections:
AS OF DECEMBER 31,
-------------------------------------
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
Water connections.............................. 1,717 1,781 1,847 1,914 1,968
Wastewater connections......................... 433 497 600 676 720
Our capital expenditure program contemplates a continuation of the trends
illustrated above.
In the area of water supply, we have largely reached the goal of universal
water supply, with an estimated coverage of 99% of the population in our service
areas as of December 31, 2001. Nonetheless, the Curitiba metropolitan region,
which currently has a population of approximately 2.8 million, which includes
Curitiba and 24 surrounding cities, is expected to grow at a rate of
approximately 2.8% per year from 2005 to 2010, according to the Parana Institute
of Economic and Social Development, or Instituto Paranaense de Desenvolvimento
Economico e Social (IPARDES). Thus, in order to maintain nearly universal
coverage, our capital expenditure program contemplates that our water supply
services will need to expand at least at the same rate.
We estimate that, as of December 31, 2001, approximately 42% of the
population in our service areas is connected to our wastewater network, out of
an estimated 80% needed to provide nearly universal coverage for our service
areas. Rural areas, accounting for approximately 20% of the population in our
service areas, are more efficiently served by decentralized means of wastewater
treatment. Our capital expenditure program contemplates increasing this coverage
level to 60% by the end of 2005 and to 66% by the end of 2010.
WATER CONSUMPTION LEVELS. Our customers' average water consumption levels
are relatively stable but vary somewhat depending on economic cycles, climatic
conditions and other factors. In 1999, 2000 and 2001, our annual average volumes
sold per connection were 215.6 cubic meters, 212.4 cubic meters and 207.7 cubic
meters, respectively. Tariff increases, new taxes, economic constraints or
droughts, among other reasons, could force the population in our service areas
to reduce its water consumption pattern.
Wastewater services are invoiced at 80% of each customer's monthly water
bill, regardless of the volume of wastewater actually collected. The wastewater
tariff has been increased to 85% of the customer's monthly water bill in the
municipalities of Curitiba and Maringa, effective for all invoices with a due
date of March 1, 2002 or later. We believe that there is an approximate
correlation between water consumed by a customer and wastewater collected from
that customer.
SEASONALITY. We experience a moderate seasonal effect on our operations
and financial results. The demand for water is highest during the summer months
in Brazil (December through February), when water use increases. Water use
generally decreases significantly during the winter months. Demand in the
coastal region is chiefly a function of tourism, with the greatest demand
occurring during the Brazilian summer holiday months.
The following table shows the cyclicality of our gross operating revenues
for each quarter of 1999, 2000 and 2001:
REVENUES BY QUARTER
(AS A PERCENTAGE OF ANNUAL REVENUES)
1999 2000 2001
---- ---- ----
First quarter............................................... 24.1% 24.8% 25.2%
Second quarter.............................................. 23.9% 24.5% 24.0%
Third quarter............................................... 24.8% 23.9% 23.7%
Fourth quarter.............................................. 27.2% 26.8% 27.1%
31
PRODUCTIVITY INCREASES. Our costs have generally not increased at the same
rate as our revenues. During the past five years, we have made marked efforts to
increase the productivity of our workforce. Among other things, we have reduced
the number of our employees, both direct and indirect, and invested in plant and
equipment. While the number of our third-party service providers has risen,
these service providers generally perform services at a lower cost than did our
direct employees who were formerly responsible for providing the same services.
These measures have added to the quality and efficiency of our operations. From
January 1, 1997 to December 31, 2001, the size of our workforce (direct and
outsourced) decreased from 6,872 employees to 4,669 employees, while we made net
aggregate investments in additions to property, plant and equipment during that
period of R$992.5 million.
The following graph shows the improvement in total connections per employee
(direct and outsourced) since January 1, 1997. This graph does not reflect
personnel employed by subcontractors, which increased during this period.
TOTAL CONNECTIONS PER EMPLOYEE
[BAR CHART GRAPHIC]
1997 313
---- ---
1998 366.00
1999 474.00
2000 546.00
2001 575.00
COST OF OPERATIONS. Our principal costs of operations are labor (including
outsourced labor), depreciation of property, plant and equipment, and
electricity, which is used in large quantities in our treatment stations and for
pumps that move water and wastewater through the pipes in our network. The
following chart details our principal expenses for 1999, 2000 and 2001:
1999 2000 2001
----------------- ----------------- -----------------
(MILLIONS (MILLIONS (MILLIONS
OF R$) % OF R$) % OF R$) %
--------- ----- --------- ----- --------- -----
Labor........................... R$148.3 36.1% R$154.4 36.8% R$152.9 33.1%
Outsourced services............. 88.6 21.5 92.9 22.2 99.6 21.6%
Depreciation and amortization... 55.3 13.4 63.4 15.1 70.4 15.2%
Electricity..................... 42.8 10.4 49.3 11.7 57.1 12.4%
Supplies for operations and
maintenance................... 18.7 4.5 21.1 5.0 23.2 5.0%
Chemicals....................... 11.4 2.8 13.2 3.2 14.9 3.2%
Pension and other benefits...... 47.9 11.7 14.1 3.4 29.0 6.3%
Annual Incentive Compensation
Program....................... 0.0 0.0 11.3 2.7 7.9 1.7
Other........................... (1.7) (0.4) (0.6) (0.1) 6.8 1.5%
------- ----- ------- ----- ------- -----
Total...................... R$411.3 100.0% R$419.1 100.0% R$461.8 100.0%
======= ===== ======= ===== ======= =====
32
We believe that our labor costs, administrative expenses and depreciation
are relatively fixed costs, while electricity and chemicals are variable costs.
WRITE-OFF POLICY. We consider the following factors in determining which
assets are impaired or require write off:
- the physical condition of the asset;
- the economic feasibility of repairing the asset;
- the lifespan of the asset; and
- our need for the asset.
We analyze overdue accounts receivable monthly. Based on our monthly
analysis, we determine the amount to include in our allowance for doubtful
accounts. Amounts owed by public-sector entities can often be recovered by
offsetting our accounts receivable against our accounts payable with these
entities or, in the case of the state of Parana, by offsetting our accounts
receivable against the dividends due to the state of Parana as a shareholder.
We are not permitted to write-off any amount owing to us from the
municipalities, the state of Parana or entities controlled by the state of
Parana.
The following tables set forth the aging of accounts receivable at December
31, 1999, 2000 and 2001, in millions of Reais:
1999
------------------------------------------------------------------------------------------
TOTAL
FROM 1 TO 60 FROM 61 TO FROM 181 TO MORE THAN OF TOTAL PAST ACCOUNTS
CURRENT DAYS 180 DAYS 360 DAYS 360 DAYS DUE RECEIVABLE
------- ------------ ---------- ----------- ------------ ---------- ----------
Public Sector
Municipalities..... R$ 2.1 R$ 2.8 R$ 2.0 R$ 6.6 R$ 15.4 R$ 26.8 R$ 28.9
State.............. 1.5 2.8 2.6 0.7 -- 6.1 7.6
Federal............ 0.2 0.3 0.2 0.1 1.4 2.0 2.2
------- ------- ------ ------- ------- ------ --------
3.8 5.9 4.8 7.4 16.8 34.9 38.7
Private Sector....... 31.0 18.3 2.5 5.1 10.6 36.5 67.5
Unbilled............. 38.9 -- -- -- -- -- 38.9
------- ------- ------ ------- ------- ------ --------
Total.............. R$ 73.7 R$ 24.2 R$ 7.3 R$ 12.5 R$ 27.4 R$ 71.4 R$ 145.1
======= ======= ====== ======= ======= ====== ========
2000
------------------------------------------------------------------------------------------
TOTAL
FROM 1 TO 60 FROM 61 TO FROM 181 TO MORE THAN OF TOTAL PAST ACCOUNTS
CURRENT DAYS 180 DAYS 360 DAYS 360 DAYS DUE RECEIVABLE
------- ------------ ---------- ----------- ------------ ---------- ----------
Public Sector
Municipalities..... R$ 1.8 R$ 2.6 R$ 2.1 R$ 8.3 R$ 23.2 R$ 36.2 R$ 38.0
State.............. 1.7 3.2 2.9 1.4 0.0 7.5 9.2
Federal............ 0.3 0.3 0.2 0.0 1.4 1.9 2.2
------- ------- ------ ------- ------- ------ --------
3.8 6.1 5.2 9.7 24.6 45.6 49.4
Private Sector....... 34.0 21.4 3.9 7.7 13.7 46.7 80.7
Unbilled............. 39.4 -- -- -- -- -- 39.4
------- ------- ------ ------- ------- ------ --------
Total.............. R$ 77.2 R$ 27.5 R$ 9.1 R$ 17.4 R$ 38.3 R$ 92.3 R$ 169.5
======= ======= ====== ======= ======= ====== ========
33
2001
------------------------------------------------------------------------------------------
TOTAL
FROM 1 TO 60 FROM 61 TO FROM 181 TO MORE THAN OF TOTAL PAST ACCOUNTS
CURRENT DAYS 180 DAYS 360 DAYS 360 DAYS DUE RECEIVABLE
------- ------------ ---------- ----------- ------------ ---------- ----------
Public Sector
Municipalities..... R$ 1.9 R$ 2.8 R$ 1.9 R$ 6.6 R$ 28.5 R$ 39.8 R$ 41.7
State.............. 1.7 3.2 2.9 -- 0.0 6.1 7.8
Federal............ 0.5 0.4 0.1 0.0 1.4 1.9 2.4
------- ------- ------ ------- ------- ------- --------
4.1 6.4 4.9 6.6 29.9 47.8 51.9
Private Sector....... 39.2 27.3 4.2 7.8 17.2 56.5 95.7
Unbilled............. 44.2 -- -- -- -- -- 44.2
------- ------- ------ ------- ------- ------- --------
Total.............. R$ 87.5 R$ 33.7 R$ 9.1 R$ 14.4 R$ 47.1 R$ 104.3 R$ 191.8
======= ======= ====== ======= ======= ======= ========
FINANCING COST. Our status as a state-owned company performing a public
service has in the past given us access to funding from various Brazilian
governmental sources. Much of this financing has been on terms and at rates that
are considerably more favorable than could be obtained by private companies.
A significant portion of our anticipated expansion over the next three
years will be funded under the "Paranasan" program. This program is partially
funded by the Japanese Bank for International Cooperation, or JBIC, to finance
the expansion of water supply and wastewater collection, treatment and disposal
facilities in the Curitiba metropolitan region and in the coastal area of the
state. Funds disbursed to the state of Parana as part of the JBIC loan after
December 31, 2001 will be on-lent to us under a "mirror" loan agreement under
which the principal and interest are calculated in Yen, but are payable in Reais
at the current exchange rate on each date of payment. We expect that draws under
the loan made after December 31, 2001 will reach an aggregate outstanding amount
of up to Y15.24 billion over the next three years (equivalent to R$269.8 million
at the commercial selling rate published by the Central Bank of Brazil for
December 31, 2001). These disbursements are repayable in installments over 12
years (2011 to 2023). This loan will accrue interest at a rate of 4.0% per year,
in the case of disbursements allocable to construction, and at a rate of 2.3%
per year, in the case of disbursements allocable to consulting and design
services.
Amounts disbursed under this program prior to December 31, 2001 are treated
as advances from shareholders for capital increases. A portion of these amounts
will be repaid to the state of Parana out of the proceeds of this offering, and
the remainder will be treated as a capital contribution by the state. As of
December 31, 2001, the total amount disbursed under the Paranasan loan and
advanced to us was Y7.7 billion (equivalent to R$136.9 million, or US$59.0
million at the commercial selling rate on December 31, 2001).
We cannot assure you that we will be able to continue to incur debt in the
future on terms and at rates as favorable as those that have been possible to
date.
34
RESULTS OF OPERATIONS AS A PERCENTAGE OF GROSS OPERATING REVENUE
The following table shows each item on our income statement, calculated as
a percentage of gross operating revenue, for the years ended December 31, 1999,
2000 and 2001.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1999 2000 2001
----- ----- -----
INCOME STATEMENT DATA
Gross operating revenue..................................... 100.0% 100.0% 100.0%
Sales taxes................................................. (3.7%) (3.7%) (3.8%)
Credit for prior periods' sales taxes....................... -- -- 2.2%
Net operating revenue....................................... 96.3% 96.3% 98.4%
Cost of operations.......................................... (26.4%) (25.3%) (24.2%)
General and administrative expenses......................... (35.0%) (32.1%) (27.5%)
Depreciation................................................ (9.5%) (9.4%) (9.2%)
Net gain on settlement and curtailment of defined-benefit
pension plan.............................................. -- 4.2% --
Other income................................................ 0.3% 0.4% 0.3%
Operating income............................................ 25.7% 34.1% 37.8%
Interest expense............................................ (11.6%) (8.5%) (6.8%)
Interest income............................................. 1.3% 1.0% 0.9%
Foreign exchange losses, net................................ (4.9%) (1.0%) (1.9%)
Other non-operating income.................................. (0.4%) (0.3%) (0.3%)
Provision for income taxes.................................. (1.2%) (4.5%) (6.4%)
Net income.................................................. 8.9% 20.8% 23.3%
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
GROSS OPERATING REVENUE. Gross operating revenue increased 13.2% to
R$761.6 million for the year ended December 31, 2001 from R$672.8 million in
2000. Of this amount, 74.1% was attributable to water operations and 25.9% to
wastewater operations. The increase in gross operating revenue is explained as
follows:
- WATER SUPPLY. Revenues from water supply operations increased 12.3% in
2001 from 2000, principally as a result of weighted average tariff
increases (based on volume consumed) of 10.9% in December 2000, which
were reflected in payments made at the beginning of January 1, 2001. The
number of water supply connections increased 2.8% to 1.97 million as of
December 31, 2001 from 1.91 million as of December 31, 2000. Amortization
of deferred income relating to initial connection charges was R$5.9
million in 2001 compared to R$5.7 million in 2000. However, because
per-customer consumption levels decreased, the volume of water billed
increased only 0.5% to 408.6 million cubic meters for 2001 from 406.5
million cubic meters for 2000. We believe that the decrease in
consumption levels resulted principally from the energy crisis in Brazil,
which resulted in the government promoting energy and water conservation.
- WASTEWATER. Revenues from wastewater services increased 15.9% in 2001
compared with 2000. The volume of wastewater billed increased 4.9% to
183.6 million cubic meters for 2001 from 175.0 million cubic meters for
2000. The number of wastewater connections increased 6.5% to 720,000 in
2001 from 676,000 in 2000. Amortization of deferred income related to
initial connection charges was R$2.9 million in 2001 compared to R$2.4
million in 2000. The water tariff increases of 10.9% that became
effective in December 2000 resulted in increased wastewater revenue
beginning in January 2001, since wastewater is invoiced at 80% of a
customer's monthly water bill.
35
SALES TAXES. As a percentage of gross operating revenue, sales taxes were
3.8% in 2001 and 3.7% in 2000. As a result of an increase in our revenues, sales
taxes increased 14.7% to R$28.9 million in 2001 from R$25.2 million in 2000.
Sales taxes are calculated based on gross operating revenues plus non-operating
revenues and financial revenues. These sales taxes consist of a federal tax for
worker assistance programs, or PASEP, of 0.65%, and a federal tax for social
welfare programs, or COFINS, of 3.0%.
CREDIT FOR PRIOR PERIODS' SALES TAXES. In 2001, we benefited from a
one-time judicial decision providing us with a R$17.2 million credit for sales
taxes paid in prior periods. There was no equivalent credit in 2000.
NET OPERATING REVENUE. Net operating revenue increased 15.8% to R$749.9
million in 2001 from R$647.6 million in 2000, as a result of the increase in
gross revenues and the one-time credit for prior periods' sales taxes.
COST OF OPERATIONS. Cost of operations increased 8.2% to R$184.3 million
in 2001 from R$170.3 million in 2000. This R$14.0 million increase is
principally accounted for by an increase of R$7.5 million, or 53.6% of the total
increase, in costs of electricity, mainly due to tariff increases, and an
increase of R$2.7 million, or 19.3% of the total increase, in raw materials
costs, principally consisting of increases in the cost and volume of chemicals
used in our treatment processes.
In 2001, our water and wastewater operations accounted for 86.6% and 13.4%,
respectively, of cost of operations compared with 87.5% and 12.5% in 2000. As a
percentage of gross operating revenue, cost of operations decreased to 24.2% in
2001 from 25.3% in 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 3.1% to R$209.6 million in 2001 from R$216.2 million in 2000. This
decrease of R$6.6 million is principally due to a reduction in the allowance for
doubtful accounts and changes in our pension plan. As a percentage of gross
operating revenue, general and administrative expenses decreased to 27.5% in
2001 from 32.1% in 2000.
Public-sector accounts receivable represent 35.2% of total billed accounts
receivable in 2001 compared to 37.9% in 2000. Public-sector accounts receivable
past due over 60 days were R$41.3 million in 2001 compared to R$39.5 million in
2000. We do not record provisions for past due public-sector receivables. Under
Brazilian law, the federal, state and municipal governments are required to pay
the expenses they incur. Therefore, we expect to recover a substantial portion
of our past due public-sector accounts receivable. In January 2002, we concluded
negotiations with the state of Parana and the municipality of Curitiba to
collect R$14.1 million in accounts receivable past due at December 31, 2001.
Private-sector accounts receivable represent 64.8% of total billed accounts
receivable in 2001 compared to 62.1% in 2000. Private-sector accounts receivable
past due over 60 days were R$29.2 million in 2001 compared to R$25.3 million in
2000. For private-sector customers, typically we disconnected water services
when a customer was over 60 days past due and will reestablish service when the
customer either pays or renegotiates the past due amounts. At December 31, 2001,
account receivable balances due from customers who had their service
disconnected were R$14.6 million compared to R$10.2 million in 2000. These
amounts were fully provided for in the allowance for doubtful accounts.
The provision for tax and legal proceedings increased to R$14.4 million in
2001 from R$6.2 million in 2000, resulting from additional environmental, labor
and civil claims recorded in 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
11.0% to R$70.4 million in 2001 from R$63.4 million in 2000. This increase of
R$7.0 million is due to an increase in property, plant and equipment in 2001,
due principally to expansion of the water distribution and wastewater collection
systems. As a percentage of gross operating revenue, depreciation and
amortization expenses remained relatively stable at 9.2% in 2001 compared to
9.4% in 2000.
OTHER INCOME, NET. Other income, net, remained stable in 2001 at R$2.5
million. Other income, net, consisted principally of income received for
providing technical advisory services to four companies.
36
INTEREST EXPENSE. Interest expense decreased 10.6% to R$51.4 million in
2001 from R$57.5 million in 2000. This reduction is principally due to lower
interest rates applicable to a portion of our Real-denominated floating-rate
debt during 2001, which was partially offset by slightly higher average loan
balances.
INTEREST INCOME. Interest income decreased 8.1% to R$6.8 million in 2001
from R$7.4 million in 2000. We earn interest income from earnings on short-term
investments and from charging interest on our accounts receivable. We had an
increase in customers with past due accounts during the period in 2001, due to
temporary restraints on enforcement actions against customers in the city of
Londrina and certain smaller municipalities, which resulted in our having less
cash available for short-term investments. The resulting decrease in interest
income was partially offset by interest received on the increased level of past
due accounts receivable.
FOREIGN EXCHANGE LOSSES, NET. Foreign exchange losses, net, increased to
R$14.1 million in 2001 from R$6.4 million in 2000. We realized foreign exchange
losses on our Dollar-linked loans. The increase in foreign exchange losses for
2001 relates to the effect of the significant devaluation of the Real on a
Dollar-linked long-term loan entered into with IBRD, which had an outstanding
balance of US$37.7 million as of December 31, 2001.
OTHER NON-OPERATING EXPENSES, NET. Other non-operating expenses, net,
increased 52.6% to R$2.9 million in 2001 from R$1.9 million in 2000. Other
non-operating expenses consist principally of losses from fixed assets sold.
PROVISION FOR INCOME TAXES. The provision for income taxes increased 59.3%
to R$48.6 million in 2001 from R$30.5 million in 2000. This increase is
principally the result of the increase in taxable income through December 31,
2001. As a percentage of income before taxes, the provision for income taxes was
21.5% in 2001 and 17.9% in 2000. This difference in effective tax rate results
from the application of a similar level of income-tax adjustments to a higher
level of pre-tax income in 2001.
NET INCOME. Net income increased 27.4% to R$177.8 million in 2001 from
R$139.6 million in 2000. This increase was a result of the factors discussed
above.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
GROSS OPERATING REVENUE. Gross operating revenue increased 15.5% to
R$672.8 million in 2000 from R$582.7 million in 1999. Of this amount, 74.7% was
attributable to water operations and 25.3% to wastewater operations. The
increase in gross operating revenue is explained as follows:
- WATER SUPPLY. Revenues from water supply operations increased 12.9% in
2000 compared to 1999. Additional revenue resulted from weighted average
tariff increases (based on volume consumed) of 3.0% that were reflected
in payments made beginning March 1, 2000 and increases of 10.0% that were
reflected in payments made beginning December 1, 1999. The number of
water supply connections increased 5.6% to 1.9 million in 2000 from 1.8
million in 1999, which contributed to the increase in water billed.
Amortization of deferred income related to initial connection charges was
R$5.7 million in 2000 compared to R$4.9 million in 1999. The volume of
water billed increased 2.0% to 406 million cubic meters in 2000 from 398
million cubic meters in 1999. Although tariffs are reviewed once a year,
they may become effective in installments.
- WASTEWATER. Revenues from wastewater services increased 23.8% in 2000
compared with 1999. The volume of billed wastewater increased 11.7% to
175.1 million cubic meters in 2000 from 156.8 million cubic meters in
1999. Amortization of deferred income related to initial connection
charges was R$2.4 million in 2000 compared to R$1.4 million in 1999. The
number of wastewater connections increased 12.6% to 676,000 in 2000 from
600,200 in 1999. The water tariff increases outlined above resulted in a
corresponding increase in wastewater revenue.
SALES TAXES. As a percentage of gross operating revenue, sales taxes
remained stable at 3.7% in 2000 and 1999. Sales taxes increased 16.7% to R$25.2
million in 2000 from R$21.6 million in 1999.
37
NET OPERATING REVENUE. Net operating revenue increased 15.4% to R$647.6
million in 2000 from R$561.1 million in 1999 as a result of the increase in
gross revenues.
COST OF OPERATIONS. Cost of operations increased 10.7% to R$170.3 million
in 2000 from R$153.8 million in 1999. This R$16.5 million increase is due to
several factors. There was an increase of R$6.0 million relating to network
maintenance services, which was principally due to an increase in the cost of
PVC pipes and connections used in preventative maintenance programs, and an
increase in the cost of hiring third-parties to perform the corrective
maintenance. Another increase of R$6.0 million in costs of electricity is due to
a 15.4% tariff increase. Increases in raw materials costs, consisting of
increases in the cost of chemicals used in our treatment processes and
maintenance and operation materials, also contributed to an increase in cost of
operations.
These increases were partially offset by a decrease in personnel-related
expenses of R$1.1 million, or 2.2%, compared to 1999, due to personnel and
overtime reductions. In 2000, we reduced our number of direct employees by 85
and our number of outsourced personnel by 339. In 2000, our water and wastewater
operations accounted for 85.8% and 14.2%, respectively, of cost of operations,
compared to 89.8% and 10.2% in 1999.
As a percentage of gross operating revenue, cost of operations decreased to
25.3% in 2000 from 26.4% in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6.0% to R$216.2 million in 2000 from R$204.0 million in 1999. This
increase of R$12.2 million is principally due to increases in the allowance for
doubtful accounts.
As a percentage of gross operating revenue, general and administrative
expenses decreased to 32.1% in 2000 from 35.0% in 1999.
Public-sector accounts receivable represent 37.9% of total billed accounts
receivable in 2000 compared to 36.5% in 1999. Public-sector accounts receivable
past due over 60 days were R$39.5 million in 2000 compared to R$29.1 million in
1999. We do not record provisions for past due public sector receivables. Under
Brazilian law, the federal, state and municipal governments are required to pay
the expenses they incur. Therefore, we expect to recover a substantial portion
of our past due public-sector accounts receivable.
Private-sector accounts receivable represent 62.1% of total billed accounts
receivable in 2000 compared to 63.5% in 1999. Private-sector accounts receivable
past due over 60 days were R$25.3 million in 2000 compared to R$18.2 million in
1999. At December 31, 2000, account receivable balances due from customers who
had their service disconnected were R$10.2 million compared to R$7.9 million in
1999. These amounts were fully provided for in the allowance for doubtful
accounts. Bad-debt expense increased to R$9.5 million in 2000 from R$1.0 million
in 1999. During 2000 and 1999, we implemented more concerted efforts to locate
private sector customers with past due balances. Based on these efforts, we were
able to refine our estimates of uncollectible accounts in 2000.
The provision for tax and legal proceedings decreased to R$6.2 million in
2000 from R$18.5 million in 1999. Beginning in 1996, we started utilizing
contracted labor services. These employees were typically under contract for two
years. During 1999, many of these contracts expired, and we received a greater
amount of labor claims, resulting in a larger provision recorded in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
14.6% to R$63.4 million in 2000 from R$55.3 million in 1999. This increase of
R$8.1 million is due to an increase in property, plant and equipment in 2000,
due principally to expansion of the water distribution and wastewater collection
systems. As a percentage of gross operating revenue, depreciation and
amortization remained relatively stable at 9.4% in 2000 compared to 9.5% in
1999.
NET GAIN ON SETTLEMENT AND CURTAILMENT OF DEFINED PENSION PLAN. During
2000, we curtailed our defined-benefit pension plan and instituted a
defined-contribution pension plan and settled certain disputes relating to
payments under our pension plan. As a result, we recognized a one-time gain of
R$28.4 million.
38
OTHER INCOME, NET. Other income, net, increased 31.6% to R$2.5 million in
2000 from R$1.9 million in 1999. Other income consists principally of income
received in exchange for providing technical advisory services.
INTEREST EXPENSE. Interest expense decreased 14.7% to R$57.5 million in
2000 from R$67.4 million in 1999. This decrease is principally due to the lower
interest rates applicable to our Real-denominated floating-rate debt and accrued
taxes during 2000 compared with 1999.
INTEREST INCOME. Interest income on financial investments decreased 3.9%
to R$7.4 million in 2000 from R$7.7 million in 1999. This decrease is largely
the result of lower than average interest rates in 2000 than in 1999.
FOREIGN EXCHANGE LOSSES, NET. Foreign exchange losses, net, decreased
77.8% to R$6.4 million in 2000 from R$28.8 million in 1999. We realized foreign
exchange losses on our Dollar-linked loans, which totaled US$41.8 million and
US$47.3 million at December 31, 2000 and 1999, respectively. This decrease in
foreign exchange losses is principally the result of a lower rate of
depreciation of the Real in 2000 than in 1999, when the government introduced a
floating-rate currency policy which resulted in significant devaluation early in
the year.
OTHER NON-OPERATING EXPENSES, NET. Other non-operating expenses, net,
decreased 26.9% to R$1.9 million in 2000 from R$2.6 million in 1999. Other
non-operating expenses consists principally of losses from assets sold.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 348.5% to
R$30.5 million in 2000 from R$6.8 million in 1999. This increase is principally
the result of our higher profits and a special one-time tax credit relating to a
temporary increase in sales tax for 1999. This was partially offset by a
decrease in the statutory tax rate to 34% for 2000 from 37% for 1999. As a
percentage of income before taxes, provision for income taxes was 17.9% in 2000
and 11.6% in 1999.
NET INCOME. Net income increased 169.0% to R$139.6 million in 2000 from
R$51.9 million in 1999. This increase was a result of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
The following table summarizes our cash flow activity during the years
ended December 31, 1999, 2000 and 2001.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- -------- --------
(IN MILLIONS OF R$)
Net cash provided by operating activities................ 212.4 272.3 308.5
Net cash used in investing activities.................... (184.3) (211.1) (269.0)
Net cash used in financing activities.................... (22.3) (53.4) (38.6)
CASH FLOWS FROM OPERATING ACTIVITIES. Our cash flows from operations was
R$308.5 million in 2001, R$272.3 million in 2000 and R$212.4 million in 1999.
These increases in cash flows from operations reflect annual increases in our
tariffs and increases in volume of water sold as a result of the expansion of
our system, as compared to cost of operations.
CASH FLOWS FROM INVESTING ACTIVITIES. Our net cash used in investing
activities was R$269.0 million in 2001, R$211.1 million in 2000 and R$184.3
million in 1999. These figures reflect the high level of our investment in
expanding our water production and distribution systems, wastewater collection,
treatment and disposal systems and in building new dams and reservoirs in each
of these years. The amount for 2001 also includes R$17.4 million paid as a first
installment on the Curitiba concession.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used in financing
activities was R$38.6 million in 2001, R$53.4 million in 2000 and R$22.3 million
in 1999. Our negative cash flows from financing activities
39
in 1999 and subsequent periods is a result of Caixa Economica Federal, a
Brazilian development bank, suspending financing for sanitation companies in
1998. The figures in this paragraph reflect advances from shareholders.
PAST AND ANTICIPATED CAPITAL EXPENDITURES
From 1999 to 2001, we spent a total of R$647.0 million on capital
expenditures. In the near future, we will require financing primarily to fund
the expansion of our water production and distribution systems and wastewater
collection, treatment and disposal systems and in building new dams and
reservoirs. We may also make capital expenditures in order to acquire new
concessions or stakes in other sanitation companies. The following table
summarizes our capital expenditure plan over the next five years.
2002 2003 2004 2005 2006 TOTAL
------- ------- ------- ------- ------ ---------
(IN MILLIONS OF R$)
Water................... R$123.5 R$111.3 R$ 39.2 R$ 24.5 R$13.7 R$ 312.2
Wastewater.............. 229.8 292.2 82.1 39.6 41.1 684.8
Operational
improvements.......... 29.6 33.6 38.4 39.9 40.9 182.4
------- ------- ------- ------- ------ ---------
New businesses.......... 20.0 40.0 -- -- -- 60.0
------- ------- ------- ------- ------ ---------
Total.............. R$402.9 R$477.1 R$159.7 R$104.0 R$95.7 R$1,239.4
======= ======= ======= ======= ====== =========
The anticipated levels of capital expenditures for 2002 and 2003 are higher
than in other years because of scheduled expenditures under the Paranasan
program.
SHORT-TERM DEBT. On July 3, 2001, we issued R$74.0 million face amount of
zero-coupon commercial paper notes due June 28, 2002, which had a present value
of R$68.1 million at December 31, 2001. We entered into swap contracts in July
2001 to swap the interest rate of such commercial paper from a fixed effective
rate of 18.56% per year into 101.7% of CDI (Certificado de Deposito
Interbancario -- the Brazilian Interbank Deposit Certificate rate).
LONG-TERM DEBT. To finance the expansion of our water production and
distribution systems, wastewater collection, treatment and disposal systems and
to build new dams and reservoirs, we have incurred indebtedness from various
sources, mostly governmental. The following table summarizes our long-term
indebtedness as of December 31, 2001. Figures in this table do not include
advances from shareholders, which are treated as short-term debt.
LONG-TERM DEBT AS OF DECEMBER 31, 2001
PRINCIPAL
LENDER OUTSTANDING CURRENCY MATURITY INTEREST RATE AMORTIZATION
------ ------------------- -------- -------- ------------------------------ ------------
(IN MILLIONS OF R$)
Banco do Brasil S.A..... R$298.2 Real 03/2014 TR + 7.504%(1)(2) Monthly(2)
IBRD (Prosam)(3)........ 87.5(4) Dollar 08/2007 5.01%(5) Semiannual
IDB (PR Urbano)......... 57.9 Real 02/2006(6) TR + (8.00% to 10.14%)(1)(2) Monthly(2)
IBRD (PEDU)............. 69.5 Real 06/2009(6) TR + 10.18%(1)(4) Monthly(2)
Caixa Economica
Federal............... 256.1 Real 11/2019(6) TR + (5.00% to 12.00%)(1)(2) Monthly(2)
Supplier financing...... 33.3 Real 02/2005(6) TJLP + (5.84% to 7.72%)(7)(8) Monthly(8)
Maringa municipality.... 0.5 Real 03/2014 TR + 6.00%(1)(2) Monthly(2)
---------------
(1) "TR" refers to the Central Bank of Brazil's short-term floating reference
rate, the Taxa Referencial (Reference Rate). The TR was created as reference
interest rate but is used in some situations as a monetary-adjustment index.
(2) Under these loans, the portion of each interest payment that corresponds to
the Taxa Referencial (Reference Rate) (deemed to be a monetary adjustment of
the principal amount) is capitalized on a
40
monthly basis, and that capitalized portion is included in the principal to
be amortized. Thus, the amortization payment increases over time. The
portion of the interest payment that corresponds to the interest spread is
paid on a current basis, based on the interest periods applicable to each
loan.
(3) Represents loans by the specified lender to the state of Parana, which were
on-lent by the state to us on the same terms received by the state.
(4) The outstanding amount of this loan in Dollars was US$37.7 million on
December 31, 2001.
(5) The interest rate is stated as a fixed rate but is subject to renegotiation
on a semiannual basis based on changes in market interest rates.
(6) Each of these entities has made more than one loan to us at various dates in
the past. The maturity date indicated is the last maturity date to occur on
any of the loans from this entity.
(7) "TJLP" refers to the Central Bank of Brazil's long-term floating reference
rate, the Taxa de Juros de Longo Prazo (Long-Term Interest Rate). The TJLP
was created as reference interest rate but is used in some situations as a
monetary-adjustment index.
(8) These amounts consist of payments to service suppliers under the applicable
construction contracts. The delayed payments under these contracts are paid
in installments, generally over a three- to five-year period. Interest on
these delayed payments is generally capitalized on a monthly basis based on
the TJLP floating reference rate plus an interest spread.
In addition to these obligations for borrowed money, we are obligated to
pay a concession fee of R$125.0 million to the municipality of Curitiba over a
30-year period, together with the periodic payment of an adjustment amount based
on the Brazilian consumer price index. We paid R$17.4 million of this amount to
the municipality of Curitiba in December 2001. At December 31, 2001, the present
value of this liability was R$62.8 million.
ANTICIPATED SOURCES OF FUNDS
Prior to 1998, we relied principally on loans from Caixa Economica Federal,
Banco do Brasil, and, to a lesser extent, on loans from international
development agencies to fund the expansion of our water and wastewater networks.
Beginning in early 1998, Caixa Economica Federal sharply limited the amount of
new credit lines it extended for our benefit and the benefit of other public
sanitation companies in Brazil, as a result of changes in governmental policies.
From that period to the present, the on-going expansion of our network has been
financed by disbursements under lines of credit already in place with Caixa
Economica Federal, disbursements from the state of Parana under pre-arranged
loans to the state from international development banks, out of our operational
cash flows and through arrangements with our contractors for deferred payments.
A portion of the capital needed for our projected investment program for
2002-2004 is expected to come from the Paranasan program, which is based on a
loan agreement entered into on January 8, 1998 between the state of Parana and
the Japan Bank for International Cooperation, known as JBIC. Under this program,
JBIC has agreed to make a loan to the state in an aggregate amount of up to
Y23.69 billion (equivalent to approximately R$419.4 million, or US$180.7
million, at the commercial selling rates published by the Central Bank of Brazil
for December 31, 2001), to be disbursed over an eight-year period starting in
1998 for the development and construction of water and wastewater projects in
the state of Parana. The grace period on the loan is seven years, and the loan
will be subsequently amortized over 18 years (2005 to 2023). The first
amortization payment by the state of Parana is due in January 2005. Interest
will accrue at a rate of 4.0% on the portion allocated to construction and at a
rate of 2.3% on the portion allocated to consulting and design. Of the total
loan amount, up to Y17.47 billion is to be allocated to construction (equivalent
to approximately R$309.3 million, or US$133.3 million, at the commercial selling
rates published by the Central Bank of Brazil for December 31, 2001) and up to
Y4.06 billion is to be allocated to consulting and design (equivalent to
approximately R$71.8 million, or US$30.9 million, at the commercial selling
rates published by the Central Bank of Brazil for December 31, 2001). The
remaining Y2.16 billion (equivalent to approximately R$38.3 million, or US$16.5
million, at the
41
commercial selling rates published by the Central Bank of Brazil for December
31, 2001) is for contingencies and will be allocable either to construction or
to consulting and design upon its being drawn.
At December 31, 2001, the total amount disbursed to the state of Parana and
advanced to us under the Paranasan program was Y7.7 billion (equivalent to
R$136.9 million, or US$59.0 million at the commercial selling rates published by
the Central Bank of Brazil on December 31, 2001). On January 29, 2002, we
entered into a "mirror" loan agreement with the state of Parana, under which the
state agreed to forward to us the remaining amounts to be received by it under
the Paranasan program, up to Y15.24 billion (equivalent to approximately R$269.8
million, or US$116.3 million, at the commercial selling rate on December 31,
2001), and we agreed to repay to the state all amounts that become due under the
program, at the times specified in the program. This "mirror" loan agreement
covers amounts disbursed on or after January 1, 2002, which we will start
repaying to the state in 2011. From 2005 to 2011, the state of Parana will repay
amounts received under this loan prior to January 1, 2002.
We expect that much of our expansion over the next three years will be paid
out of operating cash flows and with proceeds from the undrawn portion of the
Paranasan project. In addition, a portion of our expansion will be financed with
the proceeds of the global offering and, as needed, additional borrowings from
commercial banks or governmental development banks. As of December 31, 2001, we
have in place undrawn commitments on outstanding credit facilities in an
aggregate undrawn amount of R$19.1 million. We believe that, for at least the
next three years, our cash flows from operations and these sources of financing
will be adequate to meet all of our anticipated obligations and capital
expenditure and dividend requirements. However, if our obligations and capital
expenditure requirements are in excess of anticipated levels, or if our cash
flows from operations are lower than anticipated, we may be required to seek
additional equity financing or debt financing or to scale back our capital
expenditure program.
ADVANCES FROM SHAREHOLDERS
The majority of advances from shareholders were received from the state of
Parana under the Paranasan program to enable us to finance a portion of the
construction of certain water and wastewater systems. We initially considered
those amounts as advances for capital increases in an aggregate amount of
R$136.9 million at December 31, 2001. There were no contractual due dates or
interest charges for these advances. On January 29, 2002 we signed a formal
agreement with the state of Parana, under which a portion of the total amount
advanced to us will be returned to the state of Parana out of the proceeds of
this offering.
In addition, between 1996 and 2000, the state of Parana paid R$44.0 million
to COPEL (a shareholder of Domino and controlled by the state of Parana) on our
behalf. Additionally, during the same period, we had accrued amounts owed to the
state of Parana for loans (R$6.6 million) and dividends (R$11.1 million)
totaling R$17.7 million.
The above mentioned amounts resulted in an aggregate advanced amount of
R$198.6 million. Interest expense recorded with respect to these advances
amounted to approximately R$13.3 million, R$5.1 million, R$2.2 million and R$0.3
million for the years ended December 31, 2001, 2000, 1999 and 1998,
respectively, in a total aggregate amount of approximately R$20.9 million.
Therefore, after accruing such interest, the total amount due to the state of
Parana reached R$219.5 million as of December 31, 2001.
In accordance with a separate agreement also executed on January 29, 2002,
the aggregate balance of R$40.0 million, consisting of part of the amount due to
COPEL (R$22.3 million), plus the loans due to the state (R$6.6 million), plus
the dividends owed to the state of Parana (R$11.1 million), will not be owed to
and will not be repaid to the state of Parana. This amount has been recorded as
"Additional paid-in-capital" in shareholders' equity in 2002.
Therefore, after deducting the R$40.0 million of "Additional paid-in
capital", as of December 31, 2001, the aggregate outstanding amount of advances
from the state will be reduced to R$179.5 million. This amount will be repaid
using part of the proceeds from this offering and includes interest based on the
average interest rate of borrowings obtained by us during the periods the
advances have been outstanding.
42
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial market risks to which we are exposed include risks of
volatility in Brazilian interest rates and risks of fluctuations in foreign
exchange rates. Specifically, at December 31, 2001, interest on 90.0% of our
outstanding long-term indebtedness was calculated based on floating interest
rates, consisting exclusively of Brazilian floating interest rates. At that
date, approximately 10.0% of our total (long- and short-term) outstanding
indebtedness was linked to currencies other than the Real. As a result of Yen-
linked indebtedness to be incurred under the Paranasan program, we expect that
the percentage of our indebtedness that is linked to currencies other than the
Real will likely increase significantly over the next two years.
INTEREST-RATE RISK
The following table sets forth, for each category of our long-term
floating-rate debt, expected payment information for the following three years.
The information in this table is based on loans outstanding as of December 31,
2001.
2002 2003 2004 THEREAFTER TOTAL FAIR VALUE(1)
------ ------ ------ ---------- ------ -------------
(MILLIONS OF R$)
TR(2)....................................... R$682.2
Principal maturing in period(3)........... R$58.3 R$61.3 R$62.3 R$518.55 R$700.5
Effective weighted average interest
rate.................................... TR + TR + TR + TR + TR +
9.724% 9.740% 9.740% 9.740% 9.7%
TJLP(4)..................................... R$33.3
Principal maturing in period(5)........... R$18.0 R$18.5 R$12.0 R$8.0 R$56.5
Effective weighted average interest
rate.................................... TJLP + TJLP + TJLP + TJLP + TJLP +
7.085% 7.085% 7.085% 7.085% 7.08%
---------------
(1) Fair value as of December 31, 2001. Fair value is calculated as book value
as of December 31, 2001.
(2) "TR" refers to the Central Bank of Brazil's short-term floating reference
rate, the Taxa Referencial (Reference Rate). The TR was created as reference
interest rate but is used in some situations as a monetary-adjustment index.
For the period from January 1, 1997 through December 31, 2001, the average
TR (calculated as the mean of the month published TR rates) was 0.4388% per
month. During this period, the TR fluctuated from a low of 0.0312% per month
to a high of 1.9100% per month.
(3) Under our TR-based debt, on each payment date, the portion of each accrued
interest payment corresponding to the TR is capitalized, and the portion
corresponding to the interest spread is paid. Thus, the amounts maturing
through amortization payments will vary with fluctuations in the TR. The
figures shown do not reflect this capitalization.
(4) "TJLP" refers to the Central Bank of Brazil's long-term floating reference
rate, the Taxa de Juros de Longo Prazo (Long-Term Interest Rate). The TJLP
was created as reference interest rate but is used in some situations as a
monetary-adjustment index. For the period from January 1, 1997 through
December 31, 2001, the average TJLP (calculated as the mean of the month
published TJLP rates) was 11.04% per year. During this period, the TJLP
fluctuated from a low of 9.25% per year to a high of 18.1% per year.
(5) Under our TJLP-based debt, on each payment date, the portion of each accrued
interest payment corresponding to the TJLP is capitalized, and the portion
corresponding to the interest spread is paid. Thus, the amounts maturing
through amortization payments will vary with fluctuations in the TJLP. The
figures shown do not reflect this capitalization.
Our single Dollar-linked loan, in an outstanding principal amount of
US$37.7 million at December 31, 2001, bears interest at a fixed rate that is
subject to renegotiation semiannually based on market rates.
In addition to these long-term floating-rate loans, we are exposed to a
moderate level of interest-rate risk in respect of R$74.0 million face amount of
zero-coupon commercial paper notes due June 28, 2002,
43
the yield on which has been swapped against a floating-rate yield based on the
CDI, which is a Brazilian inter-bank CD rate.
EXCHANGE-RATE RISK
The following table sets forth, for each category of our long-term debt
that is linked to currencies other than the Real, expected payment information
for the following three years. The information in this table is based on loans
outstanding as of December 31, 2001.
2002 2003 2004 THEREAFTER TOTAL FAIR VALUE(1)
------ ------ ------ ---------- ------- -------------
(MILLIONS OF R$)
DOLLAR-LINKED(2).................... R$ 87.5
Principal maturing in period(3)... R$14.6 R$14.6 R$14.6 R$ 43.7 R$ 87.5
Effective average interest
rate(4)......................... 3.68% 3.68% 3.68% 3.68% 3.68%
YEN-LINKED(5)....................... R$269.8
Principal maturing in period(6)... R$ 0.0 R$ 0.0 R$ 0.0 R$269.8 R$269.8
Effective weighted average
interest rate................... 3.61% 3.61% 3.61% 3.61% 3.61%
---------------
(1) Fair value as of December 31, 2001. Fair value is calculated as book value
as of December 31, 2001.
(2) These loans are actually linked to and payable in Reais, and the amount
payable in Reais is calculated by using the Central Bank of Brazil's selling
rate in Dollars. For the period from January 1, 1997 through December 31,
2001, the average Dollar-Real commercial selling rate published by the
Central Bank of Brazil (calculated as the mean of the month-end published
commercial selling rate) was R$1.6780 = US$1.00. During this period, the
commercial selling rate per US$1.00 fluctuated from a low of R$1.0395 to a
high of R$2.8007.
(3) Under our US Dollar-based debt, on each payment date, the portion of each
accrued interest payment corresponding to the currency devaluation is
capitalized, and the portion corresponding to the interest spread is paid.
Thus, the amounts maturing through amortization payments will vary with
fluctuations in the Dollar/Real exchange rate. The figures shown do not
reflect this capitalization.
(4) This loan bears interest at a fixed rate, but the interest rate is subject
to renegotiation semiannually based on market rates.
(5) These loans are linked to Yen but are payable in Reais, based on the
Yen-Real exchange rate in effect on each payment date. For the period from
January 1, 1997 through December 31, 2001, the average Yen-Real commercial
selling rate per Y1.00 published by the Central Bank of Brazil (calculated
as the mean of the month-end published commercial selling rate) was
R$0.014105. During this period, the commercial selling rate per Y1.00
fluctuated from a low of R$0.0079048 to a high of R$0.024007.
(6) Under our Yen-linked debt, on each payment date, the portion of each accrued
interest payment corresponding to the currency devaluation is capitalized,
and the portion corresponding to the interest spread is paid. Thus, the
amounts maturing through amortization payments will vary with fluctuations
in the Yen. The figures shown do not reflect this capitalization.
Except as noted above with regard to our outstanding commercial-paper
notes, we do not enter into swap or other hedging instruments with regard to our
exposure to market risk, nor do we make investments in forward or futures
contracts or any similar derivative instruments. We currently anticipate that we
may incur R$269.8 million of similar Yen-linked debt over the next three years.
This amount, however, could vary widely, depending on our financing needs and
our available sources of credit.
RECENT CHANGES IN ACCOUNTING POLICY
We became subject to SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" on January 1, 2001. SFAS No. 133 requires that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet, at fair value. SFAS No. 133 also requires
44
more extensive disclosure about derivative transactions and hedging strategies
than was previously the case. We have entered into swap contracts in July 2001
to swap the interest rate of R$74.0 million of one-year commercial paper from a
fixed effective rate of 18.56% per year into 101.7% of CDI (Certificado de
Deposito Interbancario -- the Brazilian Interbank Deposit Certificate rate). The
adoption of SFAS No. 133 did not have a significant effect on our earnings or on
our financial position as a result of the contracted fixed rate, because of the
insignificant CDI fluctuations during the July to December 2001 period.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS 141 requires that all business combinations be
accounted for by the purchase method of accounting and changes the criteria for
recognition of intangible assets acquired in a business combination. The
provisions of SFAS 141 apply to all business combinations initiated after June
30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized; however, these assets must be reviewed at
least annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for Sanepar's fiscal year 2003, with early adoption permitted at
the beginning of Sanepar's fiscal year 2002. However, goodwill and intangible
assets acquired after June 30, 2001 are subject immediately to the non-
amortization provisions of SFAS 142. We do not expect that the adoption of SFAS
141 and 142 will have a material effect on our financial position or results of
operations.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", on the accounting for obligations associated with the
retirement of long-lived assets. SFAS 143 requires a liability to be recognized
in the financial statements for retirement obligations meeting specific
criteria. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
We believe that adoption of this statement will not have a significant impact on
our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The provisions of SFAS 144 will be effective for our fiscal year
2003 and will be applied prospectively. We are currently in the process of
evaluating the potential impact that the adoption of SFAS 144 will have on our
financial position and results of operations, but we believe that adoption of
this statement will not have a significant impact on our financial position or
results of operations.
45
BUSINESS
References in this prospectus to "customers" are to customer accounts with
us that relate to water or wastewater connections. Customers include houses,
apartment buildings, industries, commercial establishments, hospitals and public
buildings, among others, each of which may include many individuals.
References in this prospectus to "service areas" relate to the areas served
by us which are enclosed by the political boundaries of the municipalities
granting concessions to us. Under the Brazilian system of political
organization, all land within a state belongs to one or another of that state's
municipalities. However, since our concession contracts do not require us to
provide service to sparsely inhabited areas, our "service areas" do not include
undeveloped or sparsely populated areas that we do not serve within the
political boundaries of each municipality.
Population calculations for the state of Parana and for municipalities
within the state are based on estimates published by the Brazilian Institute of
Geography and Statistics, or IBGE, or by the Parana Institute of Economic and
Social Development, or IPARDES. We have used composite figures where these
estimates have differed from each other or differed from our own estimates.
Estimates of the population that we service is based on our calculations of
households and businesses served, multiplied by our estimate of the average
number of persons included in a household or business.
INTRODUCTION
We operate two services in the state of Parana, Brazil: water supply and
wastewater collection, treatment and disposal. Since our incorporation 39 years
ago, we have been the principal supplier of water and wastewater services in the
state of Parana. As of December 31, 2001, we provided water to 7.6 million of
the 9.7 million inhabitants of the state of Parana and wastewater collection,
treatment and disposal services to 3.2 million people throughout the state. We
estimate that this accounts for 99% and 42%, respectively, of the population in
our service areas.
THE WATER AND WASTEWATER INDUSTRIES IN BRAZIL
The water and wastewater industries in Brazil are experiencing rapid
growth, as Brazil has sought to modernize these services. According to the World
Bank, 91% of Brazil's urban population had access to running water in 1997, up
from 50% in 1968. Similarly, in 1997, 43% of Brazil's urban population had
access to wastewater facilities, up from 25% in 1968. At present, only about 20%
of Brazil's collected wastewater is treated, and running water is not potable in
all regions. There is some discrepancy in coverage between the northern and
southern regions of the country, with cities in Brazil's southern region
generally being wealthier and, therefore, more developed.
Although the past three decades have seen dramatic progress, the Brazilian
government has stated that it intends to accelerate this rate of growth, with
the goal of achieving universal water and wastewater coverage in urban areas by
2010. With water services, that goal has been achieved in many areas, and future
growth will only require keeping pace with the growth in the Brazilian urban
population. However, with wastewater services, the need for investment and
growth is more marked. The capital required to achieve universal coverage from
1999 to 2010 will be approximately R$34 billion, according to estimates prepared
by the Brazilian National Development Bank (Banco Nacional de Desenvolvimento
Economico e Social, or BNDES). According to the 2000 Water and Wastewater
Service Report published by the National Sanitation Information System, or the
2000 SNIS Report, total investment in the water and wastewater industry in
Brazil in 2000 by the companies surveyed totaled R$2.4 billion.
Historically, water and wastewater services in Brazil were operated by
state governments, generally through concessions granted to state-owned
companies. Beginning in 1995, responsibility for granting these concessions
passed to each municipal government. In 1998, the laws in Brazil governing
ownership of sanitation and water companies were liberalized to allow private
investment in water companies, so long as the state's ownership of voting shares
did not drop below 60%. Subsequently, Brazilian and international
46
companies have invested in a number of Brazilian water and wastewater
concessions, including in Manaus, Niteroi, Campo Grande and Paranagua.
Federal laws governing the water and wastewater sector are under review by
the Brazilian legislature and are expected to be further revised. Under the
Brazilian concession system, only one company operates water and wastewater
services in each municipality, and each concession generally lasts 30 years.
The 2000 SNIS Report completed a survey of the Brazilian water and
wastewater sector covering 217 sanitation service providers. These include 26
regional companies, each covering several municipalities, four service providers
that serve one main municipality and a small number of contiguous municipalities
and about 187 local service (municipal) providers.
In 2000, the total urban population of Brazil was approximately 137.7
million, and there are 5,507 municipalities in Brazil, according to the 2000
SNIS report. The regional and local providers surveyed provide water services to
4,033 municipalities and wastewater services to 882 municipalities. The 4,033
municipalities, with a combined population of 123.4 million, comprise 73.2% of
all municipalities in Brazil and approximately 89.6% of Brazil's urban
population. The 882 municipalities, with a combined population of 91.4 million,
comprise 16.0% of all municipalities in Brazil and approximately 66.1% of its
urban population. Only 9 out of the 26 regional sanitation companies had
revenues greater than their total operating expenses in 2000. Also according to
the 2000 SNIS report, there were 28.5 million active water connections and 11.7
million active wastewater connections in the area covered by the regional and
local sanitation companies. In such area, the water system had approximately
328,600 km of water pipes, and the wastewater system had approximately 118,100
km of wastewater pipes.
A detailed overview of the Brazilian regulation governing the water and
wastewater industries in Brazil is contained under "Regulation".
OUR KEY STRENGTHS
Our key strengths include the following:
- STABLE, WELL ESTABLISHED BUSINESS. We are Brazil's fourth largest
sanitation company in terms of net revenues and the third largest in
terms of gross profits according to the July 2001 Balanco Anual, a report
published by a leading financial newspaper in Brazil. We provide services
to approximately 78% of the population of the state of Parana. Exame, a
Brazilian business magazine, ranked us as the best company in the
southern region of Brazil and as the fourth best sanitation company in
Brazil in terms of return on investments and also as one of the fifteen
best Brazilian companies in the public service sector in 2001. We were
the only sanitation company listed. We have over 39 years of experience
in providing water and wastewater services to the population of Parana.
Over the past five years, we have shown consistent improvement in our
results of operations. As a result, we generate a significant amount of
operating cash flows, which in recent years has contributed to the
funding of our aggressive capital expenditure program as well as
substantial dividends to our shareholders.
In addition, we believe that our position as the incumbent provider of
water and sanitation services to 342 out of the 399 municipalities in the
state gives us an advantage in obtaining extensions of our current
concessions and in exploring the expansion of our services or in the
provision of new services. We currently have formal concession contracts
with 96% of the municipalities we serve (including the municipality of
Curitiba, Parana's state capital), representing approximately 99% of our
revenues in 2001.
- SIGNIFICANT OPPORTUNITIES FOR GROWTH. We believe that we have
significant avenues for growth, both within our business of wastewater
collection, treatment and disposal in Parana and in related new business
lines. It is our goal, which is supported by the state of Parana, to
provide for universal access to adequate wastewater services in the urban
and semi-urban regions of the state. Currently, only 42% of the
population in our service areas has access to wastewater services. Our
capital
47
expenditure plan contemplates increasing this coverage rate over time to
60% by the end of 2005 and to 66% by 2010.
We are also considering opportunities to obtain new water and wastewater
concessions outside the state of Parana. Additionally, we are beginning
to supply specialized water that meets certain technical specifications
to high-usage industrial customers in the Curitiba metropolitan region.
We plan to continue seeking similar opportunities in the future. We
recently signed a 20-year solid-waste concession agreement with the
municipality of Cianorte. We are considering providing solid-waste
services to additional municipalities with which we already have an
existing relationship.
- HIGH-QUALITY, RECOGNIZED OPERATIONS. We are well known throughout Brazil
and the developing world as both a leader in innovation as well as a
high-quality provider of sanitation services. We were the first company
in Brazil to receive both the ISO 14001 certification for a complete
water and wastewater system (at Foz do Iguacu) and the ISO 9002
certification for a full (abstraction, production and distribution) water
system (at Campo Largo). We are the only Brazilian company to be awarded
the National Sanitation Quality Award in each of the past four years. We
have an efficient billing system and meter all our customers. We are also
developing, in conjunction with local farmers, environmentally friendly
and safe usages of wastewater-treated sludge as fertilizer for the
cultivation of corn and other appropriate crops.
- EXPERIENCED, FORWARD-LOOKING PARTNERS. Domino Holdings S.A., a private
consortium, holds 39.71% of our common shares and 23.16% of our preferred
shares. This consortium includes:
- Sanedo Ltda., an indirect subsidiary of Vivendi Environnement S.A.,
the world's leading water company and one of the world's largest
waste-management service providers;
- Andrade Gutierrez Concessoes S.A., a subsidiary of Andrade Gutierrez
S.A., one of Brazil's largest conglomerates, which manages
construction in Brazil and Portugal, public concessions for
infrastructure and telecommunications services;
- Opportunity Daleth S.A., a holding company for the water and
sanitation investments of CVC/ Opportunity, a Brazilian
private-equity fund; and
- Copel Participacoes S.A., a subsidiary of Companhia Paranaense de
Energia -- COPEL, the principal power company in the state of
Parana.
Our relationship with Vivendi Environnement gives us access to
state-of-the-art technology and worldwide knowledge in areas of water and
wastewater treatment. Andrade Gutierrez provides substantial managerial
expertise, particularly in the area of concessions. CVC/Opportunity
provides valuable links to the investment community and to consulting and
financial planning resources. We believe that access to the resources of
our shareholders provides us with the ability to take advantage of
potential future opportunities.
- ACCESS TO ATTRACTIVE FINANCING TERMS. From 1997 to 2001 we were able to
finance on average 46% of our capital expenditure program. Because we
have operated in a sector that is a focus of social and economic
development for the federal and state governments, we have acquired this
financing at maturities and rates unavailable to most companies operating
in Brazil. On December 31, 2001, only 10.0% of our total (long and
short-term) indebtedness was linked to Dollars (equivalent to
approximately R$87.5 million at that date). Under the Paranasan program,
we expect to incur Yen-linked indebtedness to reach an aggregate
outstanding amount of up to Y15.24 billion over the next four years
(equivalent to R$269.8 million at the commercial selling rate published
by the Central Bank of Brazil for December 31, 2001), at interest rates
of 2.3% and 4.0%, depending on the use of the proceeds.
- OPERATIONS IN AN ECONOMICALLY PROGRESSIVE STATE. The state of Parana has
been a leader among Brazilian states in attracting international
industry. Business-oriented government policies have expanded industrial
centers over a 20-year period. According to Parana Business and
Opportunities, a magazine published by the state of Parana, almost US$29
billion of investments in private
48
industry and infrastructure will be made in the state from 1995 to 2003.
Parana is now home to the industrial plants of Trytech (a Mercedes/BMW
venture), Audi/Volkswagen, Renault, Volvo, Bosch, Coca-Cola and Siemens.
In addition, the following Brazilian companies either currently have or
are in the process of building plants in the state: Petroleo Brasileiro
S.A. -- Petrobras (the national oil and gas company), Companhia de
Bebidas das Americas -- AmBev (one of the world's largest brewers),
Companhia Siderurgica Nacional -- CSN (one of Brazil's leading steel
companies) and Ultrafertil S.A. (one of the largest fertilizer producers
in Brazil).
- STRATEGIC RELATIONSHIP WITH THE GOVERNMENT. The state of Parana holds
60.0% of our common shares and 34.99% of our preferred shares. Since a
private consortium acquired 39.71% of our common shares in 1998, we have
gained considerable operating autonomy. The state government has also
approved tariff adjustments that have allowed us to continue expanding our
services throughout the state.
Although we cannot assure you that it will continue to do so, we believe
that the state of Parana has a strong incentive to ensure the continued
profitability of our company because the expansion of quality water and
sanitation services is a priority of the state. In addition, when we are
profitable, we pay dividends to our shareholders, including the state of
Parana, which is our majority shareholder.
We note that there are certain risks inherent in our control by the
government, including risks that the government may pursue objectives that
are not aligned with our objectives. These risks are disclosed in detail
in the section entitled "Risk Factors".
You should consider these strengths together with the risks that we believe
are inherent in an investment in the ADSs and preferred shares. See the
discussion of "Risk Factors" beginning on page 7.
OUR STRATEGY
Our strategy is primarily the expansion of our water and wastewater
services to the population of the state of Parana while maintaining high
operating standards. We will seek to expand water services to meet population
growth in our service areas as well as improve the efficiency with which we
deliver these services to our customers. We will particularly focus on the
expansion of wastewater services to existing water customers throughout the
state, an area in which we believe there is a significant growth opportunity.
Additionally, we are considering opportunities to build on our reputation by
competing for and adding new concessions outside of Parana, as well as to enter
business lines related to our water and wastewater businesses.
In order to develop our business, we intend to pursue the following
strategic goals:
- CONTINUE TO EXPAND AND IMPROVE OUR BUSINESS WITHIN OUR EXISTING SERVICE
AREAS. We hope to achieve this goal through a combination of actions:
o EXPANSION AND GROWTH OF OUR WASTEWATER NETWORK. As of December 31,
2001, we provided wastewater collection and treatment services to
only 42% of our existing water customers. Under our ten-year
investment plan, we intend to increase this coverage level to 60% by
the end of 2005 and to 66% by the end of 2010. We believe that the
projected addition of approximately 720,000 new wastewater
connections over the next ten years presents us with a considerable
and sustainable growth opportunity.
o MAINTAIN NEARLY UNIVERSAL WATER COVERAGE. As of December 31, 2001,
we provided water to approximately 99% of the population in our
service areas. We intend to maintain this nearly universal coverage
of water services as the population within our service areas grows.
This includes actively pursuing the extension or renewal of all
current concession contracts. The population of the municipality of
Curitiba, our state's largest municipality, grew from 1996 to 2000 at
a compounded annual growth rate of 2.3%, as calculated based on
information derived from the Brazilian Institute of Geography and
Statistics, or IBGE, and other large cities in
49
Parana have also been growing quickly. According to the estimates of
IPARDES, however, the growth rate in the municipality of Curitiba is
expected to slow. We believe that the provision of water services
will continue to provide us with the solid revenue base and
consistent cash flows needed for growth.
- CONTINUE TO MAINTAIN AND IMPROVE HIGH LEVEL OF OPERATING EFFICIENCY. We
intend to accomplish this goal principally through continued investment
in control systems, developing human resources, adding plants and
equipment, replacing water main lines and upgrading pumping and
connection equipment. Besides reducing loss levels, these steps should
result in operations that are more power-efficient.
A key component of our plan to increase operating efficiency is to reduce
physical leaks and other losses. We have four principal strategies for
reducing losses:
o replace less efficient pumping equipment and transmission lines that
are susceptible to leakage;
o establish and monitor pressure zones throughout our water system both
to identify suspicious consumption patterns and to reduce the
occurrence of extreme pressure build-up in our pipes;
o continue to replace, improve and update our metering systems under our
ongoing maintenance program; and
o continue to improve our billing and control systems to better detect
fraud, theft and other sources of commercial losses.
As part of our focus on operating efficiency, we have sought and obtained
ISO certification for two of our systems. These systems have since been
used as a model for other operations statewide.
Another component in our efficiency program is to invest consistently in
the training and development of our employees and managers. We dedicated
R$1.5 million for training and development in 2001 and plan to continue
this level of investment in the future.
- MAINTAIN OUR EXISTING CONCESSIONS AND OBTAIN NEW WATER AND WASTEWATER
CONCESSIONS OUTSIDE OF THE STATE OF PARANA. We believe that numerous
opportunities exist in neighboring states to acquire concessions as they
expire. As opportunities warrant, we plan to build on our reputation by
competing for concessions that meet our investment criteria in other
states of Brazil.
- SEEK BUSINESS OPPORTUNITIES IN RELATED SANITATION CONCESSION
SERVICES. We are actively exploring opportunities in business lines
related to our core water and wastewater concession business. In
particular, we believe that great opportunities for additional revenues
exist throughout our state in the area of municipal solid-waste disposal.
We recently signed a 20-year solid-waste concession agreement with the
municipality of Cianorte. We believe that much solid-waste disposal
service in our state is conducted in an uneconomical or ecologically
irresponsible manner. In addition, we recently began operating our first
treatment plant for water for industrial use. At this plant we capture
water from a polluted, non-potable source, thus reducing the cost to
industrial customers.
OUR CAPITAL EXPENDITURE PROGRAM
The total estimated amount of our five-year investment plan for the 2002 to
2006 period is approximately R$1.24 billion. The purpose of our multi-year
investment program is to improve and expand our water and wastewater systems,
increase and protect sources of fresh water and make system improvements to
boost efficiency and reduce losses. We believe these steps are necessary to meet
the increasing demand for water and wastewater service in the state of Parana
and to address environmental needs and standards.
50
The following table summarizes our projected investments for 2002 to 2006:
2002 2003 2004 2005 2006 TOTAL
------- ------- ------- ------- ------ ---------
(IN MILLIONS OF R$)
Water........................ R$123.5 R$111.3 R$ 39.2 R$ 24.5 R$13.7 R$ 312.2
Wastewater................... 229.8 292.2 82.1 39.6 41.1 684.8
Operational Improvements..... 29.6 33.6 38.4 39.9 40.9 182.4
New Business................. 20.0 40.0 -- -- -- 60.0
------- ------- ------- ------- ------ ---------
Total................... R$402.9 R$477.1 R$159.7 R$104.0 R$95.7 R$1,239.4
======= ======= ======= ======= ====== =========
Much of the capital needed for this investment program is expected to come
from Yen-linked loans from the state under the Paranasan program, which are
expected to reach an aggregate outstanding amount of up to Y15.24 billion over
the next four years (equivalent to R$269.8 million at the commercial selling
rates published by the Central Bank of Brazil for December 31, 2001). The
proceeds of this loan are being borrowed by the state from the Japan Bank for
International Cooperation, or JBIC, and on-lent to us under a "mirror" loan
agreement. These loan proceeds are to be used to achieve a pre-agreed, detailed
expansion plan in the areas of water supply and wastewater collection, treatment
and disposal. Among other things, the Paranasan program includes:
- adding two new water treatment plants in the Curitiba metropolitan region
and two in the coastal region of Parana by April 2004;
- adding four wastewater treatment facilities in the Curitiba metropolitan
region and four in the coastal region by December 2003, which is
important for us to achieve our goals of 60% wastewater coverage in our
service areas by the end of 2005 and 66% coverage by the end of 2010;
- removing inefficient plants from operation; and
- building dams and reservoirs.
OUR OPERATIONS
We presently operate in two principal areas: water supply and wastewater
collection, treatment and disposal. The following table provides information on
the gross revenue derived from providing water supply and wastewater collection
services for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001 CAGR(1)
------- ------- ------- ------- ------- -------
(IN MILLIONS OF R$)
Water................ R$381.1 R$403.7 R$445.1 R$502.4 R$564.2 9.87%
Wastewater........... 101.2 114.5 137.6 170.4 197.4 17.35%
------- ------- ------- ------- -------
Total........... R$482.3 R$518.2 R$582.7 R$672.8 R$761.6
======= ======= ======= ======= =======
---------------
(1) Compounded annual growth rate. The average rate of inflation for this period
was 5.9% as measured by the Central Bank of Brazil.
WATER SUPPLY
We collect water, principally from rivers, streams and wells and deliver
treated water to residential, commercial, industrial and public-sector customers
in potable form or in a state compatible with the specific requirements of our
industrial customers. Under our current concessions, we provide potable water to
342 of the 399 municipalities of the state of Parana, representing 78% of the
state's population. Within these 342 municipalities, we operate 616 distinct
treatment and distribution systems. We estimate that our water reaches
approximately 99% of the population in our service areas.
51
PRODUCTION AND TRANSMISSION. Our water production and transmission
operations consist of the transportation of water from sources of supply to one
of our production plants located throughout the state of Parana and the
subsequent distribution of the treated water to our customers through our
network.
We obtain our water supply by collecting and pumping water from rivers and
streams, by diverting flow from nearby rivers, by pumping out of wells or by a
combination of these sources. We currently draw and remove approximately 85% of
our water from rivers and streams and approximately 15% from wells. In some
systems, water is held in reservoirs prior to being processed. We currently
operate four reservoirs in the Curitiba metropolitan region (Piraquara I,
Passauna, Irai and Rio Pequeno) with an average accumulation capacity of 41.25
million cubic meters. The installed capacity of our water collection systems is
currently 24.6 cubic meters per second, and the average production volume is
17.6 cubic meters per second. The Paranasan program is expected to add two more
reservoirs (Miringuava and Piraquara II), to increase the capacity of three
existing treatment centers and to add four new treatment centers, increasing the
installed capacity to 30.4 cubic meters per second by 2005. We own the dams at
each of our reservoirs as well as the land underneath those reservoirs.
We operate 471 treatment centers located throughout the state of Parana,
including three in the Curitiba metropolitan region. In our treatment centers,
water is first subjected to a process of clarification, which includes adding
chemicals that cause impurities to coagulate. Coagulation processes permit
impurities to settle downwards through decanters, which are large tanks equipped
with inclined boards which improve settling speed. The resulting water is then
run through a filtering process, which utilizes silt, sand, gravel and charcoal.
After clarification and filtering, the water is disinfected, generally with
chlorine. We intend to utilize, on an experimental basis, an ozone disinfection
system in one of our treatment centers. Following disinfection, additives are
mixed into the water to provide optimal levels of fluoride and alkaline products
and to achieve the desired pH balance.
The following table summarizes capacity, production and sources of water
for our five principal treatment centers as of December 31, 2001:
LICENSED 2000 AVERAGE
CAPACITY(1) DESIGN CAPACITY PRODUCTION SOURCE
------------- --------------- ------------- ------
PRODUCTION SYSTEM (M(3)/SECOND)
----------------- (M(3)/SECOND) (M(3)/SECOND)
Alto Iguacu
(Curitiba)............ 3.50 3.50 3.50 Iguacu River
Alto Iguacu
(Curitiba)............ 3.00 0.90 0.90 Irai River
Passauna (Curitiba)..... 2.50 2.00 1.70 Passauna Reservoir
Tibagi (Londrina)....... 1.10 0.90 0.89 Tibagi River
Cafezal (Londrina)...... 0.75 0.60 0.55 Cafezal River
Others (rest of
state)(2)............. -- 16.69 10.08 Various
---- ----- -----
Total................... -- 24.59 17.62
==== ===== =====
---------------
(1) Licensed capacity indicates the amount of water we have been authorized to
produce by the relevant governmental authority, Superintendencia de Recursos
Hidricos e Meio Ambiente, or SUDERHSA.
(2) The licensed capacity for "Others" is inapplicable because this category
consists of numerous wells that do not have licensed capacities.
As indicated in this table, some of our key production systems are
operating at or just below their design capacity. Various projects included in
our capital investment plan are intended to relieve the demand on these
production systems. For instance, in February 2002 we added approximately 3.5
cubic meters per second of design capacity at our new Irai facility, which will
allow average production at the Alto Iguacu facility (at Iguacu River) to drop
below the design capacity to approximately 3.0 cubic meters per second in year
2003. This will enable us better to meet the water supply demand on our service
areas.
DISTRIBUTION. We own and operate approximately 34,186 kilometers of water
mains and distribution lines in our service areas. Our distribution network
consists of high-capacity main lines that run from each treatment center to
pumping stations in each municipality and of lower-capacity distribution lines
that
52
deliver water from pumping stations to each customer connection point. The
following table summarizes our statewide distribution network:
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 2000 2001
------- ------- -------
Water distribution lines (km.)(1)........................ 31,826 33,284 34,186
Water connections (thousands)(1)......................... 1,847 1,914 1,968
Water volume billed (millions of m(3))................... 398.1 406.6 408.7
Water volume produced (millions of m(3))................. 554.3 554.2 551.6
Physical water losses (%)................................ 15.3 14.9 14.8
Non-physical water losses (%)............................ 22.9 22.3 22.2
---------------
(1) As of December 31 of the year indicated.
We record our water losses as physical and non-physical. Total water losses
(physical and non-physical) are the difference between water delivered to our
distribution network from our treatment centers and water metered to our
customers. Physical loss represents our estimate of the loss of water volume due
to leakage and water used in the distribution process. Physical loss is
calculated based on an average of the excess of nighttime water delivered to
each network system over expected nighttime usage for that network system.
Non-physical loss represents our estimate of water we deliver but are unable to
bill customers for (not attributable to physical loss) as a result of
imprecisions in metering, billing losses, meter fraud, unauthorized connections
and similar losses. We calculate non-physical loss as the difference between
total loss and physical loss, which can be described as the difference between
actual water volumes metered and volumes expected to be metered. Fire department
usage and other authorized but unbilled official usage of water are included in
non-physical loss.
Our water distribution network is constructed with:
- main lines of cast iron and steel; and
- supply lines of PVC, high-density polyethylene, or HDPE, and, in the case
of supply lines installed prior to 1998, cast iron.
The entire system is pressurized and has reservoirs to regulate distribution
during peak consumption periods. We also have emergency plans for supply
rationing in pre-determined areas for periods of prolonged drought or scheduled
maintenance.
We believe that the current condition of our water distribution system is
generally adequate. Due to age and external factors (such as vehicular traffic,
increased population, changes in urban zoning and industrial and commercial
development), the condition of the water lines and mains in the Curitiba
metropolitan region has tended to deteriorate more rapidly than in other regions
of the state. In order to remedy the effects of this deterioration, we have a
continuous maintenance program for water lines and mains. Lines requiring
maintenance are cleaned or replaced. In the event of leaks or breaks in water
line systems and connections, we are informed both by pressure loss detection at
our operation control centers and by the public itself through our customer
service telephone number.
Of the approximately 7,000 kilometers of main lines in the Curitiba
metropolitan region, approximately 1,140 kilometers are made of cast iron. Cast
iron is no longer widely used in laying new main lines, as it tends to oxidize
over time. This oxidization can result in rust-colored water and water leaks. We
estimate that approximately 540 kilometers, or less than 8%, of our main lines
in Curitiba have oxidized to the point of interfering with highest-quality
operations. We are replacing these deteriorated main lines in Curitiba and plan
to complete this replacement program over the next five years.
53
WASTEWATER COLLECTION AND TREATMENT
We are responsible for the collection and treatment of wastewater, as well
as the appropriate discharge and final disposal of effluents and waste resulting
from treatment. As of December 31, 2001, we collected wastewater from 42% of the
population in our service areas representing 720,000 connections.
Once our wastewater system runs by a home, the Parana state sanitation code
gives the municipality in which the home is located the power to require the
homeowner to become connected to our wastewater system. The municipalities,
however, often do not exercise this power. In the future, we intend to seek to
require municipalities to commit to exercising this power prior to our extending
new wastewater systems past previously unsupplied homes.
WASTEWATER COLLECTION. We operate and maintain approximately 12,841
kilometers of wastewater collection lines, of which approximately 3,913
kilometers are located in the Curitiba metropolitan region. The following table
shows the development of the system in recent years:
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
---------- ---------- ----------
Wastewater collection lines (in km)(1).............. 9,871 10,949 12,841
Wastewater connections(1)........................... 600,226 675,865 719,644
Wastewater volume billed (in millions of m(3))...... 156.8 175.1 183.6
---------------
(1) As of December 31 of the year indicated.
Our wastewater system consists of networks of:
- main lines of concrete or cast-iron pipe; and
- connection lines of either PVC or ceramic pipe.
Our wastewater system is generally designed to operate by gravity, although
pumping stations are necessary in certain parts of the system to ensure the
continuous flow of wastewater. In these stations, iron pipe is used to withstand
the increased pressure that results from pumping.
At present, we do not accept industrial or hazardous wastes or storm water
runoff into our wastewater system. Our wastewater treatment system is intended
principally for residential customers. This reduces wastewater processing costs
and helps ensure optimal functioning of our treatment stations.
We believe that the current condition of our wastewater systems is
generally adequate. The principal challenge in maintenance of wastewater lines
is preventing breaks and blockages due to system overloads in lines that have
deteriorated with extended usage. To that end, we operate an active maintenance
program with outsourced maintenance providers to correct such problems before
they result in operational malfunction.
WASTEWATER TREATMENT AND EFFLUENT DISCHARGE. As of December 31, 2001, we
operated wastewater systems in 141 municipalities in the state of Parana,
serving more than 3.2 million people. We operate 377 wastewater treatment
plants.
Wastewater treatment typically occurs in two steps:
- PHYSICAL SEPARATION. In the "primary" treatment process, the wastewater
is put through a series of processes to separate solid-waste contained in
the water from liquid waste. These include, in our case, screening
processes and flow tanks in which solid-waste is allowed to settle to the
bottom of the tanks.
- BIOLOGICAL DECOMPOSITION. In the "secondary" treatment process, the
wastewater is subjected to a bacterial digestive process. In this
digestive process, sludge contained in the wastewater is converted to
stable organic matter, which sinks to the bottom of the tanks and is
removed, and carbon dioxide, which dissipates into the atmosphere. This
is typically accomplished in one of two ways. In
54
aerobic processes, the wastewater is continuously aerated in circular
tanks with oxygen. Aerobic treatment processes are efficient and require
little space but consume a great amount of electricity. In anaerobic
processes, the wastewater is treated in large, shallow tanks. Anaerobic
processes require more time and physical space but are considerably
cheaper than aerobic processes due to reduced energy needs. Nearly all of
our treatment processes are anaerobic.
In our operations, as in the operations of much of the rest of the world,
the water that results from these treatment processes is typically released into
nearby rivers or the ocean in accordance with applicable environmental
standards.
Approximately 90% of the wastewater that we collect is currently treated in
the manner described above. The remaining wastewater that we collect is
untreated. It is our goal to treat 100% of collected wastewater by December
2005. Most of the funds for these additional treatment systems are expected to
come from the Paranasan program. This program is expected to add two new
treatment plants (Xixto and Padilha Sul) to our system.
Of the by-products generated by wastewater treatment, wastewater sludge is
of the most concern to us, due to the quantities produced and the costs for
disposal. Traditionally, wastewater sludge has been used as organic landfill. We
have been pioneers in Latin America in scientifically treating sludge for use as
agricultural fertilizer. We produce this fertilizer principally by mixing the
sludge with limestone. Two years ago we gradually began to make it available to
local farmers and have monitored the impact of our fertilizer by-products on
crop quality. Given the environmental and economic benefits of this approach, we
believe that this may become a preferred method of sludge disposal in the
future.
INSURANCE
We maintain insurance covering fire, explosion and electrical damage for a
portion of our property, plant and equipment. We also maintain insurance
covering theft and storm damage for some of our property and plants. We do not
maintain insurance covering other damage to property, plant and equipment,
business interruption or injuries to employees or third parties resulting from
accidents. We believe that our levels of insurance coverage are in line with
that of other sanitation companies in Brazil; however, we cannot assure you that
they are in line with market practice in other countries.
SEASONALITY
We experience a moderate seasonal effect on our operations and financial
results. The demand for water is highest during the summer months in Brazil
(December through February), when water use increases. Water use generally
decreases during the winter months. Demand in the coastal region is chiefly a
function of tourism, with the greatest demand occurring during the Brazilian
summer holiday months. We apply a seasonal adjustment to the tariffs in the
coastal region to combat water shortages in the summer peak season.
Additionally, we have emergency plans for supply rationing in pre-determined
areas for periods of prolonged drought or scheduled maintenance.
We have included historical data on seasonality under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
OUR PRINCIPAL MARKETS AND CUSTOMERS
Our market principally consists of residential customers. We also provide
water and non-hazardous wastewater services to commercial, industrial and
public-sector entities throughout the state of Parana. We operate on an
exclusive basis in every municipality in which we have a concession. We have
concessions in 342 of the 399 municipalities in our state. In addition, we have
entered into a concession contract with one municipality of the neighboring
state of Santa Catarina, and we will continue to seek such additional
opportunities outside the state of Parana, where economically feasible, in the
future.
In rural areas, certain residents supply their own water and wastewater
needs through wells and septic systems or other methods of wastewater disposal.
While we have achieved nearly universal water supply
55
services, we do not believe that it is economically feasible or environmentally
necessary to provide wastewater services to rural areas that can be more
effectively serviced by septic and other wastewater disposal systems. We do not
view these rural homes as presenting a significant economic opportunity for us
or our competitors. However, as our system is extended to run past additional
homes, those homes are generally required to connect to our system.
The share of each of the different customer categories in our billing for
2001 is described in the following table, measured as a percentage of gross
revenues:
SHARE OF EACH CUSTOMER CATEGORY IN
COMPANY BILLING
[PIE CHART]
Residential 73%
Commercial 15%
Industrial 4%
Government 8%
Total water production remained roughly stable over the past three years,
decreasing slightly from 554.3 million cubic meters of water in 1999 to 551.6
million cubic meters of water in 2001.
Our largest customer, the state of Parana, accounts for 2.42% of our
revenues. No other customer accounts for more than 2% of our revenues. Our
largest customers consist of the municipalities themselves, large industrial
companies operating in the Curitiba metropolitan region and the government of
the state of Parana. The state of Parana, which is our principal shareholder,
and these municipalities, are charged the same tariffs as our large industrial
customers.
COMPETITION
We do not encounter significant competition in municipalities where we
provide water and wastewater service, since we have exclusive concessions with
these municipalities.
There are 57 municipalities in the state of Parana that operate their own
water and wastewater systems or operate through private concessionaires. These
municipalities collectively have an population of approximately 753,000
inhabitants, equal to 7.8% of the population of the state of Parana. We do not
expect that we will seek to acquire these concessions in the future.
The Brazilian legislature is currently debating a national sanitation law
and the creation of a national sanitation authority. We are unable to predict
whether this proposed new law might result in competition in our service areas.
However, existing law and the terms of our concession contracts provide us with
a strong incumbent's advantage. Specifically, the physical water distribution
and wastewater collection networks constitute our property. If a municipal
government terminates our concession under the terms of our current contracts,
that government must purchase the distribution and collection networks by paying
the cost of that network that has not yet been depreciated. Since we are
continuously upgrading and expanding all our networks, in most instances this
would require the municipality in question to pay a significant amount. The
municipality must also assume any financial obligations pertaining to assets
under the concession.
56
CONCESSION CONTRACTS
Under Brazilian law, Brazilian municipalities have primary responsibility
for providing water and wastewater services to their residents. In large
metropolitan regions that involve more than one municipality, that
responsibility passes in part to the relevant state. Most municipalities grant
long-term concessions to water and wastewater companies to provide these
services. These concessions are formally established through the execution of
concession contracts between the municipality and the concessionaire.
OUR CONCESSIONS
We are the concessionaire for 78% of the population of the state of Parana
for water and wastewater services as a result of our concessions with 342 of the
399 municipalities in the state.
Most of our concession contracts grant us a 30-year exclusive concession at
no cost, with the exception of the Curitiba concession contract, which requires
payment of a concession fee. When negotiating the renewal of concession
contracts, some municipalities may require that the terms of the concession
contract be altered, in some instances through supplemental agreements. For
instance, some municipalities may require us to pay a concession fee or demand
that clauses exempting us from municipal taxes be removed. Other municipalities
may seek to avoid renewal of the concession itself. In extreme cases,
municipalities may seek to rescind an existing concession contract. Of our 342
concessions in the state of Parana, 26.3% will expire by the end of 2005, and an
additional 20.2% will expire from 2006 to 2010. The remaining 53.5% will expire
after 2010. In 2001, approximately 68.6% of our revenues were derived from
concessions that expire after 2015, as shown by the following chart:
THROUGH
2005 2006-2010 2011-2015 AFTER 2015
------- --------- --------- ----------
Concessions Expiring....................... 90 69 13 170
2001 Revenues for Concessions Expiring
(%)...................................... 13.7% 12.9% 4.8% 68.6%
Revenues derived from our three largest concessions, for the cities of
Curitiba, Londrina and Maringa, represented approximately 29.0%, 8.5% and 5.0%,
respectively, of our revenues for 2001. Under our contracts with these
municipalities, these concessions will expire in 2031, 2033 and 2010,
respectively. We make it a priority to obtain extensions of our concessions that
cover the most populated cities, which are formalized through supplemental
agreements. Since 1995, we have entered into supplemental agreements with 95
cities, extending the term of the concession for a period ranging from 10 to 30
years beyond the initial maturity.
Through previous bidding processes, we have sub-licensed part of our
services under our original concessions to third parties. We have approximately
57 sub-contractors. If any of the municipalities, as original granting
authorities, expropriates the original concession, we may have to indemnify the
respective sub-contractors, which may affect our results of operations and
financial condition.
CONCESSION CONTRACTS
The majority of our concession contracts contain the following provisions:
- The municipality concedes to us the right to provide the public services
of water supply and wastewater collection, treatment and disposal for 30
years in most cases. In the case of concession renewals, we are granted a
renewal sufficiently long to recover the cost of investments that we
commit to make in the renewal contract.
- We are required (a) to plan and execute all the civil construction work
necessary to build, enlarge and refurbish the public systems of potable
water supply and municipal wastewater; and (b) to issue and collect the
bills of the services that we provide.
- We have the right to propose to the state government revisions of
existing tariffs that will result in a fair return on our investments,
and we cannot grant anyone an exemption from these tariffs. We will
offer, however, a "social tariff" to the lower income segments of the
population.
57
- The municipality will exercise eminent domain over assets and rights
whose use is required for us to execute the expansion plans.
- The municipality agrees to pay 25% of the costs of the civil construction
work for water-supply systems.
- We will not be liable for the interruption in the water supply and
wastewater collection, treatment and disposal services due to force
majeure, including strikes, floods, accidents or fire.
- The municipality may at all times request clarifications on our expansion
plans and on tariffs.
- We may interrupt the supply of water when a customer's bill is 30 days or
more overdue. In the case where the overdue bill is owed by the
municipality granting us the concession, we usually try to offset our
accounts against theirs.
- The municipality can terminate the concession if it can show cause in
accordance with criteria set forth in the concession contract. These
concessions can generally be terminated when we fail to meet goals set
forth in the concession contract, the contractual term expires, the
parties agree to such termination, a serious violation of the concession
agreement occurs, a court orders termination or it is in the public
interest.
- Our assets in the municipality will be transferred to the municipality if
the concession is terminated or is not extended, provided that the
municipality reimburses us for the non-amortized or net book value of our
investments in those assets.
- Under most of the concessions contracts, we are exempt from municipal
taxes, and no royalty is payable to the municipality as a result of the
concession.
We have entered into 328 concession contracts. We operate 14 concessions
without a contract. These concessions consist of municipalities that split-off
from larger municipalities with which we had a concession contract. We still
operate in these newly created smaller municipalities in accordance with the
concession contracts we had with the previous, larger municipalities.
Nearly all of our concession contracts are based on a standard form. The
principal exceptions are the municipalities of Maringa and Curitiba. Unlike our
standard concession contracts, which are described above, the concession
contract with the municipality of Maringa details specific civil construction
works which we must complete, and it does not exempt us from paying municipal
taxes on services. The concession contract with the municipality of Curitiba
gives Curitiba extensive supervisory powers over us, establishes penalties for
our noncompliance with the agreement, including Curitiba's right to intervene in
our operations, does not require Curitiba to make investments in the concession
and requires us to observe certain environmental laws. This agreement also
establishes a concession fee that we must pay and goals that we must meet by
certain dates. Curitiba, like most other municipalities with which we have
concession contracts, is required to reimburse us for the non-amortized or net
book value of our investments in concession assets if the concession is
terminated or not renewed. We have recently entered into a new concession
contract with the municipality of Curitiba, which is among our most important
concessions.
TARIFFS
As a public utility concessionaire, we are subject to state tariff
regulation. Under state policy, our tariffs should, at a minimum, be adequate to
cover our costs of operation and maintenance, depreciation, provisions for
doubtful accounts, amortization of expenses and provide a return on our
investment. Since our incorporation in 1963, the state has promulgated the
tariff structure that we negotiated and then proposed, with only minor
adjustments.
Our tariff rate applies to the entire state, with the limited exceptions
described below. Our rate structure differentiates between type of customer and
level of consumption. There is a discounted "social tariff" that is charged to
customers who use less than 10 cubic meters per month, live in a house no larger
58
than 60 square meters and earn, as a household, no more than double the minimum
wage per month. Other residential users who consume no more than 10 cubic meters
of water per month are charged a fixed minimum-consumption tariff. Residential
customers who use 10 to 30 cubic meters of water per month are charged for
consumption in excess of 10 cubic meters per month at the regular tariff rate.
For usage levels higher than 30 cubic meters per month, the residential customer
pays a higher tariff. Commercial, industrial and public-sector customers are
similarly billed by customer category at different rates. In certain coastal
areas of the state, we apply a seasonal adjustment to the tariffs to combat
water shortages in the summer peak season.
We estimate that, in 2001, 0.21% of our residential water customers were
charged the social tariff, 37.47% the minimum-consumption tariff, and 62.32% at
rates above the minimum-consumption tariff.
Our tariffs for wastewater collection are assessed at 80% of a customer's
monthly bill for water usage, regardless of the volume of wastewater collected.
The wastewater tariff has been increased to 85% of the customer's monthly bill
for water usage in the municipalities of Curitiba and Maringa, effective for all
invoices with a due date of March 1, 2002 or later.
Based on information published by Brazilian Association of Sanitation
Companies, we believe that our tariff rates are similar to those offered by
other state-controlled Brazilian water companies within the southern and
southeastern regions of Brazil.
BILLING POLICY AND PROCEDURE
We assess our customers a minimum monthly charge of 10 cubic meters per
month, which is the minimum volume of water recommended for an average family by
the World Health Organization. This minimum charge also covers the cost of
maintaining water coverage for our customers. If our customers consume less than
10 cubic meters of water per month, they are still invoiced for 10 cubic meters
of water. This can result in a higher volume of water invoiced than metered.
Bills for water and wastewater services are delivered to our customers
monthly and are based on water usage determined by monthly water meter readings.
Bills for wastewater collection, if applicable, are calculated as 80% of the
customer's water bill, except for the municipalities of Curitiba and Maringa,
where the wastewater tariff was recently increased to 85% of the customer's
water bill. All of our customers are metered.
A significant portion of our accounts receivable is paid after the stated
due date, although only a small portion still remains delinquent at year's end.
We have established several procedures to deal with delinquent payments from
private, or non-governmental, customers. Customers have an average of 15 days to
pay their bill after its issuance. When the meter is read the following month,
usually 15 days after the deadline for the previous bill's payment has passed,
second billing notices, along with a disconnection notice, are delivered to
customers. On or following the 31st day after the deadline for payment has
passed, we suspend the water supply, close the connection valve and wrap it with
tape. We deliver the client a notice (with which the client can pay the overdue
amount) requesting him to pay the overdue bill, and, upon payment, to remove the
tape. In the recent past, a few municipalities, representing a small portion of
our billing, prohibited the suspension of service to a customer with an overdue
bill, either because of a court decision or by municipal law. We have vigorously
contested these municipal decisions in court and have generally been successful.
If the customer still has not paid the overdue account 45 days after the
payment deadline has passed, a notice is delivered to the customer requesting
settlement of amounts due within 15 days in order to prevent disconnection of
service to the property. We physically disconnect a customer from our water
network only after the second disconnection notice has been delivered and the
payment is at least 60 days past due. We have begun forwarding to a collection
agency accounts that are unpaid 90 days after the deadline. Legal action is only
used as a last resort, given the high cost of lawsuits and the length of time
required to reach final adjudication. It is our policy not to cut services to
municipalities and public-service institutions such as hospitals and charitable
organizations.
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In 2001, 39.95% of the amounts billed (including government accounts) were
paid by the scheduled due date. Within 30 days from the scheduled due date,
80.27% of amounts billed were paid. Only 8.66% of the amounts billed remained
unpaid 90 days after the due date, and less than 1% of amounts billed are
ultimately charged to the allowance for doubtful accounts. Prompt collections
from governmental entities have sometimes proved difficult. Under the Fiscal
Responsibility Law, a new law that came into effect in Brazil in May 2000,
Brazilian federal, state and local governments are required to pay their
outstanding bills by the end of their administration. In response to this law,
some municipal governments have begun making timely payments on invoices or are
actively negotiating past due amounts with us.
In addition, we have taken several actions to recover overdue public-sector
accounts. These actions include:
- increasing our usage of the municipality's labor force in expanding our
water and wastewater systems, then offsetting these costs against the
municipality's accounts receivable; and
- in the case of the state of Parana, deducting accounts receivable from
interest on equity and/or dividend payments due to the state.
QUALITY CONTROL
We believe that our quality-control systems are among the most advanced in
Brazil and Latin America. Our control systems produce a constant stream of
operational data relating to the functioning of our equipment. These various
data are entered automatically into our central computer network, either by
direct connection, telephone or the corporate intranet.
Each local production plant prepares a detailed monthly report based on the
daily data collected relating to water quality and quality of operations. Our
quality-control team studies this data and compiles it into an aggregate monthly
report on the operations of our company as a whole.
In order to ensure that our operations are of the highest quality, we have
sought and obtained certification from the International Organization for
Standardization, or ISO, for two of our systems, one for environmental
management and the second for water and wastewater operations. Each of these
certified systems is then used as the standard for all of our operations
state-wide. The ISO is a worldwide federation of independent, national-standards
bodies from approximately 140 countries, one from each country.
ISO 14001 CERTIFICATE OF ENVIRONMENTAL MANAGEMENT
We were the first basic sanitation company in Brazil to be awarded the ISO
14001 International Certificate for a complete water and wastewater system. This
ISO 14001 Certificate recognizes that a sanitation company meets certain
standards of environmental protection in its operations. ABS Quality
Evaluations, Inc. awarded the certificate to our integrated Foz de Iguacu system
in November 1999. Our ISO 14001 Certificate is recognized:
- in Latin America by the Instituto Nacional de Metrologia, Normalizacao e
Qualidade Industrial (National Institute of Metrology, Standardization
and Industrial Quality, or INMETRO);
- in Canada and the United States by American National Standards
Institute-Registrar Accreditation Board, or ANSI-RAB; and
- in the European Community by Raad voor Accreditatie, the Dutch Council
for Accreditation.
ABS Quality Evaluations, Inc. performs annual audits to verify compliance
with standards and monitor improvements to the environmental management system.
These standards require that a sanitation company follow certain procedures,
including system analysis, training, operational controls, monitoring and other
corrective and preventative measures. If the applicable prerequisites are met,
the certificate is maintained and is eligible for renewal after three years. We
underwent a new audit for renewal of the
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ISO 14001 Certificate in November 2001 and obtained a three-year renewal. We
perform our own internal ISO 14001 audit twice a year.
ISO 9002 CERTIFICATE OF QUALITY
Our water production system and treatment system in the municipality of
Campo Largo has received the ISO 9002 Certificate of Quality (1994 version). The
ISO 9002 Certificate recognizes that a company meets certain quality control
standards. This was the first certification of this type in Brazil for a water
production and treatment system. The Campo Largo ISO 9002 certification covers
the water production plant located in the municipality of Campo Largo itself,
and also water quality control and chemical product analysis, which occur in our
laboratories in Curitiba. The Certificate is recognized worldwide and is
accredited by INMETRO (Brazil) and ANSI-RAB (United States).
We obtained the ISO 9002 Certificate in August 1997. ABS Quality
Evaluations, Inc. performs an annual audit to verify compliance with standards.
These standards require that a sanitation company follow certain procedures,
including system analysis, quality control, inspections, testing, training and
other corrective and preventative measures. If these standards are met, the
certificate is maintained and is eligible for renewal after three years. We
submitted to a new audit for the renewal of the ISO 9002 Certificate in August
2000. We met all requirements, and the certificate was renewed for an additional
three years. We perform our own internal ISO 9002 audit twice a year.
NATIONAL SANITATION QUALITY AWARD
Each year since 1997, we have been awarded the National Sanitation Quality
Award, or PNQS (formerly the ABES Quality Award). This award is sponsored by the
Associacao Brasileira de Engenharia Sanitaria e Ambiental (Brazilian Association
of Environmental and Sanitary Engineering), or ABES. Our systems that have
received this award are:
- 1997 -- Cornelio Procopio System
- 1998 -- Uniao da Vitoria and Campo Mourao Systems
- 1999 -- Gurapuava and Paranavai Systems
- 2000 -- Apucarana and Paranavai Systems
The PNQS is the highest award in the field of sanitation in Brazil and is
based on the criteria of the National Quality Award. We believe we are the only
sanitation company in Brazil to have won this award for each of the past four
years.
CUSTOMER SUPPORT AND CUSTOMER RELATIONSHIPS
We have service centers in every municipality in our service areas, of
which 75% are connected online. This allows customers to access our database,
not only for billing information, but also for information on the latest results
of quality-control tests in the customer's area. In addition, we provide our
customers with on-line billing options. Since 1982, we have operated a customer
service telephone number that allows our customers to request information or
service of any kind and present claims regarding billing errors for water and
wastewater services.
SUPPLIERS
The principal materials and equipment required for our operations are pipe,
chemicals for water treatment and meters and meter-reading equipment. We rely to
a lesser extent on pumps, treatment tanks and equipment, electronic control and
other computer equipment and telecommunications equipment. Because we are a
state-owned company, we are required to procure materials and equipment through
a public bidding process.
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The pipe used in our operations is widely available in Brazil. The
chemicals we use in our water treatment are provided by several different
companies. We only purchase chemicals from companies whose products meet our
rigid quality-control standards.
We historically have obtained meters and meter-reading equipment from Lao
Industrial Ltda., a Brazilian company. We have also recently begun purchasing
metering equipment from the Brazilian subsidiaries of Schlumberger, ABB and
ARAD. Our pumps and treatment tanks and equipment are purchased from several
Brazilian manufacturers and Brazilian subsidiaries of international companies.
Our electronic control and computer equipment is provided by several Brazilian
manufacturers and Brazilian subsidiaries of IBM, Hewlett Packard and other
internationally recognized companies. We purchase telecommunications equipment
from a Brazilian subsidiary of Ericsson.
We rely heavily on outsourced personnel for various tasks, including meter
reading and pipeline installation and maintenance. In addition, we rely on
COPEL, Parana's state-owned electrical generation and distribution company, for
our power needs.
PROPERTY, PLANT AND EQUIPMENT
We own property, plant and equipment that, at December 31, 2001, had a net
book value of R$2.55 billion. The following table presents certain key data with
regard to each category of assets as of December 31, 2001.
NATURE
ASSET TYPE UNITS OF INTEREST NET BOOK VALUE
---------- ---------- ----------- -------------------
(IN MILLIONS OF R$)
Storage dams................................ 291 Owned R$ 45,209
Reservoirs and holding facilities........... 1,971 Owned 145,370
Water pumping stations...................... 934 Owned 81,504
Water treatment facilities.................. 471 Owned 81,079
Water main pipelines........................ 5,755 km. Owned 202,687
Water distribution pipelines................ 34,186 km. Owned 316,634
Water equipment............................. 20,013 Owned 32,040
Metering equipment.......................... 2,144,914 Owned 41,049
Wastewater equipment........................ 2,232 Owned 13,602
Wastewater collection pipelines............. 12,841 km. Owned 602,323
Wastewater pumping stations................. 203 Owned 18,874
Wastewater treatment facilities............. 377 Owned 180,011
The operation of our plants and equipment is described in more detail above
under "Our operations".
In addition to the plants and equipment described above, we own our
corporate headquarters in Curitiba, consisting of 12 buildings with an aggregate
floor area of 10,353 square meters (located on 33,200 square meters of land).
This and one other property in Curitiba are subject to a lien in favor of the
Federal Treasury as a guarantee against a lawsuit regarding the Social
Contribution over Profit (Contribuicao Social sobre o Lucro, or CSSL). In
addition, a loan in the amount of R$34.8 million is secured by a lien on
property, plant and equipment in an aggregate net book value of R$145.2 million.
As discussed above, we intend to expand our property, plant and equipment
aggressively in order to:
- keep pace with population growth in the area of water supply; and
- increase our level of wastewater coverage in our service areas to 60% by
year-end 2005 and 66% by year-end 2010.
To achieve this expansion, we intend to rely principally on funds obtained under
the Paranasan loan program with the state of Parana and the Japan Bank for
International Cooperation, on the proceeds of this offering and on internally
generated funds and, to a lesser extent, on other sources.
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ENVIRONMENTAL MATTERS
Our operations are subject to extensive federal, state and municipal laws
and regulations relating to the protection of human health and the environment.
These laws and regulations affect, among other activities, the planning and
operation of water supply systems, the collection and treatment of wastewater,
the release of effluents and the final disposal of wastes. Some of our
operations require environmental licenses which we can obtain only after
preparing environmental impact statements for the area affected by the proposed
activity and implementing control measures agreed upon with the agency. We can
and do incur substantial operating costs and capital expenditures to upgrade our
property, plant and equipment, a portion of which is spent to comply with
applicable environmental requirements.
Non-compliance with any environmental laws and regulations, including
accidents and releases of hazardous materials, may result in claims for property
damage or personal injury, the imposition of criminal and administrative fines
and penalties, an obligation to remediate any environmental damage that may have
been caused and a partial or total suspension of activities. If we fail to
comply with applicable environmental standards, we could lose tax incentives or
access to lines of credit provided by governmental entities or be barred from
bidding for public contracts. Executive officers, directors and managers of
legal entities may be fined or jailed if they are aware of ongoing violations of
environmental laws but fail to take steps to prevent them.
For example, we are a defendant in several civil and criminal actions
seeking damages, cleanup costs, or injunctive relief related to property damage,
personal injury or pollution allegedly resulting from our activities. In
addition, some environmental protection agencies, including the Parana
Environmental Institute (Instituto Ambiental do Parana) and the federal
environmental authority, or the Brazilian Institute for the Environment and
Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos
Recursos Naturais Renovaveis), have served us with notices relating to
allegations of noncompliance with environmental laws, including, for example,
the wrongful release of effluents and operating in environmentally protected
areas. Actions that are still on appeal or awaiting a court decision involve the
potential imposition of civil penalties, including fines and sanctions, as
described under "Legal Proceedings".
In order to remedy instances of noncompliance with environmental law,
particularly with regard to questions of environmental licensing and effluent
quality standards, on March 30, 1999 we entered into formal agreements known as
terms of commitment with the state environmental authority. These signed terms
of commitment stayed the state's right to prosecute violations and impose fines
for a three-year period. They also set forth the terms and conditions for us to
implement certain technological upgrades and other pollution controls required
by this legislation over a period of three years from the date of signing, with
the possibility for us to renew the contract for successive periods of three
years. To date, we have invested R$27 million in our plants in order to comply
with the terms of commitment, and as of December 31, 2001, we estimate that R$97
million in investment remains. Failure to comply with the obligations
established in the terms of commitment potentially subjects us to the payment of
fines imposed by the state environmental authority. At present, we have met a
significant portion of our obligations under these agreements by installing new
technology and, in some cases, discontinuing older operation systems. We have,
however, fallen behind schedule in making all of the improvements foreseen in
the terms of commitment. Because the terms of commitment expired in March 2002,
we have begun negotiating the extension of these terms of commitment and have
received a comfort letter from the Parana Environmental Institute or IAP,
agreeing to extend the terms of commitment for another three-year term, provided
that we submit reports detailing the actions already taken and yet to be taken,
which will be reflected in a timetable that will become part of the terms of
commitment. We have presented IAP with a draft for the first group of the new
terms of commitments, and are awaiting their final approval.
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EMPLOYEES
As of December 31, 2001, we had 3,933 direct employees and 736 additional
outsourced personnel. We believe that we have measures in place to ensure that
these providers of outsourced services operate at a level of quality at least as
high as our own. The table below provides data on the number of employees,
employee costs incurred by us and total connections per employee from 1997 to
2001, both for our own direct employees and for outsourced personnel.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
EMPLOYEES
Direct................................... 4,216 4,001 3,869 3,784 3,933
Outsourced............................... 2,656 2,214 1,292 953 736
----- ----- ----- ----- -----
Total................................. 6,872 6,215 5,161 4,737 4,669
===== ===== ===== ===== =====
TOTAL CONNECTIONS PER EMPLOYEE
Direct only.............................. 510 569 632 684 683
Direct and outsourced.................... 313 366 474 546 575
The numbers in this table reflect the fact that increasingly we use
third-party contractors for jobs performed in the past by outsourced personnel
and our own employees.
Our employees are represented by a total of seventeen unions, five of which
represent the majority of our workers. The remaining twelve represent specific
categories of workers. Though not all employees are affiliated with these
unions, all employees enjoy the benefits provided for in the collective labor
agreements under the provisions of labor laws, and each worker is required by
law to contribute a specified minimum amount to the labor union representing him
or her.
The current collective labor agreement does not provide for any special job
security for our employees. There are currently a total of 926 employees,
however, who enjoy provisional job security provided for by law.
For the year 2000, we instituted an annual incentive compensation program
involving all employees, with the amount and performance criteria to be proposed
by us each year. The goal of this plan is to develop and nurture a culture of
productivity, quality and results at all levels of our company. Pursuant to the
plan for 2000, for the net income in excess of 12% of net revenue, we
distributed 40% of that excess among our employees up to a maximum of 2.5 times
the gross, aggregate monthly amount of our total employee salaries. Any single
employee, however, could have collected more or less than his or her share of
this amount, based on departmental and individual performance. We paid
approximately R$11.3 million in 2001 to employees through our annual incentive
compensation program with respect to 2000 results.
We provide our own self-funded "defined contribution" health and pension
plans for our employees. We believe that the level of protection provided is at
or above the Brazilian market standard for large industrial enterprises. For
2001, our contribution to these plans equaled approximately R$16.7 million.
We believe that relations between us and our employees are good. During the
last 10 years, there have been no strikes or labor slow-downs or other
economically damaging acts of worker protest.
LEGAL PROCEEDINGS
There are a number of administrative, civil and criminal actions filed
against us, principally in connection with allegations of non-compliance with
laws, disputes regarding the value of expropriated property or taxes due and
with damages allegedly resulting from various accidents. As is typical for
companies in Brazil, we are also subject to a large number of labor claims,
mostly brought by former or retired employees.
During 2001 and 2000, we recorded provisions of R$14.4 million and R$6.2
million, respectively, for tax and legal proceedings. Provisions are recorded
based on the advice of our legal counsel. Our
64
management believes that the provisions recorded are adequate to cover our
exposure based on discussions with legal counsel.
We are also subject to a number of claims brought against us by the
Brazilian tax authorities in connection with disputed taxes. One of these
claims, relating to amounts allegedly owed but not paid in 1991 and 1992, is for
an amount in excess of R$48.7 million (exclusive of interest). Another claim
relates to the amount of penalty owed on a late payment of sales tax, with the
federal revenue service seeking an additional penalty of R$13.7 million above
the penalty already paid. We believe that the various other tax claims against
us are not material, individually or in the aggregate. We have made a provision
for these income tax and COFINS (federal sales tax) claims, among others, in an
aggregate amount of R$65.4 million as of December 31, 2001, and we have also
offered a pledge with a net book value of R$3.6 million on some of our
properties to guarantee this amount.
We are the defendants at a public civil action brought by the Labor
Attorney's Office seeking (i) the annulment of two of our service agreements
with third parties and (ii) the imposition of a R$1,000.00 daily fine for each
third-party and outsourced service provider. The appellate court upheld a
judgment rendered by the trial court in favor of the Labor Attorney's Office and
annulled our service agreements with two third parties and imposed the above
daily penalty per service provider which is to be calculated based on a number
of approximately 400 service providers. We have appealed the judgment to the
Superior Labor Court, and a final decision on this matter is still pending. We
have been granted a preliminary injunction by the Superior Labor Court
suspending the imposition of this fine until the rendering of a final judgment.
Based on advice of our counsel, we believe that we have a reasonable chance of
obtaining reversal of judgment.
On August 7, 2001, we received a notice of infringement from IBAMA due to
our alleged failure to complete an environmental impact statement and to obtain
an environmental license prior to pumping water from the Karst Aquifer. The
federal government is seeking R$1 million in fines. The matter is currently on
administrative appeal. In addition, we received a notice of infringement from
the IAP on May 10, 2001 relating to our alleged contamination of a local stream
due to the malfunction of our sanitary treatment station. The IAP is seeking
R$200,000 in damages, and the matter is currently on appeal within IAP. Based on
discussions with our legal counsel, we do not believe that the final outcome of
this matter will have a material adverse effect on our business or financial
condition.
We are also a defendant in nine civil environmental actions filed between
1992 and 2001 by the state public attorney or various public organizations in
various lower courts in the state of Parana. Each of these actions contains
allegations that we caused property damage, human exposure and personal injury,
or various kinds of environmental degradation through our use of open dumps,
releases of untreated wastewater to land and water resources, failure to control
gaseous emissions and odors and/or operations in protected areas. Various forms
of relief are demanded in eight of these actions, including payment of
approximately R$2.5 million in damages, performance of environmental remediation
and the cessation of certain operating and disposal activities. We have recorded
a provision of R$2.5 million for these environmental proceedings as of December
31, 2001. The ninth action seeks to compel us to obtain certain licenses, to
construct a treatment plant and to pay damages in an amount as yet unspecified.
In each of these actions, the amount of damages we are required to pay could
ultimately be more or less than the amount demanded by prosecutors, because the
amounts of damages in such cases are determined by an independent expert after a
judgment has been reached on the merits of the case. The amounts of damages
awarded generally have little or no relation to the amounts of damages demanded
by the prosecutors in their complaints.
In addition, on August 20, 2000, IAP initiated a criminal investigation
into the involvement of one of our executive officers, one of our managers and
one of our employees in a potential violation of environmental law resulting
from an alleged overflow of our sewage collection network in the municipality of
Itambe, which contaminated the soil and a nearby stream. This action is now in
the investigative phase. It is not possible at this moment to predict whether
this inquiry will result in criminal action against the accused, or the amount
of any fines that may be assessed against us. We are also a defendant, along
with several of our managers, in a criminal action filed July 12, 1999 by the
district attorney in the 2nd District
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Court of Londrina. The court has determined that we violated environmental law
by releasing untreated wastewater into a local stream but, as of March 31, 2002,
the penalties or damages had not been fixed.
We believe that none of these environmental claims, considered individually
or in the aggregate, will prove to be material. Because the damages determined
by independent experts may have little or no relation to the amount demanded in
the complaints, however, it is impossible for us to offer any assurances as to
amount or timing of any judgments that might be rendered against us.
Following the special shareholders meeting held on December 18, 2001 to
approve the share dividend (bonificacao), four minority preferred shareholders
who voted against share dividend informed us of their intention to exercise
withdrawal rights. These shareholders represented 20.87% of preferred share
capital and 2.61% of total share capital prior to the share dividend and the
global offering. We informed those shareholders that we had been advised by
counsel that such withdrawal rights do not exist and that we therefore did not
intend to recognize and such rights. If it were determined that withdrawal
rights did exist, we would be required to redeem the preferred shares held by
such shareholders at their book value on that date, which was R$3.08 per
preferred share. We have been advised by counsel that the time period for
asserting withdrawal rights, if any, has passed, so no other shareholders can
assert withdrawal rights.
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REGULATION
We are subject to extensive Brazilian federal, state and local laws and
regulations governing, among other things:
- the granting of rights and concessions to provide water and wastewater
services;
- public bidding requirements;
- water usage;
- water quality and environmental protection;
- tariffs on water and wastewater services; and
- governmental restrictions on the incurrence of indebtedness applicable to
state-controlled companies.
There is no single body of laws or regulations in Brazil that specifically
governs water supply and wastewater collection, treatment and disposal. Under
the Brazilian Constitution, the federal government, states and municipalities
share responsibility for water and wastewater services. The Brazilian
Constitution also states that the provision of public services, such as water
and wastewater services, is the responsibility of the applicable public
authority. Municipalities are primarily responsible for public services of
"local interest", and states are responsible for public services of "common
interest". However, any public authority has the right to provide these services
directly or through a concession granted to a third party. In the state of
Parana, all concessions are granted by the municipality in question.
CONCESSIONS
Concessions for water and wastewater services are evidenced by agreements
between us and the municipal governments. Under these concessions, the
municipalities grant us the right to supply these services in a particular
municipality or region. Our concessions usually have a contractual term of 30
years. However, our concessions generally may be terminated at any time if
certain quality and safety standards are not met or if there is a default under
the relevant concession contract. No conceding authority has ever terminated a
concession contract with us. A municipality that elects to terminate a
concession contract and take control of its water and wastewater services must
either provide these services itself or auction the concession to potential
concessionaires through a competitive bid process.
CONCESSIONS LAWS
The Federal Concessions Law enacted in 1995 created a new framework for the
granting of concessions by federal, state and municipal governments in Brazil.
The Federal Concessions Law requires that a concession granted by a public
entity be based upon a public bidding process. In general, concessions granted
after enactment of the Brazilian Constitution in 1988 that were not granted
pursuant to a public bidding process are subject to cancelation, and any
concession granted prior to enactment of the Brazilian Constitution and as to
which work or operations thereunder were not initiated by, or were suspended on,
February 13, 1995 are subject to revocation as well. The Federal Public Bids Law
provides, however, that the public bidding process can be waived when the
services are to be provided by a public entity that was created for these
specific purposes prior to the enactment of this law, provided that the prices
for such services are compatible with those prevailing in the market. Based on
this rule, municipalities granted us concessions after enactment of the
Brazilian Constitution without a public bidding process. We may be required to
bid publicly in order to acquire new concessions or to renew existing ones. We
did not have any of our concessions canceled or revoked following promulgation
of the Brazilian Constitution or the Federal Concessions Law.
The Federal Concessions Law provides that when the conceding authority
terminates a concession early, it must reimburse the sanitation company for the
non-amortized or net book value of those
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investments in assets that are essential to the rendering of the concession
services. Essential assets are those necessary for the rendering of our water
and wastewater services.
As of the date of this prospectus, all our concessions are current and in
full force and effect.
WATER USAGE AND DISCHARGE
There exist a wide variety of federal, state and local entities for the
management of water resources. The Brazilian Constitution states that the
federal government shall create a national system for the management of water
resources and defines criteria for granting the use of water resources to third
parties. Brazilian federal law establishes the National Policy for Water
Resources and the National System of Water Management. Furthermore, it mandates
that third parties be charged for their use of water resources.
State law establishes the basic principles governing the development and
use of water resources in the state of Parana in accordance with the State
Constitution. These principles include:
- rational utilization of water resources, with priority for services
provided to the general population;
- optimization of the economic and social benefits resulting from the use
of water resources;
- protection of water resources against actions which could compromise
current and future use;
- defense against critical hydrographic events which could endanger the
health and safety of the population or result in economic and social
losses; and
- development of navigable waterways for economic benefit.
Under state law, the implementation of any project that involves the use of
surface or underground water requires prior authorization or a license from the
relevant governmental authority.
A state decree provides that the Superintendencia de Desenvolvimento de
Recursos Hidricos e Saneamento Ambiental (Commission of Water Resources and
Environmental Sanitation Development, or SUDERHSA) of the state of Parana has as
its objectives:
- establishing a policy for the use of water resources with a view to
developing the water business of the state of Parana; and
- carrying out plans, studies and projects related to the integral use of
water resources, directly or by means of agreements with third parties.
Some of the authorizations granting us the right to use water resources have
expired, but we are seeking to renew them with the relevant environmental
agencies or are canceling them because we have discontinued our activities in
that area.
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The following chart outlines the various federal and state entities with
jurisdiction over water usage and wastewater discharge.
[FLOW CHART FEDERAL] [FLOW CHART STATE]
WATER QUALITY
The Ministry of Health of the federal government issued a regulation that
establishes standards of potability for all water intended for human consumption
in Brazil. This regulation is patterned after the U.S. Safe Drinking Water Act
as well as regulations promulgated by the U.S. Environmental Protection Agency.
On December 29, 2000, the Ministry of Health approved new rules governing
the quality of water which is intended for human consumption. These rules gave
affected companies 24 months to comply with its provisions, with the
understanding that until the expiration of the 24 month period, the old rules
would remain in force. We already comply with several of these rules and we are
taking steps to comply with the rest of these rules by the end of the 24-month
deadline.
We analyze test samples at our laboratories to determine compliance with
Brazilian law using the "Standard Methods" (18th Edition) procedures established
by the American Water Works Association.
WASTEWATER REGULATION
The Brazilian federal and state wastewater regulations are essentially
identical. The Parana Environmental Institute, or IAP, is authorized by state
law to monitor discharges of pollutants into public waters. Furthermore, a
company may not use or divert natural water in the state of Parana without an
administrative consent from SUDERHSA. We have not received formal authorization
from SUDERHSA to discharge untreated wastewater and, although we keep IAP
notified of our levels of untreated wastewater discharge, we are still subject
to penalties. We have not received any material notices of penalties from IAP or
SUDHERSA. Our capital expenditure program includes an allocation of
69
R$68.7 million that is designed to reduce the discharge of untreated wastewater
into rivers and the ocean, which we developed in consultation with IAP. We
cannot assure you that we will not be required in the future to obtain specific
licenses or authorizations for discharges of untreated wastewater. We must also
obtain the approval of SUDERHSA to operate our treatment facilities.
State law also permits the state to charge fees to companies that discharge
effluents into the state of Parana's water resources. Although the state of
Parana does not currently assess fees for such discharges, we cannot assure you
that such fees will not be charged in the future.
Some municipalities in the state of Parana have enacted municipal laws
requiring us to charge a tariff for wastewater services at a lower percentage
than the 80% of the water usage that we generally invoice. We have consistently
taken the position that the power to set tariffs is reserved to the state and
not the municipalities. To date, these municipal laws have not been enforced
against us.
ENVIRONMENTAL LICENSES
We must have an environmental license for the construction, installation,
expansion and operation of enterprises that use environmental resources and that
may be considered real or potential polluters. We currently hold valid licenses
for the operation of most of our facilities. The licenses that have expired are
being renewed before the relevant environmental agencies. As part of the terms
of our environmental licenses, we may be required to obtain environmental impact
studies prior to beginning construction or installation of new facilities.
TARIFFS
As a public utility concessionaire, we are subject to state tariff
regulation. Under current state policy, our tariffs are set at levels that are,
at a minimum, sufficient to cover our costs of operation and maintenance,
depreciation, provisions for doubtful accounts and amortization of expenses and
to provide a return on our investment. We submit our tariff rates to the state
of Parana annually for review, typically in October. After review, the governor
establishes the new tariff by decree which typically becomes effective on the
bills which have a due date of December 1 or later. The state currently has a
policy of considering the following criteria in determining our tariffs:
- type of customer;
- capacity of the water meter;
- characteristics of consumption;
- volume consumed;
- fixed and variable costs;
- investment plans (in order to ensure adequate cash for investments);
- productivity;
- seasonal variations; and
- social and economic conditions of residential consumers.
In addition to the criteria the state considers in determining tariffs, we,
as a company, consider factors like the costs associated with the use of water
resources, depreciation, provision for bad debts, amortization of expenses and
adequate remuneration for the investments. We currently maintain a tariff table
that considers, on one hand, which applicants are entitled to a reduced rate (or
"social tariff") due to their low incomes and, on the other hand, a spectrum of
higher rates broken down into consumption levels and customer categories
(commercial, industrial, residential and public) for everyone else. For each
category of customer we have a three-tier tariff schedule, based on volume of
usage. We bill our customers on a monthly basis. We are also authorized to enter
into individual contracts with certain customers, such as municipalities, to
sell water or wastewater services on a bulk basis.
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GOVERNMENTAL RESTRICTIONS ON INCURRENCE OF DEBT
The National Monetary Council set forth rules governing external credit
operations of the Federal District, the states, the municipalities and their
respective companies and other bodies, including us. These rules require, among
other things, that, with certain exceptions for the importation of goods and
services:
- The proceeds of external borrowings must be used to refinance outstanding
financial obligations of the borrower. Preference must be given to those
obligations that have a higher cost or shorter term than the external
debt and, pending application, remain on deposit, as directed by the
Central Bank of Brazil, in a blocked account.
- The total amount of the external borrowing must be paid by monthly
deposits in a blocked account. Each monthly deposit is to equal the total
debt service obligation (including principal and interest) divided by the
number of months remaining in the term of the obligation.
The account for proceeds of external credit operations must be an escrow
account opened in a federal financial institution and must hold the funds until
released for purposes of refinancing outstanding obligations of the borrower.
The escrow account to be used for repayments is to be an escrow account opened
in a federal financial institution and is to secure the payment of principal and
interest on the external debt. These requirements do not apply to financing
transactions involving multilateral or official organizations such as the World
Bank, the Inter-American Development Bank or the Japanese Bank for International
Cooperation.
Our external credit transactions are also subject to the approval of the
Brazilian Treasury Department and the Central Bank of Brazil. After reviewing
the financial conditions of an applicable transaction, these organizations will
approve the transaction and, at our request, establish an electronic
registration through which we can remit all scheduled payments of principal,
interest and expenses. The electronic registration grants the borrower access to
the commercial market for foreign exchange purposes. Nevertheless, to facilitate
the conduct of monetary policy and to eliminate imbalances in Brazil's balance
of payments, the Central Bank of Brazil can introduce restrictions on inflows
and remittances abroad of foreign capital.
LENDING LIMITS OF BRAZILIAN FINANCIAL INSTITUTIONS
Brazilian law limits the amount that Brazilian financial institutions may
lend to public sector companies up to 45% of the lender's net worth.
AUDIT COURT OF THE STATE OF PARANA
The Audit Court (Tribunal de Contas) of the state of Parana must approve
our accounts each year. The Audit Court is still analyzing our accounts for 1998
fiscal year and thus has yet to approve our accounts for such year. The Audit
Court has not informed us of any irregularities in our accounts for 1998. We
have already been granted this approval for 1999 and 2000. Although we still
expect this approval to be granted for 1998, a refusal to approve our accounts
for the 1998 fiscal year could lead the Audit Court to (i) require our directors
and officers to account for any irregularities ascertained by the Audit Court;
(ii) request the state legislature to suspend all of our agreements that are
considered irregular; and (iii) request the Attorney's Office to bring a public
civil action against us in order to investigate any irregularities ascertained
by the Audit Court.
PENDING LEGISLATION
New sanitation laws are under discussion at both the federal and state
levels. The Brazilian House of Representatives is currently considering a bill
for a national sanitation law that contemplates, among other things, the
following:
- prohibiting concession payments to municipalities;
- dispensing of public bidding requirements for concessions granted to
government-controlled companies;
71
- establishing guidelines for fixing tariffs, including provisions that
require gains from productivity increases to be partially passed on to
consumers;
- clarifying that, in the event that a contract is rescinded by the
relevant municipality, the concessionaire must be reimbursed for the
entire value of the assets assumed by the municipality; and
- clarifying the allocation of responsibilities among the federal, state
and municipal governments.
We anticipate that the bill may be modified substantially before it is passed
into law.
The legislature of the state of Parana currently has a bill before it which
would create a state agency to regulate sanitation and energy services. That
agency would oversee the utilization of those public services by the state of
Parana and its municipalities. We also expect that the state legislature would
create an agency supervision fee.
PUBLIC BIDDING PROCEDURES
Pursuant to the Brazilian federal public bids law, the public bidding
process commences when the conceding authority, state-controlled company or
other relevant governmental authority publishes an announcement in the relevant,
official federal, state or municipal gazette, as well as in a leading Brazilian
newspaper, stating that it will carry out public bidding, pursuant to provisions
set forth in an edital (invitation to bid). The invitation to bid must specify,
among other terms:
- the purpose, duration and goals of the bid;
- a description of the qualifications required for adequate performance of
the services covered by the bid;
- the deadlines for the submission of bids;
- the criteria used for selection of the winning bidder; and
- a list of the documents required to establish the bidder's technical,
financial and legal capabilities.
The invitation to bid is binding upon the conceding authority. Bidders may
submit their proposals either individually or in consortia, as provided for in
the invitation to bid.
After receiving proposals, the conceding authority will evaluate each
proposal according to one of the following criteria, which must have been set
forth in the invitation to bid:
- the technical quality of the proposal;
- the lowest cost or lowest public service tariff offered;
- the highest amount offered in consideration for their concession; or
- a combination of the criteria above.
The public bidding laws described above will apply to us in the event that
we seek to secure new concessions or to renew existing ones, unless we manage to
renew such concession agreements before they expire. Moreover, subject to
certain exceptions, these bidding laws currently apply to us with respect to
obtaining goods and services from outsourcing for, among other things, our
business operations or in connection with our capital expenditure program.
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MANAGEMENT
We are managed by our board of directors (conselho de administracao),
composed of nine members and an equal number of alternates, and our seven
executive officers (diretoria). We have a permanent audit committee (conselho
fiscal), which is composed of three to five members. Our principal governing
document is our by-laws (estatuto social).
DIRECTORS AND SENIOR MANAGEMENT
BOARD OF DIRECTORS
The conselho de administracao, our board of directors, is the
decision-making body responsible for determining general guidelines for our
business, and for formulating and expressing our policies. The board of
directors is responsible for electing our executive officers and supervising
their management. It also monitors the executive officers' implementation of the
general guidelines and policies. Our board of directors ordinarily meets four
times a year and in special session when called by the chairman of the board,
the vice-chairman, one-third of the members of the board or the chief executive
officer. Under the Brazilian corporations law, a board member is prohibited from
voting in any meeting or with respect to any transaction in which he or she has
a conflict of interest with us. Also, under that law each member of the board of
directors must hold at least one of our common or preferred shares. The business
address of each of our directors is the address of our principal executive
offices. Members of our board of directors are elected to three-year terms.
Under the Brazilian corporations law, the board of directors must have at
least three members. Each director and his or her respective alternate are
elected at a general shareholders meeting and are subject to removal at any
time. Our by-laws state that the board of directors must consist of nine
members.
Set forth below are the names, ages, positions, expiration of current term
and brief biographical descriptions of the members of our board of directors.
Ages are as of December 2001.
EXPIRATION OF
NAME AGE POSITION CURRENT TERM
---- --- -------- ----------------
Ingo Henrique Hubert........ 53 Chairman November 4, 2004
Jose Carlos Irago Garcia.... 64 Vice Chairman November 4, 2004
Carlos Afonso Teixeira de
Freitas................... 58 Chief Executive Officer and November 4, 2004
Board Member
Miguel Salomao.............. 63 Board member November 4, 2004
Jose Antonio Andreguetto.... 42 Board member November 4, 2004
Armando Martinho Bardou
Raggio.................... 52 Board member November 4, 2004
Rodrigo Bhering Andrade..... 43 Board member November 4, 2004
Hamilton Aparecido
Gimenes................... 40 Board member June 9, 2002
Ricardo Coutinho de Senna... 53 Board member November 4, 2004
INGO HENRIQUE HUBERT. Mr. Hubert was chief executive officer of our
company from 1979 to 1983. He also worked at Telecomunicacoes do Parana S.A. as
vice-president and as human resources officer from 1976 to 1979 and 1984 to
1985. From 1985 to 1988, he worked as an executive officer at Grupo Empresarial
Tupi. From 1988 to 1991 he worked as an executive officer at Industria Ceramica
Parana S.A. and from 1991 to 1995 he was the CEO of Industrias de Bombas
Centrifugas Ltda. Since 1995, Mr. Hubert has also been CEO of COPEL, our
affiliate and indirect shareholder. He has been chairman of our board of
directors since February 2001.
Mr. Hubert holds degrees in electrical engineering from Universidade
Federal do Parana and completed post-graduate work in electrical engineering at
the University of Stuttgart. He holds a degree in business management from
Institut Europeen d'Administration des Affaires in Fontainebleau, France and
73
conducted post-graduate work in Political and Social Economic Development from
the University of California, Berkeley.
JOSE CARLOS IRAGO GARCIA. Mr. Irago has worked in businesses and business
associations in Europe and Latin America for over 40 years.
From 1960 to 1968, he was chief executive officer in Venezuela of Inducret
S.A. and director of INPLAVCA. From 1968 to 1979, he was chief executive officer
in Brazil and Latin America of Oficina Tecnica de Empresas de Ingenieria S.A.
From 1980 to 1993, he was chief executive officer of Tecnicas de Depuracion de
Aguas S.A. From 1993 to 1998, he was general manager of a region of Sociedad
Mediterranea de Aguas S.A. (a direct subsidiary of Compagnie Generale des Eaux
in Spain); chief executive officer of Tecnicas de Depuracion de Aguas S.A. (an
indirect subsidiary of Compagnie Generale des Eaux in Spain); and board member
of various subsidiaries of Sociedad Mediterranea de Aguas S.A. (a direct
subsidiary of Compagnie Generale des Eaux in Spain).
From 1999 to the present, Mr. Irago has been the chief executive officer in
Brazil of Proactiva Medio Ambiente S.A. (a joint venture between FCC and Vivendi
Environnement); the general manager of Empressa Geral de Servicos, Ltda. and
Sanedo, Ltda. (indirect subsidiaries of Vivendi Environnement); one of our board
members on behalf of Sanedo; and a board member of Domino, one of our
shareholders.
Mr. Irago graduated as Merchandise Expert from the Escuela de Comercio at
Vigo, Spain, and in business administration from the Business Institute at the
London Business School and Instituto de Empresa.
MIGUEL SALOMAO. Mr. Salomao worked for Banco do Brasil in various
capacities from 1961 to 1967. He worked for the Central Bank of Brazil from 1967
to 1990, with the last nine years of his tenure as the Central Bank's delegate
to Parana and Santa Catarina. From 1991 to 1994 he served as a consultant on
monetary policy with the IMF. He was Secretary of the Treasury for the state of
Parana from 1995 to 1997 and has served as Secretary of State for Planning and
General Coordination since 1997. He has been a board member since September
1998.
Mr. Salomao holds degrees in social science from Pontificia Universidade
Catolica do Parana and economics from Fundacao de Estudos Sociais do Parana. He
also holds a graduate degree in international economics from Universidade de Sao
Paulo.
JOSE ANTONIO ANDREGUETTO. Mr. Andreguetto was CEO of the Environmental
Institute of Parana from 1995 to 2000, and is currently the institute's
president. He is also Parana's Secretary of State for the Environment and Water
Resources, a position he has held since 2000, and is a member of National
Environmental Council, president of the Administrative Council of Managers in
the Development of Water Resources and Environmental Sanitation since 2000,
president of the State Environmental Council since 2000, and president of the
Council for the Development of the Parana Coast since 2000. He has been a board
member since February 2001.
ARMANDO MARTINHO BARDOU RAGGIO. Mr. Raggio has served in leadership
positions in various organizations relating to the public health for 25 years.
More recently, he served as Secretary of Health for the municipality of Curitiba
between 1992 and 1994, was president of the National Council of Secretaries of
Health for Municipalities in 1994, became Parana's Secretary of State for Health
during 1995, and in 1996 became president of the National Council of Secretaries
of Health. He has been a board member since September 1998.
Mr. Raggio is a physician, receiving his degree in medicine from
Universidade Federal do Parana in 1976.
RODRIGO BHERING ANDRADE. Before becoming a member of our board, Mr.
Andrade worked as an attorney at Pinheiro Neto - Advogados, a law firm, the
Mergers and Acquisitions Group for Latin America at J.P. Morgan, and,
subsequently, investment officer at GP Investimentos. Mr. Andrade has served as
board member of various Brazilian companies. Currently, he is a board member of
Santos Brasil S.A.,
74
IG-Internet Group do Brasil and W-Aura Participacoes S.A. He has been a member
of our board since September 1998.
Mr. Andrade holds a law degree from Universidade de Brasilia and has an
LL.M. from Yale Law School.
HAMILTON APARECIDO GIMENES. Mr. Gimenes has been an employee of our
company since 1983, and has occupied several key positions. He has been a board
member since April 1999. He is the employee's representative to the board of
directors.
Mr. Gimenes holds a teaching degree from the Centro Tecnico -- Educacional
Superior do Oeste Paranaense.
RICARDO COUTINHO DE SENNA. Mr. Senna has been chief concessions officer
for Andrade Gutierrez S.A., one of our affiliates, since 2000. He also serves on
the boards of directors of several other Andrade Gutierrez S.A. affiliates:
Concessionaria do Sistema Anhanguera Bandeirantes S.A.; Concessionaria
Presidente Dutra S.A.; Concessionaria de Rodovias Integradas S.A.;
Concessionaria Via Lagos; Concessionaria Ponte Rio Niteroi S.A.; Barcas S.A.;
and of Domino, one of our direct shareholders. He has been a board member since
September 1998.
Mr. Senna holds a degree in civil engineering from Universidade Federal de
Minas Gerais.
CARLOS AFONSO TEIXEIRA DE FREITAS. Mr. Freitas has worked in our company
in various positions for over 30 years, including project engineer, production
chief, operations chief and chief technical officer. Currently he is our CEO, a
position he has occupied since January 1995. He has been a board member since
September 1998.
Mr. Freitas has also served in several positions outside our company. He
was General Coordinator for the Curitiba metropolitan region from 1988 to 1989
and president of the Brazilian Association of Sanitation and Environmental
Engineering from 1981 to 1983 and 1989 to 1993.
Mr. Freitas holds a degree in civil engineering from Universidade Federal
do Parana and a degree in sanitation engineering from Universidade de Sao Paulo.
EXECUTIVE OFFICERS
Our executive officers are our legal representatives and are responsible
for our internal organization and our day-to-day management, and the
implementation of the general policies and guidelines established by the board
of directors. The executive officers have individual responsibilities
established by our by-laws and by our board of directors. The business address
of each of our executive officers is the address of our principal executive
offices.
Our board of directors elects our executive officers for a three-year term,
and the board may remove any executive officer before the expiration of such
officer's term. According to the Brazilian corporations law, executive officers
must be Brazilian residents. The executive officers hold regularly scheduled
meetings on a weekly basis and hold additional meetings when called by any
executive officer.
75
Set forth below are the names, ages, positions, expirations of current term
and brief biographical descriptions of our executive officers as of December 31,
2001. Ages are as of December 31, 2001.
EXPIRATION OF
NAME AGE POSITION CURRENT TERM
---- --- -------- ----------------
Carlos Afonso Teixeira de Chief Executive Officer November 4, 2004
Freitas.......................... 58
Jean Marie d'Aspe(1)............... 52 Chief Operating Officer June 8, 2002
Luiz Carlos dos Santos Bueno Chief Administrative November 4, 2004
Filho............................ 46 Officer
Ricardo Del Guerra Perpetuo........ 39 Chief Financial Officer June 8, 2002
Lauro Klas Junior.................. 53 Chief New Business November 4, 2004
Officer
Alberto Zocco Junior............... 53 Chief Investor Relations November 4, 2004
Officer
---------------
(1)Mr. d'Aspe is expected to retire by year-end 2002 and is expected to be
replaced by Pierre Yves Morgue.
CARLOS AFONSO TEIXEIRA DE FREITAS. Mr. Freitas is currently a member of
our board of directors as well as our CEO. His biography is included above.
JEAN MARIE D'ASPE. From 1974 to 1980, Mr. D'Aspe was a civil works
engineer for Soletanche Enterprise in France. Mr. d'Aspe has also worked for
affiliates of Compagnie Generale des Eaux for many years. From 1980 to 1998, he
served in various positions for Compagnie Generale des Eaux, including as Caen
sector chief, technical director for the French Antilles, Nice sector chief,
Toulouse water and wastewater director and general manager of the southern
region of France. He has been our chief operating officer since June 1999.
Mr. d'Aspe graduated with a degree in civil engineering from the Ecole
Nationale Superieure des Mines in Nancy, France.
LUIZ CARLOS DOS SANTOS BUENO FILHO. Mr. Bueno has worked in various
positions and at various companies for over twenty years. From 1983 to 1994 he
worked for the state of Parana as an engineer and technical consultant. He has
also worked for us in various capacities since 1981. From 1981 to 1983, he
worked for us as a mechanical engineer, from 1995 to 1997 he was our chief
officer for research and development, from 1997 to 1998 he was our chief officer
for institutional organization, and he has been our chief administrative officer
since October 1998.
Mr. Bueno holds a degree in mechanical engineering from Universidade de
Mogi das Cruzes, and holds an advanced degree in mechanical engineering from
Ecole Nationale Superior des Arts et Metiers in Paris.
RICARDO DEL GUERRA PERPETUO. Mr. Perpetuo has worked in various
finance-related positions. From 1985 to 1988 he worked at the assets desk at
Banco Cidade S.A., becoming head of the asset desk in 1987. He was head of the
assets desk at BankBoston in Sao Paulo from 1989 to 1990, chief financial
officer of Civilcorp Engenharia Construcoes e Inc. Ltda. from 1990 to 1996 and
chief financial officer of Metodo Engenharia S.A. from 1996 to 1999, and also
served on its board of directors. Mr. Perpetuo has also represented Metodo
Engenharia S.A. and its affiliated companies, TSM-Tyshman Speyer Metodo (Brazil)
and BMT-Bechtel Metodo Telecomunicacoes (Brazil).
Mr. Perpetuo is the author of Operacoes Financeiras em Vigor no Mercado
(Financial Operations in Force in the Market) and has collaborated on two other
financial books. He also has written a financial column for the newspaper Estado
de Sao Paulo. He was a professor of graduate level financial
76
mathematics at Fundacao Armando Alvarez Penteado in Sao Paulo. He has been our
chief financial officer since June 1999.
Mr. Perpetuo holds degrees in civil engineering from Universidade MacKenzie
of Sao Paulo and in business administration from Fundacao Getulio Vargas.
LAURO KLAS JUNIOR. Mr. Klas has worked in many capacities in our company
for nearly twenty years. He was western division chief engineer from 1973 to
1974, chief of the Curitiba system from 1976 to 1979, regional administrator in
various regions from 1981 to 1987, metropolitan chief from 1988 to 1991, project
chief for our metropolitan region from 1991 to 1992, studies and projects chief
from 1992 to 1995, chief of technology planning from 1995 to 1996, technical
executive officer from 1996 to 1997 and new business executive officer from 1997
to 1998. He has been our chief technical officer since October 1998.
Mr. Klas holds a degree in civil engineering, and has taken additional
courses in water-related studies from Universidade Federal do Parana. He has
also studied business at Fundacao Joao Pinheiro and received an MBA from Amana
Key in Sao Paulo.
ALBERTO ZOCCO JUNIOR. Before becoming our investor relations officer, Mr.
Zocco worked in our company for 27 years. He was operations engineer from 1972
to 1973, northeast division chief from 1974 to 1975, northern regional
administrator from 1975 to 1983, chief of the expansion division from 1983 to
1987, supply chief from 1987 to 1988, chief of operational development from 1988
to 1991, operational development engineer from 1992 to 1994, chief operations
officer from 1995 to 1997, an executive officer from 1997 to 1998, new business
executive officer in 1998, and investor relations officer from 1998 to the
present. His current term as investor relations officer began in February 2000.
Mr. Zocco has also held several other positions relating to sanitation. He
was the general secretary of the Brazilian Association of Sanitation and
Environmental Engineering from 1989 to 1993. He was director of the Engineering
Institute of the state of Parana from 1995 to 1998. Currently, he is also the
coordinator of operational development for the Association of Basic State
Sanitation Businesses, a position he has held since 1995.
Mr. Zocco holds a degree in civil engineering from Universidade Federal do
Parana, and has done post-graduate work in hydraulic construction at the same
university.
PIERRE YVES MOURGUE. Mr. Mourgue is expected to replace Mr. d'Aspe as our
chief operating officer. Mr. Mourgue began working for Vivendi in 1990 as
assistant to the operating director of the Loire Valley of France. In 1993 he
became the sales manager for Vivendi in Paris. He then worked as the operations
manager in Anvergue in central France. From 1999 to 2001, he worked as chief
executive officer of Stephanoise des Eaux, a subsidiary of both Vivendi and
Ondeo.
Mr. Mourgue graduated in 1988 with a degree in Agronomy Engineering from
the Institut National Agronomique Paris Grignon in Paris, France, one of the
"Grandes Ecoles" of France.
COMPENSATION
According to our by-laws, our shareholders are responsible for establishing
the aggregate compensation we pay to the members of our board of directors and
the executive officers. The members of our board of directors are then
responsible for distributing such aggregate compensation individually in
compliance with our by-laws.
For the fiscal year ended December 31, 2001, the aggregate compensation
(including benefits in kind granted) that we paid to members of the board of
directors and the executive officers for services in all capacities was
approximately R$1.1 million.
77
For the year ended December 31, 2001, the aggregate compensation that we
paid to the members of the audit committee was approximately R$62,650.
As of March 15, 2001, our board members and executive officers owned an
aggregate of 67,261 preferred shares. For the fiscal year ended December 31,
2001, none of our board members and executive officers had any financial or
other interests in any transaction involving us which was not in the ordinary
course of our business.
None of our directors and executive officers is party to an employment
contract providing for benefits upon termination of employment.
ANNUAL INCENTIVE COMPENSATION PROGRAM
Pursuant to Brazilian federal law, companies operating in Brazil are
allowed to have an annual incentive compensation program. The benefits under
this program must be calculated based on company profits and must be shared with
employees. These programs are deductible for income tax purposes, beginning from
and after fiscal year 1996. However, we understand that no government regulation
currently exists for determining how the profits should be distributed. In 1998,
we implemented an annual incentive compensation program for the first time.
Our program has been based on the achievement of both company-wide and
individual goals. The basis of the goals are maintenance or improvement of
standards, productivity and net income. The goals are formally agreed to by
management and the employees. Our program for year 2001 resulted in
distributions to employees of R$7.9 million.
AUDIT COMMITTEE
Under the Brazilian corporations law, the conselho fiscal, or audit
committee, is a corporate body independent of management and a company's
external auditors. A Brazilian audit committee is not equivalent to, or
comparable with, a U.S. audit committee. The primary responsibility of the audit
committee is to review management's activities and the financial statements, and
report its findings to the shareholders. While the committee can review all
management activities, the committee principally focuses on the management's
accounting and financial activities. Under the Brazilian corporations law, the
audit committee may not contain members that are on the board of directors, on
the executive committee, our employees, employees of a controlled company or of
a company of this group, or a spouse or relative of any member of our
management. In addition, the Brazilian corporations law requires the audit
committee members to receive as remuneration at least 10% of the average annual
amount paid to the executive officers. The Brazilian corporations law requires
an audit committee to be composed of a minimum of three and a maximum of five
members, plus their respective alternates. For sociedades de economia mista,
like Sanepar, the audit committee operates on a permanent basis.
Generally under the Brazilian corporations law, holders of non-voting
preferred shares have the right to elect separately one member of the audit
committee. Also, under the Brazilian corporations law, minority groups of
shareholders which hold at least 10% of the voting shares have the right to
elect separately one member of the audit committee. For sociedades de economia
mista, as our company is, the minority common shareholders (i.e., those not a
part of the control block) have the right to elect one member of our audit
committee and the preferred shareholders have the right to elect another member
of the audit committee.
Under our by-laws, the audit committee is composed of three to five members
and an equal number of alternates, who may or may not be shareholders, and are
elected annually at the annual shareholders meeting. Currently, our audit
committee has five members. Our audit committee is a permanent body and meets
when called by any member of the committee, and as required by law. Members of
our audit
78
committee receive compensation set at the shareholders meeting and in conformity
with the Brazilian corporations law.
Set forth below are the names and positions of the members of our audit
committee as of April 22, 2002.
EXPIRATION
NAME POSITION OF CURRENT TERM
---- --------- ---------------
Celso Ferreira Almeida.................................... President April 21, 2003
Juraci Barbosa Sobrinho................................... Counselor April 21, 2003
Herminio Paiva de Castro.................................. Counselor April 21, 2003
Luis Otavio Nunes West.................................... Counselor April 21, 2003
Jorge Michel Lepeltier.................................... Counselor April 21, 2003
SHARE OWNERSHIP
There are no provisions in our by-laws regarding a board member's power to
vote on a proposal, arrangement or contract in which such board member is
materially interested, although Brazilian corporations law has a provision
forbidding such interested voting. There are likewise no provisions restricting
a board member's ability to borrow money from us, although any such borrowings
must by law be at arm's length and must be preceded by authorization of the
shareholders or the board of directors. Our by-laws do not set forth an age
limit requirement for retirement of our board members. At the shareholders
meeting, shareholders determine the amount of compensation for board members and
executive officers. Under Brazilian corporations law, each member of our board
of directors must hold at least one of our common or preferred shares.
Set forth below are the names and total shares held by our officers and
directors as of April 10, 2001. These amounts reflect the share dividend that
was declared on March 22, 2002.
PREFERRED COMMON PERCENT OF SHARES
NAME SHARES SHARES OUTSTANDING
---- --------- ------ ------------------
Carlos Afonso Teixeira de Freitas............. 59,067 -- 0.05% of preferred
Ricardo Del Guerra Perpetuo................... 24,992 -- 0.02% of preferred
In addition, each of the other members of our board of directors and his or her
alternate owns one preferred share.
79
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth information about the levels of our share
ownership as of April 10, 2002:
NUMBER OF % OF NUMBER OF % OF
COMMON COMMON % OF PREFERRED PREFERRED % OF NUMBER % TOTAL
SHAREHOLDER SHARES SHARES TOTAL SHARES SHARES TOTAL TOTAL SHARES SHARES
----------- ----------- ------ ----- ---------- --------- ----- ------------ -------
State of Parana........ 173,902,122 60.00% 42.00% 43,475,530 34.99% 10.50% 217,377,652 52.50%
Domino................. 115,106,273 39.71 27.80 28,776,568 23.16 6.95 143,882,841 34.75
Officers and directors
as a group(1)........ 0 0.00 0.00 84,076 0.07 0.02 84,076 0.02
Sanepar pension fund... 0 0.00 0.00 2,715,222 2.19 0.66 2,715,222 0.66
Other.................. 828,475 0.29 0.00 49,193,916 39.59 11.88 50,022,391 12.08
----------- ------ ----- ---------- ------ ----- ----------- ------
289,836,870 100.00% 70.00% 124,245,312 100.00% 30.00% 414,082,182 100.00%
=========== ====== ===== ========== ====== ===== =========== ======
---------------
(1) Mr. Carlos Teixeira, President and Chief Executive Officer, holds 59,067
preferred shares, and Mr. Ricardo Perpetuo, Chief Financial Officer, holds
24,992 preferred shares. In addition, each member of the Board of Directors
holds one preferred share.
None of the holders of our preferred or common shares is entitled to any
special voting rights, whether due to their controlling positions or otherwise.
An affiliate of Credit Suisse First Boston Corporation, one of the
international underwriters, beneficially owns more than 10% of our preferred
shares outstanding prior to the closing of this offering. Two affiliates of
Salomon Smith Barney Inc., one of the international underwriters, are limited
partners in CVC/Opportunity Equity Partners L.P., a Cayman Islands partnership
which owns 24.52% of Opportunity Daleth S.A., a shareholder of Domino.
OUR COMMON SHAREHOLDERS
THE STATE OF PARANA
Under current state law, the government of the state of Parana must
maintain ownership of at least 60.0% of our common shares. Thus, the state of
Parana is our controlling shareholder. The state also holds ownership interests
in several other utilities and public service companies. The most prominent of
these companies is COPEL. It holds a 58.6% ownership interest in COPEL. COPEL is
one of our indirect shareholders.
DOMINO HOLDINGS S.A.
Domino is a Brazilian company formed for the specific purpose of investing
in us. Its ownership interest in us is its principal asset. Domino is owned by
four companies, each of which is discussed in more detail below:
- Andrade Gutierrez Concessoes S.A.;
- Sanedo Ltda., an indirect subsidiary of Vivendi Environnement S.A.;
- Opportunity Daleth S.A.; and
- Copel Participacoes S.A., a subsidiary of COPEL.
ANDRADE GUTIERREZ CONCESSOES S.A. Andrade Gutierrez Concessoes S.A. is the
public concession arm of Andrade Gutierrez S.A. group, one of Brazil's largest
conglomerates. Andrade Gutierrez S.A. was
80
created in 1948 as a heavy construction company, but since the early nineties it
has also become active in three new major areas: public concessions for
telecommunications and real estate development. For example, through AG Telecom,
it holds a stake in the group that controls Telemar Participacoes, the holding
company for Tele Norte Leste Participacoes S.A., the largest telecommunication
company in the Brazilian private sector, providing services to 16 different
states in Brazil. It has also allowed the group, through Andrade Gutierrez
Concessoes S.A., to take advantage of private sector opportunities under the
Brazilian privatization programs. For example, Andrade Gutierrez Concessoes S.A.
holds 15.31% of the total equity on CCR -- Companhia de Concessoes Rodoviarias
which consists of five concessions for the high-traffic highways in Brazil and
through its 27.5% stake in Domino, owns an indirect interest in 10.92% of our
common shares and 6.37% of our preferred shares.
In 2001, the Andrade Gutierrez group had gross operating revenues of R$3.1
billion and total assets of R$8.2 billion. These figures are still unaudited.
During the same period, Andrade Gutierrez Concessoes S.A. had gross operating
revenues of R$256 million and total assets of R$662 million. These figures have
been audited.
SANEDO LTDA. Sanedo is an indirect Brazilian subsidiary of Vivendi
Environnement. Vivendi Environnement holds water, waste management, energy, and
transportation operations worldwide. Its Vivendi Water unit, operating in some
100 countries, is the world's leading water company. Its subsidiary Onyx is the
world's third-largest waste-management service provider. Vivendi Environnement's
parent company, Vivendi Universal S.A., is a world-recognized conglomerate and
currently owns 63% of Vivendi Environnement. Vivendi Environnement, through its
30.0% stake in Domino, owns an indirect interest in 11.91% of our common shares
and 6.95% of our preferred shares.
OPPORTUNITY DALETH AND CVC/OPPORTUNITY. Opportunity Daleth S.A. is an
investment vehicle controlled by CVC/Opportunity, formed to take advantage of
investment opportunities in water and sanitation companies in Brazil. In
addition to CVC/Opportunity, Opportunity Daleth has two other investors, GEEMF
II Water and FUNCEF -- Fundacao dos Economiarios Federais. GEEMF II Water is an
investment vehicle of Global Environment Emerging Markets Fund II, a U.S.-based
fund focused on emerging markets investments in healthcare and environmentally
beneficial sectors. FUNCEF is a Brazilian pension fund. Opportunity Daleth,
through its 27.5% stake in Domino, owns an indirect 10.92% interest in our
common shares and 6.37% of our preferred shares.
CVC/Opportunity consists of CVC/Opportunity Equity Partners L.P. -- an
offshore investment fund and CVC/Opportunity Equity Partners FMIA -- a Brazilian
private equity fund, both of which are organized specifically to invest in
private equity opportunities in Brazil. CVC/Opportunity began operating in
September 1997 and its portfolio is composed of investments in Brazilian public
service companies, including Brasil Telecom S.A., Telemar S.A. (wireline
telecommunications), Telemig Celular S.A. and Amazonia Celular S.A. (Wireless
Telecommunications), Santos Brasil S.A. (container handling terminal -- Sao
Paulo) and Opportrans (underground urban transportation -- Rio de Janeiro). The
total amount invested by CVC/Opportunity is approximately US$1.1 billion.
Two affiliates of Salomon Smith Barney Inc., one of the international
underwriters, are limited partners in CVC/Opportunity Equity Partners L.P., a
Cayman Islands partnership which owns 24.52% of Opportunity Daleth S.A., a
shareholder of Domino.
COPEL. COPEL provides electricity for 2.9 million clients in the state of
Parana, which represents 9.2 million people, and has a generation capacity of
4,549 MW. It is one of three large utilities formerly controlled by municipal or
state governments, rather than by the federal government. Through acquisitions,
COPEL is expanding into water, sanitation, natural gas and telecommunications.
COPEL, through its 15.0% stake in Domino, owns an indirect interest in 5.96% of
our common shares and 3.47% of our preferred shares.
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SHAREHOLDERS AGREEMENT
On September 4, 1998 our major shareholders, the state of Parana and
Domino, entered into a 15-year shareholders agreement. Among other things, the
shareholders agreement governs the voting rights of these shareholders in our
general meetings. Our major shareholders have the same voting rights.
Accordingly, these shareholders have agreed to vote as a block whenever the
relevant resolutions deal with:
- certain changes to our by-laws;
- issuance of debentures convertible into voting stock, subscription rights
for voting stock or participation certificates;
- redemption of our stock;
- our merger, spin-off, amalgamation, change of corporate form, dissolution
or winding-up (including the appointment of a liquidator);
- unequal dividend distribution other than as provided in our constitutive
documents or the shareholders agreement; and
- compensation for members of our board of directors and executive
officers.
Additionally, our shareholders agreement sets forth other guidelines, policies
and requirements with respect to: (i) the election of our directors and officers
and the operation of our administrative bodies; (ii) the administration of our
business; (iii) our operational activities; (iv) the distribution of profits
(including our obligation to distribute, in addition to the mandatory
distribution, at least an additional 25% of our net profits in each fiscal
year); and (v) the disposal of our shares.
Recent changes in the Brazilian corporations law give our minority
shareholders the right to appoint one or two of our directors, as further
described in "Description of Share Capital -- Our common and preferred shares."
In this connection, the shareholders agreement will have to be amended in the
case our minority shareholders decide to exercise the above right.
In a situation in 1997 involving the sale of a noncontrolling equity
interest in a company controlled by the state of Minas Gerais and a shareholders
agreement between the state and a non-Brazilian minority shareholder, following
the election of a new governor, the state of Minas Gerais commenced a legal
action seeking to void its shareholders agreement with the non-Brazilian
minority shareholder based principally on the theory that the grant of veto
powers to the minority shareholder violated the state law requiring the state to
control the company. A state appellate court upheld a judgment rendered by a
state trial court in favor of the state and voided the shareholders agreement.
The shareholder has appealed to the Brazilian Superior Court of Justice, and a
decision as to whether such appeal fulfills the applicable requirements for the
review by the Court of Justice is still pending. We cannot assure you that the
state of Parana would not in the future seek to void the shareholders agreement
or that it would be unable to do so.
SHAREHOLDERS MEETINGS
As described above, our common shareholders have agreed to vote unanimously
on certain significant corporate actions. They have agreed to meet before
shareholders meetings and discuss proposals regarding these actions. If they
cannot reach agreement before the meeting, then at the meeting they will vote
against the proposal.
Pursuant to the Brazilian corporations law, shareholders voting at a
shareholders meeting have the power to take the following actions, among other
things:
- amend the by-laws;
- elect or dismiss members of the board of directors and members of the
audit committee at any time;
- receive the annual reports by management and accept or reject
management's financial statements, including the allocation of net
profits and the distributable amount for payment of the mandatory
dividend and allocation to the various reserve accounts;
- authorize the issuance of debentures;
82
- suspend the rights of a shareholder in default of obligations established
by law or by the by-laws;
- accept or reject the valuation of assets contributed by a shareholder in
consideration for the issuance of capital stock;
- authorize the issuance of founder's shares;
- pass resolutions to reorganize our legal form, to merge, consolidate, or
split us, to dissolve and liquidate us, to elect and dismiss our
liquidators and to examine their accounts; and
- authorize management to file for bankruptcy or to request a concordata, a
procedure involving protection from creditors similar in nature to
reorganization under the U.S. Bankruptcy Code.
In order to elect board members, the common shareholders nominate
individuals to occupy the available posts, and all shareholders vote together to
elect these individuals. All of our shareholders meetings, including the annual
shareholders meeting, are convened by publishing, no fewer than 15 days prior to
the scheduled meeting date and no fewer than three times, a notice in Diario
Oficial do Estado do Parana and Gazeta do Povo, newspapers with general
circulation in Curitiba where we have our registered office, and in Gazeta
Mercantil, a newspaper with general circulation in Sao Paulo, Brazil. Such
notices must contain the agenda, time and place for the meeting and, in the case
of an amendment to our by-laws, an indication of the subject matter. Any
shareholder may attend such meeting and take part in the discussion of matters
submitted for consideration, and each common share entitles its holder to cast
one vote in the deliberations held at the meeting.
According to the Brazilian corporations law and our by-laws, annual and
special shareholders meetings may be called by the board of directors or the
executive officers. A shareholders meeting may also be called:
- by the audit committee, should the administrative bodies delay in doing
so for more than one month (with respect to the annual meeting), and a
special shareholders meeting whenever serious or urgent matters occur,
including in the agenda of the meeting such matters as it may deem
necessary;
- by any shareholder, whenever the directors fail to convene the meeting
for more than 60 days after the deadline, in the cases determined by law
or our by-laws;
- by shareholders representing at least 5% of the share capital whenever
the directors do not, within eight days, comply with their justifiable
request that a meeting be called; and
- by shareholders representing at least 5% of the voting shares, or 5% of
non-voting shareholders, whenever the directors do not, within eight
days, comply with the request that a meeting be called in order to
appoint the audit committee.
A shareholder may be represented at a shareholders meeting by an
attorney-in-fact appointed not more than one year before the meeting, who must
be a shareholder, a company officer or a lawyer. For a public company, such as
our company, the attorney-in-fact may also be a financial institution.
CORPORATE GOVERNANCE
BOARD OF DIRECTORS
Our board of directors has nine members and nine alternates. Pursuant to
the shareholders agreement, the state of Parana has the right to appoint five
members to the board of directors, and an equal number of alternates. Domino has
the right to appoint three members and three alternates. The remaining member
and his or her alternate is appointed by employee vote. Only the entity that
appointed the board member can dismiss that board member. Directors are elected
to three-year terms. As a consequence of the new provisions of the Brazilian
corporations law (which have been introduced by Law No. 10,303), according to
which minority shareholders holding a determined percentage of our shares have
the right to appoint one or two of our directors, we may have to amend our
by-laws so as to create one or more additional board seats.
83
A number of key corporate decisions are taken at the board level. Some
decisions, such as the approval of related party transactions, approval of the
sale or encumbering of permanent assets, the granting of guarantees exceeding
0.5% of our net worth and approval of financial agreements exceeding 2% of our
net worth, require the affirmative vote of at least seven board members (a
qualified majority). Other decisions of the board (that do not require a
qualified majority) include the power to call shareholders meetings and the
election of the executive officers.
EXECUTIVE OFFICERS
We have seven executive officers:
- chief executive officer;
- chief financial officer;
- chief operating officer;
- chief new business officer;
- chief superintendent officer;
- chief investor relations officer; and
- chief administrative officer.
Our board of directors elects our executive officers to three-year terms.
Pursuant to the shareholders agreement, our chief executive officer, chief
new business officer, chief administrative officer and chief investor relations
officer are elected solely from a slate of names provided by the state of
Parana. The chief superintendent (a position which is currently vacant), chief
financial officer and chief operations officer are elected solely from a slate
of names provided by Domino.
RELATED PARTY TRANSACTIONS
None of the members of our board of directors or executive officers are
related to one another. Their relationships with our company are arm's-length.
TRANSACTIONS WITH THE STATE OF PARANA
Our controlling shareholder is the state of Parana. The state of Parana is
one of our principal clients in terms of water and wastewater and in terms of
billings. For the year ended December 31, 2001, the state of Parana accounted
for 2.42% of amounts billed under all customer invoices for the year. We work
closely with the state of Parana, and the state has in the past arranged
financing that allows us to benefit from its governmental status.
In January 1998, the state of Parana entered into a contract with the Japan
Bank for International Cooperation, or JBIC, for a loan of up to Y23.69 billion
(equivalent to approximately R$419.4 million and US$180.7 million, at the
commercial selling rates published by the Central Bank of Brazil for December
31, 2001) to be used for the development and construction of water and
wastewater projects in the state of Parana. On January 29, 2002, we entered into
a "mirror" loan agreement with the state of Parana, under which the state agreed
to forward to us all amounts to be received by it under the Paranasan program
beginning January 1, 2002, and we agreed to repay to the state amounts that
become due under the program, including interest accruing at the rates specified
in the program. These disbursements are repayable in allotments over 18 years
(2005 to 2023). This loan will accrue interest at a rate of 4.0% per year, in
the case of disbursements allocable to construction, and 2.3% per year, in the
case of disbursements allocable to consulting and design services. These rates
are identical to the rates payable by the state to JBIC under the Paranasan loan
documentation. For more information on the Paranasan program, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and capital resources".
Through December 31, 2001, we had received an aggregate of R$198.6 million
in advances from the state of Parana, not including approximately R$20.9 of
accrued interest. At that date, this included R$136.9 million of funds advanced
to us under the Paranasan program, as described above; R$44.0 million
84
of amounts paid to COPEL on our behalf as described below; R$11.1 million of
interest on equity payable to the state but never in fact paid in 1997; and
R$6.6 million of other amounts paid by the state on our behalf. On January 29,
2002, Sanepar and the state of Parana entered into agreements under which R$40.0
million of these advances and similar amounts owed to the state will not be owed
to and will not be repaid to the state, but instead will be treated as an
additional capital contribution, although no additional shares of share capital
will be issued to the state. Sanepar agreed to repay the remainder of advances
by the state through December 31, 2001, including accrued interest, using part
of the proceeds obtained from this offering. These amounts to be repaid are
recorded on our balance sheets as a current liability as "Advances from
Shareholders".
The state of Parana has entered into additional loans with the
International Bank for Reconstruction and Development and the Inter-American
Development Bank on our behalf and in an aggregate amount of R$214.9 million, as
of December 31, 2001, and on-lent funds to us on the same terms.
Additionally, the state of Parana has guaranteed R$287.4 million of our
long-term debt.
TRANSACTIONS WITH COPEL
We maintain an important business relationship with COPEL. COPEL is both an
indirect holder of our common shares through Domino and an affiliate through the
state of Parana. In addition, COPEL is also one of our largest suppliers,
because electricity is one of our largest operating expenses. We have
approximately 600 electricity supply contracts with COPEL under which COPEL
provides us with electricity in our service areas. In 2001, COPEL billed us an
average of R$4.5 million per month.
In the past, we did not pay invoices from COPEL from December 1993 through
April 1994 and from June 1994 through November 1994. On January 30, 1996, the
state of Parana assumed the responsibility for these bills. As a consequence,
the state paid R$44.0 million to COPEL on our behalf. In accordance with an
agreement dated January 29, 2002, the payments made to COPEL by the state of
Parana, and not reimbursed to the state of Parana by us, totaling R$22.3
million, will not be repaid to the state of Parana and have been recorded as
"Additional paid-in capital" in 2002. The remainder, or R$21.7 million, will be
repaid to the state of Parana from the proceeds of this offering, and is
included within the R$179.5 million (US$77.4 million) referred to in the Use of
Proceeds Section.
TRANSACTIONS WITH AFFILIATES OF VIVENDI
Vivendi Environnement, a French company that is one of the world's leading
water companies, is an indirect holder of our common shares that currently has
the right to name one of our board members and one of our executive officers. On
March 8, 2000, we entered into a construction contract for the expansion of our
network and operations with a consortium that includes OTV, an affiliate of
Vivendi Environnement. The amount of the contract is for R$31.8 million. The
outstanding amount of this contract involving OTV was R$698,000 as of February
28, 2002. This contract and purchases thereunder are entered into on an
arm's-length basis.
85
DESCRIPTION OF SHARE CAPITAL
GENERAL
We are a mixed-ownership corporation (sociedade de economia mista de
capital aberto, or a company of mixed state and private ownership) incorporated
under the laws of Brazil. Our common shares do not currently have a public
trading market. Our preferred shares traded on the SOMA under the symbol "SAPR4"
from March 16, 2000 through the present. We anticipate that, prior to the close
of the global offering, our preferred shares will cease to be listed on the SOMA
and begin trading on the Sao Paulo Stock Exchange, or Bovespa, also under the
symbol "SAPR4".
OUR COMMON AND PREFERRED SHARES
On December 31, 2001, our common and preferred shares and their aggregate
paid-in value were as follows:
NUMBER OF
TYPE OF SHARES SHARES PAID-IN AMOUNT(IN R$)
-------------- ----------- ---------------------
Common............................................. 289,836,870 389,342,813
Preferred.......................................... 41,428,876 55,652,116
----------- -----------
Total......................................... 331,265,746 444,994,929
=========== ===========
Following the share dividend (bonificacao) on March 22, 2002 and prior to this
offering, the number of our preferred and common shares and paid-in capital is
as follows:
TYPE OF SHARES NUMBER OF SHARES PAID-IN AMOUNT(IN R$)
-------------- ---------------- ---------------------
Common........................................... 289,836,870 389,342,813
Preferred........................................ 124,245,312 442,364,216
----------- -----------
Total....................................... 414,082,182 831,707,029
=========== ===========
All shares issued are fully paid and have no par value. All shares issued
are outstanding. We are issuing 144,000,000 preferred shares in connection with
this offering, which will bring the total preferred shares outstanding after
completion of the offering to 268,245,312. With one exception, no shares have
been paid for with assets other than cash within the past five years. There are
no options or warrants to purchase our shares outstanding. We have no treasury
shares, although we are not prohibited from holding treasury shares. Our by-laws
do not impose restrictions on foreign ownership of our shares; the state of
Parana is, however, required by state law to hold at least 60% of our common
shares. When required to publish matters pursuant to Brazilian law, we publish
them in the Diario Oficial do Estado -- PR (Official Gazette of Parana), Gazeta
do Povo -- PR (Peoples' Gazette of Parana) and/or the Gazeta Mercantil, Brazil's
leading business newspaper.
According to the records at the Central Bank of Brazil, as of April 15,
2002, of our shares outstanding, none of our common shares and 12,855,837 of our
preferred shares were held by persons outside Brazil, accounting for 0.0% and
10.35% of all common and preferred shares outstanding, respectively. These
figures have not been adjusted to reflect the share dividend (bonificacao) on
March 22, 2002.
The following table sets forth our historical numbers of shares outstanding
for the periods indicated:
OUTSTANDING AS OF DECEMBER 31,
-----------------------------------------
TYPE OF SHARES 1999 2000 2001
-------------- ----------- ----------- -----------
Common...................................... 289,836,870 289,836,870 289,836,870
Preferred................................... 41,428,876 41,428,876 41,428,876
----------- ----------- -----------
Total.................................. 331,265,746 331,265,746 331,265,746
=========== =========== ===========
86
Generally speaking, holders of our common and preferred shares have the
same rights, preferences and restrictions with three principal exceptions.
First, each common share entitles its holder the right to vote at shareholders
meetings, whereas under ordinary circumstances, each preferred share entitles
its holder the right to vote only in limited circumstances. Second, all the
holders of our preferred shares must receive dividends per share of at least 10%
more than the amount paid to the holders of our common shares. Third, in the
event of a liquidation, after labor, tax, secured and unsecured commercial
credits have been satisfied, the remaining funds are then distributed to
shareholders. Such funds, if any, are paid first to holders of our preferred
shares and then to holders of our common shares. Such rights, preferences and
restrictions are discussed in more detail below.
We will convene a special general meeting of shareholders on April 26, 2002
to resolve on the adjustments to be made in our by-laws in order to expressly
provide that the preferred shares will have the right to receive dividends of at
least 10% more than the amount paid to holders of common shares in order to
adapt our by-laws to the new requirements set forth by Law No. 10,303, which
amended the Brazilian corporations law. In practice, there should be no change
in the preferences of our preferred shares (including the preferred shares being
issued in this global offering), since the preferences currently granted to the
holders of our preferred shares already meet the requirements set forth by Law
No. 10,303.
CREATION OF PREFERRED SHARES FOR THIS OFFERING
Authorization for the issuance of the preferred shares underlying the ADSs
was granted by an amendment to our by-laws effected in an special shareholders
meeting dated on December 18, 2001 and confirmed in another special shareholders
meeting held on March 15, 2002. The by-laws were amended in order to authorize
our board of directors to make a capital increase, without an additional
amendment to our by-laws or any additional shareholder approval, consisting of
an issuance of up to R$900 million in non-voting preferred shares, at a price to
be determined by our board of directors, taking into account the market
conditions at the time of this offering.
VOTING RIGHTS
Each common share entitles its holder to one vote at our shareholders
meetings. Our preferred shares do not have the right to vote. However, the
Brazilian corporations law provides that non-voting shares, such as our
preferred shares, acquire voting rights beginning when a company has failed for
three consecutive fiscal years or a shorter period according to the company's
charter to pay the fixed or minimum dividend to which such shares are entitled
and continuing until payment thereof is made. Therefore, if we were to fail to
pay the minimum required dividend to preferred shareholders for three
consecutive years, our preferred shares would acquire voting rights. Our by-laws
do not provide for a fixed or minimum dividend at this point in time.
Any change in the preferences or rights of our preferred shares, or the
creation of a class of shares having priority over our preferred shares, unless
such change is authorized by the by-laws, would require the approval of our
common shareholders in a special shareholders meeting in addition to approval by
a majority of the holders of our outstanding preferred shares. The preferred
shareholders would vote as a class at a special meeting, which would be
announced via publication on at least three occasions in the Official Gazette of
Parana, as well as in a newspaper of wide circulation in Parana at least fifteen
days before the meeting. For such an announcement, we would provide notice in
either Gazeta do Povo or Gazeta Mercantil.
Law No. 10,303, which amended the Brazilian corporations law, grants
holders of Sanepar preferred shares the right to elect and dismiss directors as
follows:
- holders of our preferred shares without voting rights (or with restricted
voting rights) representing 10% of the total issued capital stock, and
- holders of our common shares that are not part of the control group, and
represent at least 15% of our voting capital stock,
87
will now have the right to appoint, by voting during our annual shareholders
meeting where the controlling shareholder is excluded, a director and his or her
alternate. If none of our non-controlling holders of common or preferred shares
meets the respective thresholds described above, holders of preferred or common
shares representing at least 10% of our share capital would be able to combine
their holdings to appoint one member and an alternate to our board of directors.
Such rights may only be exercised by those shareholders who prove that they have
held the required stake with no interruption during at least the three months
directly preceding our annual shareholders meeting. Further, such rights may
only be exercised at our annual shareholders meeting to be held after 2006.
Until then, the election of a director by our non-controlling shareholders shall
be made by choosing one out of three names selected by our controlling
shareholder.
Holders of common shares have some rights which cannot be amended through
changes in the by-laws or at a general shareholders meeting. These rights
include the right to vote (each common share entitles its holder the right to
vote at the general shareholders meeting), the right to participate in
distributions (dividends, interest on capital and to share in the remaining
assets of the company in the event of liquidation), the right of inspection and
preemptive rights in some circumstances. In addition to those rights, the
by-laws and the majority of the voting shareholders can establish a number of
additional rights and, likewise, remove those rights. Currently, our by-laws do
not establish any rights in addition to those already set forth by the Brazilian
corporations law.
PREEMPTIVE RIGHTS
Generally, both our common and preferred shareholders have preemptive
rights to purchase equity securities we may issue in proportion to their
shareholdings. Our shareholders have 30 days to purchase the new securities
after we announce their issuance. However, in the specific case of the issuance
authorized by the by-laws in connection with this offering, the current
shareholders have no preemptive rights as permitted by the Brazilian
corporations law.
According to the Brazilian corporations law, the by-laws may eliminate the
preemptive rights of the shareholders in the issuance of shares, debentures
convertible into shares, convertible founders' shares and warrants if (i)
offered in a stock exchange; (ii) offered for public subscription; or (iii) the
purpose of the issuance is an equity swap in order to acquire control of another
company subject to the limit on the number of shares that may be issued with the
approval of the board without any additional shareholder approval.
Our by-laws, as amended in our special shareholders meeting of December 18,
2001 and confirmed at the special shareholders meeting dated March 15, 2002,
provide that this offering will not give rise to preemptive rights of existing
shareholders.
In the event of a capital increase which would maintain or increase the
proportion of capital represented by preferred shares, holders of ADSs would,
except under circumstances described above, have preemptive rights to subscribe
only to our newly issued preferred shares. In the event of a capital increase
which would reduce the proportion of capital represented by preferred shares,
holders of ADSs will 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 overall interest in us, except if such
increase is made to bring the ratio of common shares to preferred shares up to
50%/50% pursuant to Law No. 10,303. However, you may not be able to exercise the
preemptive rights relating to the preferred shares underlying your ADSs unless a
registration statement under the Securities Act is effective with respect to
those rights or an exemption from the registration requirements of the
Securities Act is available. If a registration statement is not filed and an
exemption from registration does not exist, The Bank of New York, as depositary,
will attempt to sell the preemptive rights, and you will be entitled to receive
the net proceeds of the sale. However, preemptive rights will expire if the
depositary cannot sell them, and you will not receive any payment for those
lapsed rights.
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RIGHT OF WITHDRAWAL
Our common shares and preferred shares are not redeemable. We have no
sinking fund for our shares.
The Brazilian corporations law provides that, under limited circumstances,
a shareholder has the right to withdraw his equity interest from the company and
to receive payment for the portion of shareholders' equity attributable to his
or her equity interest. This right of withdrawal may be exercised by our
dissenting shareholders (including any holder of preferred shares) in the event
that at least half of all voting shares outstanding authorize us:
- to create a new class of preferred shares or to disproportionately
increase an existing class of preferred shares relative to the other
classes of preferred shares unless otherwise provided in our by-laws;
- to modify a preference, privilege or condition of redemption or
amortization conferred on one or more classes of preferred shares or to
create a new class with greater privileges than the existing classes of
preferred shares;
- amending the by-laws to reduce the mandatory distribution of dividends;
- to change our corporate purpose;
- to merge us with another company or to consolidate us;
- to spin-off our company, if such spin-off results in a: (a) change in the
corporate purposes, except when the spun-off assets are directed to a
company which main activity is materially similar to that of our company,
(b) reduction of the mandatory dividend, or (c) participation in a group
of companies, as defined by the Brazilian corporations law;
- to transfer all of our shares to another company in order to make us a
wholly owned subsidiary of that company, a transaction known as
incorporacao de acoes;
- to approve the acquisition of control of another company at a price which
exceeds the limits set forth in the Brazilian corporations law;
- to approve our participation in a group of companies as defined under the
Brazilian corporations law; or
- in the event that the entity resulting from a merger, an incorporacao de
acoes as described above or a spin-off that we conduct fails to become a
listed company within 120 days of the shareholders meeting at which such
decision was taken.
In the first two points above, only those shareholders to whom the
resolution will be adverse have the right to withdraw. If there is a resolution
to (a) merge us with another company or consolidate us, (b) transfer all of our
shares to another company in order to make us a wholly owned subsidiary of such
company, or (c) participate in a group of companies, the withdrawal rights are
exercisable only if our shares do not satisfy certain tests of liquidity at the
time of the shareholders resolution.
The right of withdrawal lapses 30 days after publication of the minutes of
the relevant shareholders meeting. In the first two points above, the resolution
is subject to the prior approval or subsequent (up to one year) ratification by
holders of a majority of the outstanding preferred shares, in a special meeting;
in this case the 30-day term is counted from the publication of the minutes of
the special meeting. We would be entitled to reconsider any action giving rise
to withdrawal rights within ten days following the expiration of such rights if
the payments for withdrawal of shares of dissenting shareholders would
jeopardize our financial stability.
For purposes of the right of withdrawal, the concept of "dissenting
shareholder", under Brazilian corporations law, includes not only those
shareholders who vote against a resolution specified above, but also against
those that abstain from voting or who fail to attend the shareholders meeting.
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According to the Brazilian corporations law and our by-laws, if a
shareholder asks to withdraw his or her shares, the share price for such
withdrawal is the book value of the shares, determined on the basis of the last
balance sheet approved by the shareholders. If the shareholders meeting giving
rise to redemption rights occurs more than 60 days after the date of the last
approved balance sheet, a dissenting shareholder may demand that its shares be
valued on the basis of a new balance sheet especially drawn up for such purpose.
In this case, we must immediately pay 80% of the book value of the shares in the
most recent balance sheet approved by the shareholders, and the remaining 20%
must be paid within 120 days of the date of the resolution of the general
shareholders meeting.
Brazilian corporations law allows any company to determine in its by-laws
that their shares will be redeemable at their economic value, even if lower than
the book value. If the redemption is made by the economic value, an appraisal
must be made by three experts or a specialist company, chosen by the
shareholders in a special meeting where each common or preferred share has the
right to cast one vote, based on three to six choices presented by the board of
directors. Currently, our by-laws do not grant us this option.
CONVERSION RIGHTS
Neither our common shares nor our preferred shares have conversion rights.
FORM AND TRANSFER
Because our preferred shares are in registered book-entry form, Banco Itau
S.A., as registrar, must effect any transfer of shares by an entry made in its
books, in which it debits the share account of the transferor and credits the
share account of the transferee. When preferred shares are acquired or sold on a
Brazilian stock exchange, the transfer is effected on the records of our
registrar by a representative of a brokerage firm or the stock exchange's
clearing system. Banco Itau S.A. also performs all the services of safe-keeping
and transfer of shares and related services for us.
Transfers of shares by a foreign investor are executed in the same way by
that investor's local agent on the investor's behalf except that, if the
original investment was registered with the Central Bank of Brazil pursuant to
Resolution No. 2,689 of January 26, 2000 of the National Monetary Council, the
foreign investor should also seek amendment through its local agent, if
necessary, of the electronic registration to reflect the new ownership.
The Sao Paulo stock exchange, known as Bovespa, operates a central clearing
system through Companhia Brasileira de Liquidacao e Custodia, or CBLC. As soon
as we are granted a trading registration by Bovespa, a holder of our shares will
be able to participate in this system and all shares elected to be put into the
system will be deposited into custody with CBLC (through a Brazilian institution
that is duly authorized to operate by the Central Bank and maintains a clearing
account with CBLC). The fact that such shares are subject to custody with the
relevant stock exchange will be reflected in our registry of shareholders. Each
participating shareholder will, in turn, be registered in the register of our
beneficial shareholders that is maintained by CBLC and will be treated in the
same way as registered shareholders.
OUR BY-LAWS
Our principal governing document is our estatuto social (by-laws).
OUR COMPANY PURPOSE
We were formed for the purpose of:
- completing studies of construction work in connection with water and
waste removal installations, and conducting such construction work;
- engaging, directly or through subsidiaries, in water distribution and
wastewater collection services;
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- cooperating with other entities in relation to water distribution and
wastewater collection, as provided in agreements or other documents
executed by us;
- rendering technical or administrative assistance in relation to water
distribution and wastewater removal services to municipalities or other
entities;
- holding equity in other companies with a view to widening our water and
wastewater service areas;
- removing and disposing of residential and industrial solid-waste;
- providing public and private services of urban drainage; and
- assisting, certifying and consulting in the areas specified above.
BOARD OF DIRECTORS
A majority of board members present is required to approve routine
decisions. Four board members are required for a quorum. The chairman of the
board serves as tie-breaker, when necessary. For certain "non-routine"
decisions, a supermajority of seven board members is required for approval,
including those listed below:
- approval of contracts involving affiliates;
- approval of encumbrances on our assets and guarantees, in each case,
above 0.5% of our net worth (per guarantee);
- approval of loans in excess of 2% of our company's net worth;
- examination of the executive officers' reports and financial records
before their publication;
- change of auditors;
- allocation of profits;
- approval of plans on employment positions and salary policies;
- upon request of the executive committee, deliberation on the vote of
affiliates at shareholders meetings, as provided in our business plan;
- payment of semiannual dividends, and payment of interest attributable to
shareholders' equity;
- examination of all contracts approved by waiver or that were not obtained
by competitive bidding;
- approval of proposed tariff rates and charge schedules related to our
services, products and operations;
- deciding questions that are not detailed in our by-laws; and
- approval of any capital increases authorized by the general meeting and
the share dividend (bonificacao) and approval of any agreements with
financial institutions and custodians in relation to this issuance.
BOARD MEMBER APPOINTMENT
According to our shareholders agreement, the Parana state government has
the right to appoint five members of the board of directors. Domino has the
right to appoint three members and our employees have the right to appoint one.
Brazilian corporations law provides that in a company of mixed private and
public ownership, minority common shareholders have the right to elect one
member of the board of directors. The minority holders of common shares,
however, have never attended a shareholders meeting in order to vote their
shares; thus, the present composition of the board of directors does not include
any member elected by the minority common shareholders.
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All members of the board of directors serve three-year terms. In the case
of vacancy, a previously selected alternate will be seated until the next
shareholders meeting. Our by-laws do not provide for staggered elections to the
board of directors.
AMENDMENT
Our board of directors can propose to the general shareholders meeting any
amendments to our by-laws. Generally, in order to amend our by-laws, the
affirmative vote of the majority of common shareholders is required. According
to our shareholders agreement, however, most of the provisions of our by-laws
can only be amended by unanimous decision of our two largest common
shareholders, the state of Parana and Domino.
SHAREHOLDERS MEETINGS
Our by-laws and Brazilian corporations law require that regular
shareholders meetings be held within the first four months of each year. A
special shareholder meeting may be called by the board of directors, the audit
committee, and any shareholder, in certain instances provided for by Brazilian
corporations law. All shareholders have the right to attend shareholder meetings
and take part in the discussion of matters submitted for consideration, and all
common shareholders have the right to vote at such meetings. These meetings are
presided over by a shareholder who is elected to preside by shareholder vote.
LIABILITY OF DIRECTORS AND OFFICERS
Under the Brazilian corporations law, directors of a corporation generally
have duties comparable to those imposed under the laws of most states of the
United States, including a duty of loyalty to the company, a duty to refrain
from self-dealing and a duty to use reasonable care in the management of the
company's affairs. Our directors and officers may be held liable for breaches of
duty to us and our shareholders and may be subject to judicial actions brought
by governmental agencies or our shareholders, directly or derivatively.
REGULATION OF FOREIGN INVESTMENT IN BRAZILIAN EQUITY SECURITIES
There are no restrictions on ownership of preferred shares by individuals
or legal entities domiciled outside Brazil. However, the right to convert
dividend payments and other distributions on our preferred shares and proceeds
from the sale of preferred 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, the registration of
the relevant investment with the Central Bank of Brazil.
Investments in our preferred shares through the holding of ADSs must be
made pursuant to Annex V to Resolution No. 1,289 of March 20, 1987, as amended,
of the National Monetary Council, also known as the Annex V Regulations. Direct
investments in our preferred shares upon the cancellation of the underlying ADSs
may be held by foreign investors under Law No. 4,131 of September 3, 1962 or
Resolution No. 2,689, and other related regulations. These laws effectively
allow registered foreign investors to invest in any capital market instrument in
Brazil and extend favorable tax treatment to all foreign investors registered
and qualified under Resolution No. 2,689, who are not resident in a "tax haven",
as defined by Brazilian tax laws (i.e., a country that does not impose taxes or
where the minimum income tax rate is lower than 20%).
Under Resolution No. 2,689, foreign investors (including individuals, legal
entities, mutual funds and other collective investment entities that are
domiciled or headquartered outside Brazil) 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.
According to the foreign investment regulations in Brazil, a foreign
investor must:
- appoint at least one representative in Brazil, with powers to perform
actions relating to its investment,
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- appoint an authorized custodian in Brazil for its investment,
- register as a foreign investor with the Brazilian Securities Commission
(Comissao de Valores Mobiliarios, or CVM),
- enroll itself with the Brazilian Taxpayer Registry, or CPF, in the case
of individual investors, and
- register its foreign investment with the Central Bank of Brazil.
Securities and other financial assets held by investors under Resolution
No. 2,689 must be registered or maintained in deposit accounts or under the
custody of an entity licensed by the Central Bank of Brazil or the CVM. Any
transfer of a security that is held pursuant to Resolution No. 2,689 must be
made through stock exchanges or organized over-the-counter markets licensed by
the CVM, except for a transfer resulting from a corporate reorganization or
occurring upon the death of a foreign investor by operation of law or will.
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 Dollars and remitting such Dollars abroad. Holders of preferred shares
(obtained as a result of converting ADSs) who have not registered their
investment with the Central Bank of Brazil could be adversely affected by delays
in, or refusals to grant, any required government approval for conversions of
payments made in Reais and remittances abroad of the converted amounts.
The Annex V regulations provide for the issuance of depositary shares in
foreign markets in respect of shares of Brazilian issuers. The proceeds from the
sale of ADSs by their holders outside Brazil are free of Brazilian foreign
investment controls and holders of the ADSs who are not resident in a tax haven
jurisdiction will be entitled to favorable tax treatment. An application will be
filed to have the ADSs approved under the Annex V Regulations by the Central
Bank of Brazil and the Brazilian Securities Commission, and final approval is
expected to be received before the approval for listing on the New York Stock
Exchange of the ADSs representing our preferred shares.
Upon the effectiveness of the Registration Statement in which this
prospectus is included and approval for listing of the ADSs for trading on the
NYSE, an electronic registration will be issued in the name of the depositary
bank with respect to the ADSs and will be maintained by the Brazilian custodian
for the preferred shares on behalf of the depositary bank. This electronic
registration is carried on through the Central Bank of Brazil Information
System, or SISBACEN. Pursuant to the electronic registration, under current
Central Bank of Brazil rules, the custodian and the depositary bank will be able
to convert dividends and other distributions or sales proceeds with respect to
our preferred shares represented by ADSs into foreign currency and remit such
amounts outside Brazil. In the event that a holder of ADSs exchanges the ADSs
for our preferred shares, the holder will be entitled to continue to rely on the
depositary's electronic registration for five business days after the exchange.
Thereafter, the holder may not be able to convert into foreign currency and
remit outside Brazil the proceeds from the disposition of, or distributions with
respect to, our preferred shares, unless the holder obtains its own certificate
of registration by registering its investment directly with the Central Bank of
Brazil under Law No. 4,131 or Resolution No. 2,689. The holder will generally be
subject to less favorable Brazilian tax treatment than a holder of ADSs. In
addition, if the foreign investor resides in a "tax haven" jurisdiction, the
investor will be also subject to less favorable tax treatment.
Under current Brazilian legislation, the federal government may impose
temporary restrictions on remittances of capital abroad in the event of a
serious imbalance or anticipated serious imbalance in Brazil's balance of
payments. For approximately nine months in 1989 and early 1990, the federal
government froze all dividend and capital repatriations held by the Central Bank
of Brazil that were owed to foreign equity investors in order to maintain
Brazil's foreign currency reserves. Theses amounts were subsequently released in
accordance with government directives. We cannot assure you that the federal
government will not impose similar restrictions on remittances in the future.
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NEW PROVISIONS IN THE BRAZILIAN CORPORATIONS LAW
On October 31, 2001, Law No. 10,303 was enacted amending the current
Brazilian corporations law in several material respects. The main goal of this
law was to broaden the rights of minority shareholders, such as the holders of
our preferred shares. Law No. 10,303 came into effect and force on March 2,
2002.
The following provisions could have a material impact on the preferred
shares represented by ADSs because they will:
- Obligate our controlling shareholder to make a tender offer for our
shares if it increases its interest in our share capital to a level that
materially and negatively affects the liquidity of our shares, as defined
by the Brazilian Securities Commission.
- Authorize us to redeem minority shareholders' shares if, after a tender
offer, our controlling shareholder increases its participation in our
total share capital to more than 95%.
- Require that preferred shares traded on a stock exchange have one of the
following advantages: (i) priority in receipt of dividends corresponding
to at least 3% of the book value per share (after this priority condition
is met and the same dividend amount is paid to the holders of common
shares, equal conditions apply to preferred and common shares); or (ii)
dividends 10% higher than those paid for common shares; or (iii)
tag-along right at 80% of the price paid to the controlling shareholder
in case of a transfer of control.
- Give dissenting shareholders the right to withdrawal in the event of a
spin-off that results in: (i) a change of our corporate purpose (except
where the spun-off company's net worth is conveyed to a company whose
main purpose is the same as that of the spun-off company); (ii) a
reduction of the mandatory annual dividend we are required to distribute
to our shareholders; or (iii) a new shareholding stake in a group of
companies.
- Entitle each shareholder that is not a controlling shareholder but that
holds
(i) preferred shares representing at least 10% of our share capital or
(ii) common shares representing at least 15% of our voting shares to the
right to appoint one member and an alternate to our board of
directors. If none of the common or preferred shareholders meets
the respective thresholds described above, shareholders holding
preferred or common shares representing at least 10% of our share
capital would be able to combine their holdings to appoint one
member and an alternate to our board of directors. Until 2005, the
board members that may be elected by our non-controlling
shareholders are to be chosen from a triple list drawn up by the
controlling shareholder. Any such members elected by the minority
shareholders are to have veto power on the selection of our
independent auditors.
- Require controlling shareholders and shareholders that appoint members of
our management, board of directors or executive officers to immediately
file with the Brazilian Securities Commission and the stock exchanges in
which our securities are traded, a statement of any change in their
shareholdings.
- Require us to send copies of the documentation we submit to our
shareholders in connection with shareholders meetings to the stock
exchanges where our shares are most actively traded.
NEW DISCLOSURE REQUIREMENTS
On January 3, 2002, the Brazilian Securities Commission issued new
requirements regarding the disclosure and use of information related to material
facts and acts of publicly-held corporations, including the disclosure of
information in the trading and acquisition of securities issued by publicly-held
corporations.
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The new requirements include provisions that:
- broaden the concept of a material fact that gives rise to reporting
requirements. Material facts now include the decisions of the controlling
shareholders, the resolutions of the general meeting of shareholders and
of management of the corporation or any other facts related to its
business (whether occurred within the company or otherwise somehow
related thereto) that may influence the price of its publicly-traded
securities, or the decision of investors so as to trade such securities
or to exercise any of such securities' underlying rights;
- better specify the examples of facts that are considered as material
facts, which now include, among others, the execution of shareholders
agreements providing for the transfer of control, the entry or withdrawal
of shareholders that maintain any managing, financial, technological or
administrative contract with or contribution to the corporation and any
corporate restructuring undertaken among related companies;
- extend the obligation to disclose material facts (originally allocated to
the investor-relations officer) to controlling shareholders, other
officers, directors, members of the audit committee and other advisory
boards (in case of failure of the investor-relations officer to proceed
so);
- extend the duty of secrecy of yet undisclosed material facts to the
members of the audit committee, any other advisory and technical boards
and the company's employees;
- material facts shall now be simultaneously disclosed to all markets in
which the corporation's securities are admitted for trading;
- the acquiror of a controlling stake in a corporation shall publish a
material fact including its intent as to whether or not de-listing the
corporation's shares within one year;
- broaden the rules regarding disclosure requirements in the acquisition
and disposal of a material shareholding stake; and
- further restrict the use of inside information.
These new requirements came into effect as of April 4, 2002.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
The rights of a holder of an ADS will be set forth in the deposit agreement
among us, the depositary and you, as the holder of the ADS. Copies of the
deposit agreement and our constitutive documents are available for inspection at
the corporate trust office of the depositary, located at 101 Barclay Street, New
York, New York 10286 (temporarily located at One Wall Street, New York, New York
10286). The principal executive office of the depositary is located at One Wall
Street, New York, New York 10286.
ADSS
There are differences between holding ADSs and preferred shares. The
depositary will issue ADSs under the deposit agreement. An ADS is an American
Depositary Share. Each ADS will represent the ownership interest in ten of our
preferred shares. We will deposit the preferred shares (or the right to receive
preferred shares) with the custodian, which is currently BANCO Itau S.A. Each
ADS will also represent any and all other securities, cash and other property
deposited with the depositary but not distributed to ADS holders ("deposited
securities"). ADSs are normally represented by certificates that are commonly
known as American depositary receipts.
If you hold ADSs directly by means of an American depositary receipt
registered in your name, you are an ADS holder. This description assumes you
hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the
procedures of your broker or other financial institution to assert the rights of
ADS holders described in this section. You should consult with your broker or
financial institution to find out what those procedures are.
If you become an owner of ADSs, directly or indirectly, you will become a
party to the deposit agreement and therefore will be bound by its terms and to
the terms of the American depositary receipt that represents your ADSs. The
deposit agreement and the American depositary receipt specify the rights and
obligations of you, us and the depositary. Because the depositary will actually
hold the preferred shares, you must rely on it to exercise the rights of a
shareholder. The deposit agreement and the American depositary receipts are
governed by New York law. However, our obligations to the holders of the
preferred shares will continue to be governed by the laws of Brazil, which may
be different from the laws in the United States.
The following is a summary of the material terms of the deposit agreement.
Because it is a summary, it does not contain all the information that may be
important to you. For more complete information, you should read the entire
agreement and the form of the ADS. For directions on how to obtain copies of
these, you should read the information in "Where You Can Find More Information".
DEPOSIT, TRANSFER AND WITHDRAWAL
The depositary will issue ADSs if you or your broker deposit preferred
shares or evidence of rights to receive shares with the custodian. Upon payment
of its fees and expenses and of any taxes or charges, such as stamp taxes or
stock transfer taxes or fees, the depositary will register the appropriate
number of ADSs in the names you request and will deliver the ADRs at its
corporate trust office to the persons you request.
You may at any time surrender your ADSs to the depositary at its corporate
trust office for withdrawal of the deposited securities. Upon payment of any
required fees and expenses and of any taxes or charges, such as stamp taxes or
share transfer taxes or fees, the depositary will deliver the underlying
preferred shares to an account you designate, as well as any other deposited
securities underlying the ADSs at the office of the custodian, or at your
request, risk and expense, the depositary will deliver the deposited securities
at its office.
The depositary must be satisfied that Brazil has granted any necessary
regulatory approval before a preferred share will be accepted for deposit.
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PRE-RELEASE
In certain circumstances, subject to the provisions of the deposit
agreement, the depositary may issue ADSs before deposit of the underlying
preferred shares. This is called a pre-release of ADSs. The depositary may also
deliver shares upon cancellation of pre-released ADSs, even if the ADSs are
canceled before the pre-release transaction has been closed out. A pre-release
is closed out as soon as the underlying shares are delivered to the depositary.
The depositary may receive ADSs instead of shares to close out a pre-release.
The depositary may pre-release ADSs only under the following conditions:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to the depositary in writing
that;
o the person or the customer owns the preferred shares or ADSs to be
deposited,
o the person assigns all beneficial rights, title and interest in such
shares or ADSs to the depositary in its capacity as depositary and for
the benefit of ADS holders, and
o the person will not take any action with respect to the shares or ADSs
that is inconsistent with the transfer of beneficial ownership other
than in satisfaction of such pre-release;
- the pre-release must be fully collateralized with cash or other
collateral that the depositary considers appropriate; and
- the depositary must be able to close out the pre-release on not more than
five business days' notice.
In addition, the depositary will limit the number of ADSs that may be
outstanding at any time as a result of pre-release, although the depositary may
disregard the limit from time to time, if it thinks it is appropriate to do so.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS AND RIGHTS
The depositary has agreed to pay you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities, subject to restrictions imposed by applicable law and after
deducting its fees and expenses. You will receive these distributions in
proportion to the number of shares your ADSs represent. The Depositary will set
the date for the currency exchange rate as promptly as practicable upon receipt
of any cash dividends or other distributions from us.
CASH DISTRIBUTIONS
The depositary will, as promptly as practicable, convert any cash dividend
or other cash distribution we pay on the preferred shares into Dollars, if it
can do so on a reasonable basis and can transfer the Dollars to the United
States. If that is not possible or if any approval from the Brazilian government
is needed and cannot be obtained, the deposit agreement allows the depositary to
distribute the foreign currency only to those ADS holders to whom it is possible
to do so. It may, at its discretion, hold the foreign currency it cannot convert
for the account of the ADS holders who have not been paid. It will not invest
the foreign currency, and it will not be liable for the interest. If the
depositary can only convert a portion of the cash dividend into Dollars, it can
either distribute the unconverted portion in the foreign currency or hold the
foreign currency on the account of the ADS holders.
Before making a distribution, any withholding taxes that must be paid under
any applicable law will be deducted. The depositary will distribute only whole
Dollars and cents and will round fractional cents to the nearest whole cent. If
the exchange rates fluctuate during a time when the depositary cannot convert
the foreign currency, you may lose some or all of the value of the distribution.
SHARE DISTRIBUTIONS
The depositary will distribute new ADSs representing any shares we may
distribute as a share dividend or free distribution, if we furnish it promptly
with satisfactory evidence that it is legal to do so. The depositary will only
distribute whole ADSs. It will sell shares which would require it to use a
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fractional ADS and distribute the net proceeds in the same way as it does with
cash. If the depositary does not distribute additional ADSs, each ADS will also
represent the new shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES
If we offer holders of our preferred shares any rights to subscribe for
additional shares or any other rights, the depositary may, after consultation
with us to the extent practicable, make these rights available to you. We must
first instruct the depositary to do so, and furnish it with satisfactory
evidence that it is legal to do so. If we do not furnish this evidence and give
these directions, and the depositary decides it is practical to sell the rights,
the depositary will sell the rights and distribute the proceeds in the same way
as it does with cash. The depositary may allow rights that are not distributed
or sold to lapse. In that case, you will receive no value for them.
If the depositary makes rights available to you, upon instruction from you,
it will exercise the rights and purchase the shares on your behalf. The
depositary will then deposit the shares and issue ADSs to you. It will only
exercise rights if you pay it the exercise price and any other charges the
rights require you to pay.
United States securities laws may restrict the sale, deposit, cancellation
and transfer of the ADSs issued after exercise of rights. The depositary will
not be responsible for any failure to determine that it may be lawful or
feasible to make such rights available to you.
OTHER DISTRIBUTIONS
The depositary will send to you anything else we distribute on deposited
securities by any means it thinks is legal, fair and practical. If it cannot
make the distribution in that way, the depositary may decide to sell what we
distributed and distribute the net proceeds in the same way as it does with cash
or it may decide to hold what we distributed, in which case the ADSs will also
represent the newly distributed property. The depositary may withhold any taxes
or expenses it thinks is applicable in this process.
The depositary is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADS holders. We have no
obligation to register ADSs, shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADSs, shares, rights or anything else to ADS holders. This
means that you may not receive the distribution we make on our preferred shares
or any value for them if it is illegal or impractical for us to make them
available to you.
CHANGES AFFECTING DEPOSITED SHARES
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
IF WE DO ANY OF THE FOLLOWING, THEN ALL OF THE FOLLOWING WILL APPLY:
Change the nominal or par value of our The cash, shares or other securities received by the
shares depositary will become deposited securities.
Reclassify, split up or consolidate any of Each ADS will automatically represent its equal share of
the deposited securities the new deposited securities, unless additional ADSs are
issued.
Distribute securities on the shares that The depositary may, and will if we request, ask you to
are not distributed to you surrender your outstanding ADSs in exchange for new ADSs
representing the new deposited securities.
Recapitalize, reorganize, merge,
liquidate, sell all or substantially all
of our assets or take any similar action
VOTING OF DEPOSITED SECURITIES
You have very limited rights to vote under the preferred shares or the
ADSs. You may instruct the depositary to vote the shares underlying your ADSs,
but only if we ask the depositary to ask for your
98
instructions. Otherwise, you will not be able to exercise your right to vote
unless you withdraw the underlying preferred shares. However, you may not know
about the meeting enough in advance to withdraw the underlying preferred shares.
If we ask for your instructions, the depositary will notify you of the
upcoming vote and will arrange to deliver our voting materials to you. The
materials will:
- describe the matters to be voted on; and
- explain how you, on a certain date, may instruct the depositary to vote
the underlying preferred shares or other deposited securities underlying
your ADSs as you direct.
For instructions to be valid, the depositary must receive them on or before
the date specified. The depositary will try, as far as practical, subject to
Brazilian law and the provisions of our constitutive documents, to vote or to
have its agents vote the underlying preferred shares or other deposited
securities as you instruct. The depositary will only vote or attempt to vote as
you instruct.
We cannot ensure that you will receive voting materials in time to ensure
that you can instruct the depositary to vote your shares. In addition, the
depositary and its agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting instructions. This means
that you may not be able to vote and there may be nothing you can do if your
shares are not voted as you requested. In addition, your ability to bring an
action against us may be limited.
REPORTS AND OTHER COMMUNICATIONS
The depositary will make available to you for inspection any reports and
communications from us or made available by us at its corporate trust office.
The depositary will also, upon written request, send to the registered holders
of ADSs copies of such reports and communications furnished by us under the
deposit agreement.
Any such reports and communications furnished to the depositary by us will
be furnished in English when so required under any US securities laws.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
We may agree with the depositary to amend the deposit agreement and the
ADSs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or registration
fees, cable, telex or fax transmission costs, delivery costs or other such
expenses, or prejudices an important right of ADS holders, it will only become
effective 30 days after the depositary notifies you of the amendment. At the
time an amendment becomes effective, you are considered, by continuing to hold
your ADS, to agree to the amendment and to be bound by the ADSs and the deposit
agreement as amended.
The depositary will terminate the deposit agreement if we ask it to do so,
by mailing notice of termination to you at least 30 days before termination. The
depositary may also terminate the deposit agreement if the depositary has told
us that it would like to resign and we have not appointed a new depositary bank
within 60 days.
After termination, the deposit agreement requires the depositary and its
agents to do only the following under the deposit agreement: collect
distributions on the deposited securities and deliver shares and other deposited
securities upon cancellation of ADSs. One year after the date of termination,
the depositary may sell any remaining deposited securities by public or private
sale. After that, the depositary will hold the proceeds of the sale, as well as
any other cash it is holding under the deposit agreement for the pro rata
benefit of the ADS holders that have not surrendered their ADSs. It will not
invest the money and will have no liability for interest. The depositary's only
obligations will be to account for the proceeds of the sale and other cash.
After termination our only obligations will be with respect to indemnification
and to pay certain amounts to the depositary.
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CHARGES OF THE DEPOSITARY
ADS HOLDERS MUST PAY: FOR:
$5.00 (or less) per 100 ADSs or portion - Each issuance of an ADS, including as a
thereof result of a distribution of shares or rights
or other property
- Each cancellation of an ADS, including if
the agreement terminates
$0.02 (or less per ADS) - Any cash payment
Registration or Transfer Fees - Transfer and registration of shares on our
share register or the share register of the
foreign registrar from your name to the
name of the depositary or its agent when
you deposit or withdraw our preferred
shares
Expenses of the depositary - Conversion of foreign currency to Dollars
- Cable, telex and facsimile transmission
expenses
- Servicing of shares or deposited
securities
Taxes and other government charges the - As necessary
depositary or the custodian have to pay on
any ADS or preferred share underlying an
ADS, for example, stock transfer taxes,
stamp duty or withholding taxes
$0.02 (or less) per ADS per calendar year - Depositary services: provided that this
fee will not be charged if a fee of $0.02
was charged in the same calendar year for
a cash distribution
LIABILITY OF OWNER FOR TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADSs or on the deposited securities underlying your ADSs. The depositary
may refuse to transfer your ADSs or allow you to withdraw the deposited
securities underlying your ADSs until these taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADSs
to pay any taxes you owe and you will remain liable for any deficiency. If it
sells deposited securities, it will, if appropriate, reduce the number of ADSs
to reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO HOLDERS OF ADSs
The deposit agreement expressly limits our obligations and the obligations
of the depositary, and it limits our liability and the liability of the
depositary. We and the depositary:
- are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
- are not liable if either is prevented or delayed by law or circumstances
beyond their control from performing their obligations under the deposit
agreement;
- are not liable if either exercises discretion permitted under the deposit
agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADSs or the agreement on your behalf or on behalf of any
other party; and
- may rely on the advice of or information from legal counsel, accountants
and persons depositing preferred shares, any unregistered holder or any
other person believed by it in good faith to be competent to give such
advice or information.
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Neither us nor the depositary will be liable for any failure to carry out
any instructions to vote any of the deposited securities, or for the manner any
vote is cast or the effect of any such vote, provided that any action or
non-action is in good faith.
In the deposit agreement, we and the depositary agree to indemnify each
other under certain circumstances.
MAINTENANCE OF BOOKS AND RECORDS BY THE DEPOSITARY
The depositary will keep books at its corporate trust office open for
inspection by you at all reasonable times. You agree not to inspect the books
for the purpose of communication with other registered holders other than in
relation to our business, the deposit agreement or the ADSs.
APPOINTMENT OF CO-TRANSFER AGENTS
The depositary may appoint one or more co-transfer agents for the purpose
of effecting transfers, combinations and split-ups of ADSs. In carrying out its
functions, a co-transfer agent may require evidence of authority and compliance
with applicable laws and other requirements by you and will be entitled to
protection and indemnity to the same extent as the depositary.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before the depositary will issue or register transfer of an ADS, make a
distribution on an ADS or withdrawal of shares, the depositary may require:
- payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third-parties for the
transfer of any shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The depositary may refuse to deliver, transfer or register transfers of
ADSs generally when the books of the depositary are closed, or at any time if
the depositary thinks it advisable to do so.
CANCELLATION OF ADSs
You have the right to cancel your ADSs and withdraw the underlying shares
at any time except:
- when temporary delays arise because we or the depositary have temporarily
closed our transfer books or the deposit of shares in connection with
voting at a shareholders meeting or payment of dividends;
- when you or other ADS holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADSs or to the withdrawal
of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
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DIVIDENDS AND DIVIDEND POLICY
PAYMENT OF DIVIDENDS
We are required by the Brazilian corporations law and by our by-laws to
hold an annual shareholders meeting by April 30 of each year at which, among
other things, the common shareholders can declare an annual dividend upon the
recommendation of our executive officers and with the approval of our board of
directors.
MANDATORY DISTRIBUTIONS, PRIORITY AND AMOUNT OF DIVIDENDS
The Brazilian corporations law generally requires that the by-laws of each
Brazilian corporation specify a minimum percentage of the adjusted net income
each fiscal year that must be distributed to shareholders as dividends. This
percentage may not be lower than 25%. If the corporation's by-laws are silent in
this regard, the percentage is deemed to be 50%.
Our by-laws provide for a mandatory distribution of 25% of our annual
adjusted net income, as calculated under Brazilian GAAP. In addition, our
shareholders agreement provides for a mandatory distribution of at least an
additional 25% of our net income. We understand that our controlling
shareholders, the state of Parana and Domino, intend to calculate this
additional amount on the same basis as the mandatory 25% distribution. This
additional distribution may be waived or the method of calculation modified by
the state of Parana and Domino at any time, both as to themselves and as to
other shareholders, including holders of our preferred shares and the ADSs. As
of June 1997, under Brazilian corporations law, all the holders of our preferred
shares must receive dividends per share of at least 10% more than the amount
paid to the holders of common shares. This 10%, however, is calculated as part
of the minimum distributable amount that holders of our common and preferred
shares receive according to Brazilian corporations law, our by-laws and our
shareholders agreement. The privilege of receiving 10% more in dividends than
holders of common shares may not be waived unless we grant our holders of
preferred shares a right to a fixed or minimum dividend.
The distributable amount is calculated as a company's net income as
determined in accordance with the Brazilian corporations law, as reduced by (i)
accumulated losses for prior years and (ii) amounts allocated to the legal
reserve and the contingency reserve, if any, and as increased by the reversal of
such reserve established in prior years. The distributable amount may be limited
to the amount of the net profits in the fiscal year that they have been
generated, provided that the difference be accounted for as unrealized profits
reserve. According to the Brazilian corporations law, we must allocate 5% of our
annual net income to the legal reserve until the reserve equals 20% of our share
capital as of the end of the most recent fiscal year. We are not required,
however, to make any allocations to our legal reserve for any fiscal year in
which the balance of the reserve, when added to the balances in our capital
reserves, exceeds 30% of our share capital.
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 these gains are distributed to the company in the form of
cash dividends, the company is required to reverse the reserve. In addition to
the mandatory distribution, the board of directors may recommend to shareholders
the payment of interim distributions out of preexisting and accumulated profits
for the preceding fiscal year or semester, based on financial statements
approved by its shareholders, as long as the preparation of these financial
statements is required either by law or the company's by-laws. Any payment of
interim distribution may be offset against the amount of the mandatory
distribution.
Dividends must be paid within 60 days from the date of the shareholders
meeting that authorized their distribution or as directed at the shareholders
meeting, based on the financial statements prepared for the preceding financial
year. Dividends will be paid to the holder listed in the share register.
Dividends on shares held through depositaries will be made to the depositary,
for further distribution to the shareholder. The executive officers committee is
responsible for determining the manner, places and processes by which dividends
are paid. After three years, any unclaimed dividends are returned to us.
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INTEREST ON EQUITY
As part of their dividends, Brazilian companies may distribute "interest on
equity" to shareholders, which the companies may treat as an expense for income
tax purposes. Payments of interest on equity are subject to the Brazilian
withholding tax. Payments of interest on equity may be made at the discretion of
our board of directors, subject to the approval of common shareholders. Interest
on equity payments, net of withholding tax, may be used to satisfy a company's
mandatory distribution obligation. The rate of such interest may not exceed the
result obtained by multiplying the shareholders' equity by the daily pro rata
variation of the Taxa de Juros de Longo Prazo, or TJLP, the long-term interest
rate published by the Central Bank of Brazil, for the applicable period. Also,
the payment of dividends is conditioned upon the existence of profits, and is
capped to the greater of (a) 50% of net income (before the deduction of the
provision for social contributions on net profits and the deduction of the
interest on equity) for the period for which the payment is made, or (b) 50% of
the sum of retained earnings and profit reserves.
SUSPENSION OF DIVIDENDS
The Brazilian corporations law permits a company to suspend the mandatory
distribution either in the form of dividends or payments of interest on equity
if its board of directors determines prior to the annual shareholders meeting
that payment of the mandatory distribution for the preceding fiscal year would
be inadvisable in view of the company's financial condition. The holders of
common shares must ratify such determination at the annual shareholders meeting
and any such determination must be reported to the CVM within five days of the
relevant shareholders meeting. In addition, the audit committee must review any
such determination and report to the shareholders and the CVM. Under Brazilian
corporations 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.
DIVIDEND POLICY
Under our by-laws, both common and preferred shares share equally in
allowances and privileges we may grant our shareholders, as explained above.
Under our by-laws we are required to distribute 25% of our annual adjusted net
income, as calculated under Brazilian GAAP.
In addition to the mandatory distribution, under the terms of our
shareholders agreement, our controlling shareholders have agreed to vote for the
distribution of at least an extra 25% of our net income. We understand that our
controlling shareholders, the state of Parana and Domino, intend to calculate
this additional amount on the same basis as the mandatory 25% distribution. This
amount can be waived or amended by the controlling shareholders who are the
signatories to this agreement at any time, both as to themselves and as to other
shareholders, including holders of our preferred shares and the ADSs. In
addition, the controlling shareholders can elect to modify the adjustments made
to net income for purposes of calculating the additional dividend, as occurred
in 2001. See note 12 to the financial statements. For more information on our
shareholders agreement, see "Major Shareholders and Related Party Transactions".
Under Brazilian law, distributions can be made in the form of dividends or
interest on equity. Distributions in the form of interest on equity are subject
to, and will be paid net of, Brazilian withholding tax.
The declaration of annual dividends, including dividends in excess of
mandatory distribution, requires the approval vote of a majority of our common
shareholders. The declaration of an annual dividend will also depend on other
factors such as our results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by our
shareholders.
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HISTORY OF DIVIDEND PAYMENTS
The following table sets forth the dividends to holders of our capital
stock since 1999. The amounts in the table below relate to cash dividends
declared. These figures have not been adjusted to reflect the share dividend
(bonificacao) on March 22, 2002.
SHARES (IN R$ PER 1,000 SHARES)
-------------------------------------------------------
COMMON
-------------------------------------------------------
INTEREST ON EQUITY
FIRST ---------------------------------
PAYMENT WITHHOLDING NET
DATE DIVIDEND GROSS TAX NET TOTAL
------- -------- -------- ----------- -------- --------
1999................. -- R$ 91.63 R$ 5.50 R$ 86.13 R$ 86.13
2000................. -- 228.26 13.59 214.67 214.67
2001(1).............. -- 218.76 13.03 205.73 205.73
SHARES (IN R$ PER 1,000 SHARES)
-------------------------------------------------------
PREFERRED
-------------------------------------------------------
INTEREST ON EQUITY
FIRST ---------------------------------
PAYMENT WITHHOLDING NET
DATE DIVIDEND GROSS TAX NET TOTAL
------- -------- -------- ----------- -------- --------
1999................. -- R$ 91.63 R$11.47 R$ 80.16 R$ 80.16
2000................. 22.83 228.26 29.93 198.33 221.16
2001(1).............. -- 240.64 30.20 210.44 210.44
CONVERTED INTO DOLLARS AT THE RATE OF R$2.3204 = US$1.00, THE
COMMERCIAL SELLING RATE PUBLISHED BY THE CENTRAL BANK OF BRAZIL
FOR DECEMBER 31, 2001
SHARES (IN US$ PER 1,000 SHARES) SHARES (IN US$ PER 1,000 SHARES)
---------------------------------------------- ------------------------------------------------
COMMON PREFERRED
---------------------------------------------- ------------------------------------------------
INTEREST ON EQUITY INTEREST ON EQUITY
FIRST --------------------------- ----------------------------
PAYMENT WITHHOLDING NET WITHHOLDING NET
DATE DIVIDEND GROSS TAX NET TOTAL DIVIDEND GROSS TAX NET TOTAL
------- -------- ----- ----------- ----- ----- -------- ------ ----------- ----- ------
1999................. -- 39.49 2.37 37.12 37.12 -- 39.49 4.94 34.55 34.55
2000................. -- 98.37 5.86 92.51 92.51 9.84 98.38 12.90 85.48 95.32
2001(1).............. -- 94.28 5.62 88.66 88.66 -- 103.70 13.01 90.69 90.69
---------------
(1)The calculation of dividends for 2001 did not reflect the recognition of
unrealized gains in the amount of R$106.2 million. For an explanation of
reserves for, and recognition of, unrealized gains, see footnote 12 to our
financial statements.
We calculate our dividends based on adjusted net income as calculated in
accordance with Brazilian GAAP. Thus, the historical information presented in
this prospectus regarding net income does not directly correlate to
distributable income for the years presented, since the income presentations in
this prospectus are prepared in accordance with U.S. GAAP. The principal
differences between our net income calculations under U.S. GAAP and Brazilian
GAAP are as follows:
- Different criteria for recognition of pension liabilities and similar
benefit obligations;
- Under Brazilian GAAP, only the interest on borrowings specifically
related to the construction of our property, plant and equipment qualifies
for capitalization. Under U.S. GAAP, all interest incurred qualifies for
capitalization;
- Reversal of the Brazilian GAAP depreciation expense related to the
revalued portion of property, plant and equipment, since the revaluation
of assets is not acceptable under U.S. GAAP;
- Recognition of initial connection charges as earned while under U.S. GAAP
such amounts are amortized over 10 years;
- Deferred tax income taxes on the items above.
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SHARES ELIGIBLE FOR FUTURE SALE
Before the completion of this offering, 124,245,312 preferred shares were
outstanding and freely tradable in Brazil. Of this amount, 72,252,098 preferred
shares are held by Domino and the state of Parana and may be sold in the United
States only if the sale is registered with the SEC or if they qualify for an
exemption from registration under the Securities Act, including Rule 144 or
Regulation S. An additional 51,909,138 preferred shares are held by
non-affiliates, do not constitute restricted securities under Rule 144 and may
be resold freely. Following the completion of this offering, the 10,080,000
additional ADSs, representing 100,800,000 preferred shares, sold in this
offering, together with any of the 43,200,000 preferred shares sold in the
Brazilian offering that are converted to ADSs, will be freely tradable within
the United States without restriction, except for any ADSs or shares that may be
acquired by an affiliate of our company, as that term is defined in Rule 144.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted preferred shares from
our company or any of our affiliates, the purchaser or subsequent preferred
shareholder is entitled to sell within any three-month period a number of
preferred shares that does not exceed the greater of:
- 1% of our then outstanding preferred shares, including preferred shares
represented by ADSs; or
- the average weekly trading volume of our preferred shares (including
preferred shares represented by ADSs) on all national exchanges and/or
reported through the automated quotation system of a registered
securities association (initially consisting only of the New York Stock
Exchange) during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission.
Sales by our affiliates are also subject to these volume limitations.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information about our
company. If two years have elapsed since the later of the date of acquisition of
restricted preferred shares from our company or from any of our affiliates, and
the purchaser or subsequent preferred shareholder is deemed not to have been our
affiliate at any time during the 90 days preceding a sale, that person would be
entitled to sell their preferred shares in the public market under Rule 144(k)
without regard to the volume limitations, manner-of-sale provisions, notice
requirements or public information requirements.
Our officers, directors, the state of Parana and Domino have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our share capital or ADSs representing
such shares or securities convertible into or exchangeable or exercisable for
any shares of our share capital or ADSs representing such shares, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the shares of our share capital or ADSs
representing such shares, whether any of these transactions are to be settled by
delivery of shares of our share capital, ADSs representing such shares or other
securities, in cash or otherwise, or publicly disclose the intention to make any
offer, sale, pledge or disposition, or to enter into any transaction, swap,
hedge or other arrangement, without, in each case, the prior written consent of
the representatives of the international underwriters for a period of 180 days
after the date this prospectus.
We have also granted registration rights to our principal shareholders,
Domino and the state of Parana, with respect to our preferred shares held by
them. Other holders of preferred shares, including any directors and officers,
may be permitted to participate in any such registration. Any such registration
may be effected as part of an underwritten offering or by means of a shelf
registration.
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The following chart sets out the number of shares that are freely tradable
at various times after the completion of the offering:
AFTER AFTER AFTER
90 DAYS 180 DAYS ONE YEAR
----------- ----------- -----------
Freely tradable shares(1)(2)................ 195,909,139 198,591,592 203,956,498
Affiliate shares available for sale(3)...... 72,336,174 69,653,721 64,288,815
---------------
(1) After the 180-day lock-up period agreed with the international underwriters,
affiliate shares available for sale will become freely tradable in an amount
that, over any three-month period, will equal at least 1% of the
then-outstanding shares, and may exceed this amount depending on the history
of the weekly trading volume at time of sale.
(2) Assumes no exercise of the international underwriters' over-allotment
option.
(3) Available for sale only in a registered offering or pursuant to an exemption
from registration under the Securities Act. All of these shares are included
in the registration rights agreement that we entered into with our principal
shareholders.
Under current law, the state of Parana must maintain ownership of at least
60% of our voting shares. We are not aware of any plans by Domino or the state
of Parana to dispose of significant amounts of common or preferred shares. We
cannot assure you, however, that they will not dispose of a significant amount
of preferred shares after the lock-up period.
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TAXATION
Subject to the limitations and qualifications stated herein, this summary
contains a description of material Brazilian and U.S. federal income tax
consequences of the purchase, ownership and disposition of preferred shares or
ADSs by a holder, also called a U.S. holder, that is the beneficial owner of
preferred shares or ADSs and that is a citizen or resident of the United States
or a U.S. domestic corporation or that otherwise will be subject to U.S. federal
income tax on a net income basis in respect of preferred shares or ADSs. The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase preferred shares
or ADSs. In particular, this summary deals only with U.S. holders that will hold
preferred shares or ADSs as capital assets, and does not address the tax
treatment of U.S. holders that own or are treated as owning common shares or
preferred shares that in the aggregate entitle the shareholder to elect 10% or
more of a company's directors or that may be subject to special tax rules, such
as banks, insurance companies, dealers in securities or currencies, individual
retirement and other tax deferred accounts, tax-exempt organizations, persons
that will hold preferred shares or ADSs as a position in a "straddle", a
"hedging transaction" or a "conversion transaction" for tax purposes, and
persons that have a "functional currency" other than the Dollar.
The summary is based upon the tax laws of Brazil and the United States as
in effect on the date of this prospectus, which are subject to change, possibly
with retroactive effect, and to differing interpretations. Prospective
purchasers of preferred shares or ADSs should consult their own tax advisors as
to the Brazilian, U.S. or other tax consequences of the purchase, ownership and
disposition of preferred shares or ADSs, including, in particular, the effect of
any foreign, state or local tax laws.
Although there presently is no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
if or when a treaty will enter into force or how it will affect the U.S. holders
of preferred shares or ADSs.
BRAZILIAN TAX CONSEQUENCES
The following discussion, insofar as it addresses matters of law or legal
conclusions, and subject to the limitations and qualifications stated herein, is
based on advice provided to us by our Brazilian counsel, Pinheiro Neto -
Advogados.
GENERAL
The following discussion summarizes the material Brazilian tax consequences
of the acquisition, ownership and disposition of preferred shares or ADSs, as
the case may be, by a holder that is not domiciled in Brazil, also called a
non-Brazilian holder, for purposes of Brazilian taxation and, in the case of a
preferred shareholder, which has registered its investment in preferred shares
at the Central Bank of Brazil as a Dollar investment.
Pursuant to Brazilian law, investors may invest in the preferred shares
under Resolution No. 2,689, of January 26, 2000, of the National Monetary
Council.
The rules of Resolution No. 2,689 allow foreign investors to invest in
almost all financial assets and to engage in almost all transactions available
in the Brazilian financial and capital markets, provided that some requirements
are fulfilled. In accordance with Resolution No. 2,689, the definition of
foreign investor includes individuals, legal entities, mutual funds and other
collective investment entities, domiciled or headquartered abroad.
Pursuant to the foreign investment rules, foreign investors must:
- appoint at least one representative in Brazil with powers to perform
actions relating to the foreign investment;
- complete the appropriate foreign investor registration form;
107
- register as a foreign investor with the Brazilian Securities Commission;
- register the foreign investment with the Central Bank of Brazil; and
- enroll themselves with the Brazilian Taxpayer Registry, or CPF, in the
case of individual investors.
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 of Brazil or
the Brazilian Securities Commission. In addition, securities trading is
restricted to transactions carried out in the stock exchanges or organized
over-the-counter markets licensed by the Brazilian Securities Commission.
TAXATION OF DIVIDENDS
Dividends, including share dividends and other dividends paid in property,
paid by us to the depositary with respect to our ADSs, or to a non-Brazilian
preferred shareholder, are currently not subject to income withholding tax,
provided that they are paid out of profits generated as of January 1, 1996 (or
out of reserves derived therefrom). We do not have retained earnings generated
prior to January 1, 1996 (or reserves out of such earnings).
PAYMENT OF INTEREST ATTRIBUTED TO SHAREHOLDERS' EQUITY
Law No. 9,249 of December 26, 1995, as amended, permits Brazilian
corporations to make distributions to shareholders of interest on equity or
interest attributed to shareholders' equity. These distributions may be paid in
cash. A company may treat these payments as an expense for income tax and social
contribution purposes. This interest is limited to the pro rata variation of the
Brazilian federal government's long term interest rate -- TJLP, times the
shareholders' equity, as determined by the Central Bank of Brazil from time to
time, and cannot exceed the greater of:
- 50% on net income for the period in respect of which the payment is made;
or
- 50% of retained earnings as of the date of beginning of the period in
respect of which the payment is made.
Any payment of interest on equity to shareholders (including holders of
ADSs in respect of our preferred shares) is subject to a withholding tax at a
rate of 15%, or 25% in the case of the shareholder domiciled in a "tax haven"
jurisdiction. These payments may be included, at their net value, as part of any
mandatory dividend.
To the extent that payments of interest on equity are included as part of
mandatory dividend, we are required to distribute an additional amount to ensure
that the net amount received by shareholders, after payment of the applicable
withholding tax is at least equal to the mandatory dividend of 25%.
If we distribute interest on equity, distributions to non-Brazilians of
interest attributed to shareholders' equity in respect of our preferred shares,
including the preferred shares underlying the ADSs, may be converted into
Dollars and remitted outside Brazil, subject to applicable exchange controls.
We cannot assure you that our board of directors will not determine that
future distributions should be made by means of payment of interest on equity.
TAXATION OF GAINS
For purposes of Brazilian taxation, there are three types of non-Brazilian
holders of ADSs or preferred shares.
- market investors, who are those non-Brazilian residents registered with
the Central Bank of Brazil and the Brazilian Securities Commission to
invest in Brazil, in accordance with Resolution No. 2,689, or those
investors holding ADSs;
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- ordinary non-Brazilian holders, which include any and all non-Brazilian
residents who invest in Brazil through any other means; and
- investors that reside in a "tax haven" jurisdiction (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 No. 2,689.
Gains realized outside Brazil by a non-Brazilian holder on the disposition
of ADSs to another non-Brazilian holder are not subject to Brazilian tax.
The deposit of preferred shares in exchange for ADSs may be subject to
Brazilian income tax on capital gains at the rate of 15% if the amount
previously registered with the Central Bank of Brazil, as a foreign investment
in the preferred shares or, in the case of other market investors other than
those under Resolution No. 2,689, which are not resident in a tax haven
jurisdiction, the acquisition costs of the preferred shares, as the case may be,
is lower than:
- the average price per preferred share on a Brazilian stock exchange or
organized over-the-counter market on which the greatest number of such
shares were sold on the day of deposit; or
- if no preferred shares were sold on that day, the average price on the
Brazilian stock exchange or organized over-the-counter market on which
the greatest number of preferred shares were sold in the 15 trading
sessions immediately preceding such deposit.
In such a case, the difference between the amount previously registered or
the acquisition costs, as the case may be, and the average price of the
preferred shares calculated as above, will be considered a capital gain subject
to the income tax rate of 15%. Such taxation is not applicable in case of
investors registered under Resolution No. 2,689 which are not resident in a tax
haven jurisdiction. The withdrawal of ADSs in exchange for preferred shares is
not subject to Brazilian tax. On receipt of the underlying preferred shares, the
non-Brazilian holder registered under Resolution No. 2,689 will be entitled to
register the Dollar value of such shares with the Central Bank of Brazil as
described below in "Registered capital".
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of preferred shares that occur abroad to non-Brazilian resident holders.
Non-Brazilian resident holders registered under Resolution No. 2,689 which are
not located in a tax haven jurisdiction are subject to income tax imposed at a
rate of 15% on gains realized on sales or exchanges of the preferred shares that
occur in Brazil or with a resident of Brazil, other than in connection with
transactions on the Brazilian stock, future or commodities exchange. With
reference to proceeds of a redemption or of a liquidating distribution with
respect to the preferred shares, the difference between the amount effectively
received by the shareholder and the amount of foreign currency registered with
the Central Bank of Brazil, translated into Reais at the commercial selling rate
on the date of the redemption or liquidating distribution, will be also treated
as capital gains derived from the sale or exchange not carried out on Brazilian
stock exchange or organized over-the-counter market and subject to income tax at
a rate of 15%.
Non-Brazilian holders are subject to a withholding tax at a rate of 15% on
gains realized on:
- sales or exchanges of the preferred shares in Brazil; or
- sales of the preferred shares to a resident of Brazil outside of a
Brazilian stock exchange or organized over-the-counter market.
Gains realized on transactions performed on the Brazilian stock exchange or
organized over-the-counter market by a holder of ADSs or preferred shares
residing in a tax haven jurisdiction are subject to income tax at a rate of 20%.
The "gain realized" as a result of a transaction on a Brazilian stock
exchange or organized over-the-counter 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, of the shares sold. The
acquisition cost of shares registered as an investment with the Central Bank of
Brazil is calculated on the basis of the
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foreign currency amount registered with the Central Bank of Brazil translated
into Reais at the commercial selling rate on the date of the sale or exchange.
The current preferential treatment for holders of the ADSs and some
non-Brazilian resident preferred shareholders under Resolution No. 2,689 may not
continue in the future. Any exercise of preemptive rights relating to the
preferred shares will not be subject to Brazilian taxation. Any gain on the sale
or assignment of preemptive rights relating to the preferred shares by the
depositary on behalf of holders of the ADSs will be subject to Brazilian income
taxation according to the same rules applicable to the sale or disposition of
preferred shares. The maximum rate is currently 15%.
TAXATION OF FOREIGN EXCHANGE TRANSACTIONS
Pursuant to Decree No. 2,219 of May 2, 1997, the conversion into Brazilian
currency of proceeds received by a Brazilian entity from a foreign investment in
the Brazilian securities market (including those in connection with an
investment in preferred shares or the ADSs and those under Resolution No. 2,689)
and the conversion into foreign currency of proceeds received by a non-Brazilian
holder is subject to a tax on exchange transactions known as the Imposto sobre
Operacoes Financeiras (Tax on Financial Operations, or IOF). The IOF rate is
currently 0%. However, according to Law No. 8,894 of 1994, the IOF foreign
exchange transaction rate may be increased at any time to a maximum of 25% by a
decision of the Minister of Finance, but only in relation to future exchange
transactions.
TAXATION ON BONDS AND SECURITIES TRANSACTIONS
Law No. 8,894 of 1994 created an IOF tax on bonds and securities
transactions, which may be imposed on any transactions involving bonds and
securities, even if these transactions are performed on the Brazilian stock,
futures or commodities exchange. As a general rule, the rate of this tax with
respect to preferred shares and ADSs is currently 0%. The executive branch may
increase such rate up to 1.5% per day, but only with respect to future
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 by a
non-Brazilian holder, except for gift and inheritance taxes which are levied by
some states of Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil within such state to individuals or
entities resident or domiciled within such state in Brazil. There are no
Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of preferred shares or ADSs.
TAX ON BANK ACCOUNT TRANSACTIONS
As a general rule, the Contribuicao Provisoria sobre Movimentacao
Financeira (the Provisional Contribution on Financial Transactions, or CPMF), is
imposed on any debit to bank accounts. Therefore, transactions by the depositary
or by preferred shareholders which involve the transfer of Brazilian currency
through Brazilian financial institutions will be subject to the CPMF tax. This
includes the instance when a non-Brazilian holder transfers the proceeds from
the sale or assignment of preferred shares by an exchange transaction, in which
case the CPMF tax shall be levied on the amount to be remitted abroad in Reais.
If we have to perform any exchange transaction in connection with ADSs or
preferred shares, we will also be subject to the CPMF tax. The CPMF tax is
imposed generally on bank account debits, at a rate of 0.38%. Although the CPMF
tax is set to expire in June 2002, the Brazilian Congress is discussing the
renewal of the CPMF tax.
The responsibility for the collection of the CPMF tax is borne by the
financial institution that carries out the relevant financial transaction. When
the non-Brazilian holder remits the proceeds from the sale or assignment of
preferred shares by means of a foreign exchange transaction, the CPMF tax should
be levied on the amount to be remitted abroad in Reais. If we have to perform
any exchange transaction in connection with ADSs or preferred shares, we will
bear the CPMF tax.
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BENEFICIARIES RESIDENT OR DOMICILED IN TAX HAVENS OR LOW TAX JURISDICTIONS
Law No. 9,779, dated as of January 1, 1999, states that, with the exception
of limited prescribed circumstances, income derived from operations by a
beneficiary, resident or domiciled in a country considered a tax haven is
subject to withholding income tax at the rate of 25%. Tax havens are considered
to be countries which do not impose any income tax or which impose such tax at a
maximum rate of less than 20%. Accordingly, if the distribution of interest
attributed to shareholders' equity is made to a beneficiary resident or
domiciled in a tax haven jurisdiction, the applicable income tax rate will be
25% instead of 15%.
The capital gains obtained by a beneficiary resident or domiciled in a tax
haven jurisdiction will be subject to the following taxation: (i) gains realized
on transactions carried out on the Brazilian stock, futures or commodities
exchange are subject to income tax at a rate of 20%; (ii) gains obtained on the
spot market or on variable funds are subject to the income tax at a rate of 10%
(to be increased to 20% as of January 1, 2002); and (iii) gains realized on
transactions that occur in Brazil or with a resident of Brazil, other than in
connection with transactions on the Brazilian stock, future or commodities
exchange, are subject to the income tax at a rate of 15%.
REGISTERED CAPITAL
The amount of an investment in preferred shares held by a non-Brazilian
holder who obtains registration under Resolution No. 2,689, or by the depositary
representing such holder, is eligible for registration with the Central Bank of
Brazil; such registration (the amount so registered being called registered
capital) allows the remittance outside Brazil of foreign currency, converted at
the commercial selling 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 as part of the
international offering, or purchased in Brazil after the date hereof, and
deposited with the depositary will be equal to its purchase price (in Dollars).
The registered capital for a preferred share that is withdrawn upon surrender of
an ADS will be the Dollar equivalent of the average price of a preferred share
on the stock exchange or organized over-the-counter market on which the greatest
number of such shares were sold on the day of withdrawal, or if no preferred
shares were sold on that day, the average price on the stock exchange or
organized over-the-counter market on which the greatest number of preferred
shares were sold in the 15 trading sessions immediately preceding such
withdrawal. A non-Brazilian preferred shareholder may experience delays in
effecting such registration, which may delay remittances abroad. Such a delay
may adversely affect the amount, in Dollars, received by the non-Brazilian
holder.
The Dollar value of the average price of preferred shares is determined on
the basis of the average of the Dollar/Real commercial selling rates quoted by
the Central Bank of Brazil information system on that date (or, if the average
price of preferred shares is determined under the second option above, the
average of such average quoted rates on the same 15 dates used to determine the
average price of preferred shares).
UNITED STATES TAX CONSEQUENCES
The following discussion, insofar as it addresses matters of law or legal
conclusions, and subject to the limitations and qualifications stated herein, is
based on advice provided to us by our U.S. counsel, Milbank, Tweed, Hadley &
McCloy LLP.
TAXATION OF DIVIDENDS
In general, distributions with respect to the preferred shares or the ADSs
will, to the extent made from our current or accumulated earnings and profits,
as determined under U.S. federal income tax principles, constitute dividends for
U.S. federal income tax purposes. If a distribution exceeds the amount of our
current and accumulated earnings and profits, it will be treated as a nontaxable
return of capital to the extent of the U.S. holder's tax basis in the preferred
shares or ADSs, and thereafter as capital gain.
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The gross amount of dividends (including amounts withheld in respect of
Brazilian taxes) paid with respect to the preferred shares or ADSs generally
will be includible in the gross income of a U.S. holder as ordinary income when
the dividends are received by the depositary, in the case of ADSs, or by the
U.S. holder, in the case of preferred shares. Dividends will not be eligible for
the dividends-received deduction allowed to corporations.
Dividends paid in Reais will be includible in the income of a U.S. holder
in a Dollar amount calculated by reference to the exchange rate in effect on the
day they are received by the depositary, in the case of ADSs, or by the U.S.
holder, in the case of preferred shares. If dividends paid in Reais are
converted into Dollars on the day they are received by the U.S. holder or the
depositary, as the case may be, U.S. holders generally should not be required to
recognize foreign currency gain or loss in respect of the dividend income. Any
gain or loss recognized on a subsequent sale or conversion of the Reais for a
different amount generally will be United States source ordinary income or loss.
However, U.S. holders should consult their own tax advisors regarding the
treatment of any foreign currency gain or loss if any Reais received by the U.S.
holder or the depositary are not converted into Dollars on the date of receipt.
If a holder of preferred shares or ADSs receives a distribution of our
shares or rights to acquire our shares, then the basis of such distributed
shares or rights ("new shares") and of the shares with respect to which they
were distributed ("old shares"), respectively, will be determined by allocating
between the old shares and the new shares the adjusted basis of the old shares.
If rights to acquire additional Sanepar shares are distributed and the fair
market value of such rights is less than 15% of the fair market value of the old
shares at such time, then the basis of such rights will be zero, unless the
taxpayer makes an election.
The dividends generally will be foreign source income but generally will be
treated separately with other items of "passive income" (or in the case of
certain holders, "financial services income") for purposes of determining the
availability of U.S. foreign tax credits to a U.S. holder. Subject to
limitations under U.S. federal income tax law concerning credits or deductions
for foreign taxes, the Brazilian withholding tax will be treated as a foreign
income tax eligible for credit against a U.S. holder's U.S. federal income tax
liability (or at a U.S. holder's election, may be deducted in computing taxable
income). U.S. holders should consult their own tax advisors regarding the
availability of foreign tax credits with respect to Brazilian withholding taxes.
Investors are urged to consult their tax advisors regarding the availability of
the foreign tax credit under their particular circumstances. The Internal
Revenue Service, or IRS, has expressed concern that parties to whom foreign
shares are released in connection with depositary arrangements may be taking
actions that are inconsistent with the claiming of foreign tax credits by U.S.
persons who are holders of depositary shares. Accordingly, investors should be
aware that the discussion above regarding the creditability of Brazilian
withholding tax on dividends paid with respect to preferred shares represented
by ADSs could be affected by future action taken by the IRS.
A non-U.S. holder generally will not be subject to United States federal
income tax on dividends paid with respect to ADSs or preferred shares unless
such income is effectively connected with the conduct by the non-U.S. holder of
a trade or business within the United States.
TAXATION OF CAPITAL GAINS
U.S. holders will recognize capital gain or loss upon the sale or other
disposition of ADSs or preferred shares (or subscription rights with respect to
such shares) held by the U.S. holder or the depositary. Any gain recognized by a
U.S. holder generally will be treated as U.S. source income and any loss will be
treated as U.S. source loss for purposes of determining the availability of U.S.
foreign tax credits to a U.S. holder. Capital gains of individuals derived with
respect to capital assets held for more than one year are eligible for reduced
rates of taxation. The deductibility of capital losses is subject to
limitations.
U.S. holders will not recognize gain or loss on deposits or withdrawals of
preferred shares in exchange for ADSs or on the exercise of subscription rights.
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If a Brazilian withholding tax is imposed on the sale or disposition of
preferred shares (see "Brazilian Tax Consequences"), the amount realized by a
U.S. holder will include the gross amount of the proceeds of such sale or
disposition before deduction of the Brazilian withholding tax. A U.S. holder
that does not receive adequate foreign source income from other sources may not
be able to derive effective U.S. foreign tax credit benefits in respect of these
Brazilian taxes. The availability of U.S. foreign tax credits for these
Brazilian taxes and any Brazilian taxes imposed on distributions that do not
constitute dividends for U.S. tax purposes is subject to various limitations and
involves the application of rules that depend on a U.S. holder's particular
circumstances. U.S. holders are urged to consult their own tax advisors
regarding the application of the foreign tax credit rules to their investment
in, and disposition of, preferred shares.
A non-U.S. holder of ADSs or preferred shares will not be subject to United
States federal income tax on gain from the sale or other disposition of ADSs or
preferred shares unless (i) such gain is effectively connected with the conduct
of a trade or business within the United States or (ii) the non-U.S. holder is
an individual who is present in the United States for at least 183 days during
the taxable year of the disposition and certain other conditions are met.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Based upon its current income, assets and activities, we do not expect our
preferred shares or ADSs to be considered shares of a passive foreign investment
company ("PFIC") for our current fiscal year. A PFIC is a foreign corporation
that receives predominantly passive foreign source income. PFIC is defined in
section 1297(a) as any foreign corporation in which at least 75% of the gross
income for the taxable year is passive income or the average percentage of
assets held by the corporation during the taxable year which produce passive
income or which are held for the production of passive income is at least 50%.
However, because the determination of whether the preferred shares or ADSs
constitute shares of a PFIC will be based upon the composition of our income and
assets, and entities in which we hold at least a 25% interest, from time to time
and because there are uncertainties in the application of the relevant rules,
there can be no assurance that the preferred shares or ADSs will not be
considered shares of a PFIC for any fiscal year. If the preferred shares or ADSs
were shares of a PFIC for any fiscal year, U.S. holders (including certain
indirect U.S. holders) may be subject to adverse tax consequences upon a sale or
other disposition of such preferred shares or ADSs, or upon the receipt of
certain distributions from us, unless such U.S. holders elected, generally for
the first taxable year for which shares of a PFIC were considered to be held, to
be taxed currently on a pro rata portion of our income, whether or not such
income was distributed in the form of dividends or otherwise (and we made
available certain information required for such election) or unless such U.S.
holders elected to include in income each year an amount equal to the excess, if
any, of the fair market value of the PFIC shares as of the close of the tax year
over the holder's adjusted basis in the shares.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividends in respect of the ADSs or preferred shares and the proceeds from
the sale, exchange, or redemption of the ADSs or shares may be reported to the
United States Internal Revenue Service if paid to U.S. holders other than
certain exempt recipients (such as corporations). Such U.S. holders may be
subject to backup withholding on the proceeds from the sale, exchange, or
redemption of the preferred shares or ADSs paid within the United States (and,
in some cases, outside of the United States), if the U.S. holder fails to
provide an accurate taxpayer identification number or to report interest and
dividends required to be shown on its federal income tax returns. The amount of
any backup withholding from a payment to a U.S. holder will be allowed as a
credit against the U.S. holder's U.S. federal income tax liability, provided
that the required information is furnished to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions contained in an international
underwriting agreement dated as of the date of this prospectus, we have agreed
to sell to the international underwriters named below, for whom Credit Suisse
First Boston Corporation, Salomon Smith Barney Inc. and ABN AMRO Rothschild LLC
are acting as representatives, the following respective numbers of ADSs:
NUMBER
UNDERWRITER OF ADSS
----------- --------
Credit Suisse First Boston Corporation......................
Salomon Smith Barney Inc. ..................................
ABN AMRO Rothschild LLC.....................................
--------
Total..................................................
========
The international underwriting agreement provides that the underwriters are
obligated to purchase all the ADSs in the offering if any are purchased, other
than those ADSs covered by the over-allotment option described below. The
international underwriting agreement also provides that if an underwriter
defaults the purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated. We also have entered into an
underwriting agreement with a syndicate of underwriters providing for the
concurrent offer and sale of 43,200,000 preferred shares in Brazil. The
international and the Brazilian offerings are each conditioned on the closing of
the other.
We have granted to the international underwriters a 30-day option to
purchase on a pro rata basis up to 2,159,100 additional ADSs at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of ADSs.
The underwriters for each of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer ADSs or preferred shares, as the case may be. The
international and Brazilian underwriters also have agreed that they may sell
ADSs or preferred shares, as the case may be, between their respective
underwriting syndicates. The number of ADSs or preferred shares, as the case may
be, actually allocated to each offering may differ from the amount offered due
to reallocation between the international and Brazilian offerings.
The international underwriters propose to offer the ADSs at the public
offering price on the cover page of this prospectus and to selling group members
at that price less a selling concession of $ per ADS. The international
underwriters and selling group members may allow a discount of $ per ADS on
sales to other broker/dealers. After the initial public offering, the
representatives may change the public offering price and concession and discount
to broker/dealers.
The following table summarizes the compensation and estimated expenses we
will pay:
PER ADS TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and
commissions paid by us........ $ $ $ $
Expenses payable by us.......... $ $ $ $
The international underwriters will not confirm sales to any accounts over
which they exercise discretionary authority without first receiving a written
consent from those accounts.
The offering is being conducted in accordance with the applicable
provisions of Rule 2720 of the National Association of Securities Dealers, Inc.
Conduct Rules because an affiliate of Credit Suisse First Boston Corporation
beneficially owns more than 10% of our preferred shares outstanding prior to the
closing of this offering and because two affiliates of Salomon Smith Barney Inc.
are limited partners in CVC/Opportunity Equity Partners L.P., a Cayman Islands
partnership which owns 24.52% of Opportunity Daleth S.A., a shareholder of
Domino. Rule 2720 requires that the initial public offering price of the
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ADSs not be higher than that recommended by a "qualified independent
underwriter" meeting certain standards. Accordingly, ABN AMRO Rothschild LLC is
assuming the responsibilities of acting as the qualified independent underwriter
in pricing the offering, conducting due diligence and participating in the
preparation of this prospectus and the registration statement of which this
prospectus is a part. The initial public offering price of the ADSs is no higher
than the price recommended by ABN AMRO Rothschild LLC. ABN AMRO Rothschild LLC
will not receive any additional fees for serving as qualified independent
underwriter in connection with this offering. We have agreed to indemnify ABN
AMRO Rothschild LLC against liabilities incurred in connection with acting as a
qualified independent underwriter, including liabilities under the Securities
Act of 1933 (the "Securities Act").
Indirect affiliates of ABN AMRO Rothschild LLC own R$10 million of
commercial paper of our company and manage an investment fund which owns R$15
million of commercial paper of our company. We expect to use the proceeds of the
global offering to repay all our outstanding commercial paper. Banco ABN AMBRO
Real S.A., an affiliate of ABN AMRO Rothschild LLC, performed investment banking
services for us in 2001 for which they have received customary fees and
expenses. In the ordinary course of business, we have engaged in commercial
transactions related to our business with the underwriters and their affiliates
for which we have paid customary fees and expenses. The underwriters or their
respective affiliates may, from time to time, engage in transactions with and
perform services for us in the ordinary course of their business.
BB Banco de Investimento S.A. ("Banco do Brasil") was initially engaged as
the global coordinator for the global offering of preferred shares and ADSs.
Banco do Brasil then subcontracted certain of its responsibilities to the
international underwriters and the other Brazilian underwriters. Banco do Brasil
was engaged without our soliciting public bids in connection with the services
to be rendered by it based on an exemption from Brazilian law regarding public
bidding procedures which permits the engagement of uniquely qualified
contractors without a public bid. In connection with the engagement of Banco do
Brasil, we obtained a favorable opinion of the Budget Oversight Board of the
state of Parana. However, Brazilian law relating to public bidding is somewhat
unclear. Therefore, although we believe that our engagement of Banco do Brasil
and its subcontracting arrangements with the international underwriters and the
other Brazilian underwriters are valid, we cannot assure you that such
engagements and arrangements will not be challenged in the future or the result
of any such challenge. The underwriting agreements with the international and
Brazilian underwriters will supercede such engagement and subcontracting
arrangement.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our share capital or ADSs representing such shares or
securities convertible into or exchangeable or exercisable for any shares of our
share capital or ADSs representing such shares, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing, without the
prior written consent of the representatives for a period of 180 days after the
date of this prospectus.
Our officers, directors, the state of Parana and Domino have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our share capital or ADSs representing
such shares or securities convertible into or exchangeable or exercisable for
any shares of our share capital or ADSs representing such shares, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the shares of our share capital or ADSs
representing such shares, whether any of these transactions are to be settled by
delivery of shares of our share capital, ADSs representing such shares or other
securities, in cash or otherwise, or publicly disclose the intention to make any
offer, sale, pledge or disposition, or to enter into any transaction, swap,
hedge or other arrangement, without, in each case, the prior written consent of
the representatives for a period of 180 days after the date of this prospectus.
We have agreed to indemnify the international underwriters against
liabilities under the Securities Act, or contribute to payments that the
international underwriters may be required to make in that respect.
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We have applied to list the ADSs on The New York Stock Exchange under the
symbol "BRS". In connection with the listing of the ADSs on The New York Stock
Exchange, the international underwriters will undertake to sell round lots of
100 ADSs or more to a minimum of 2,000 beneficial owners.
Prior to this offering, there has been no public market for the ADSs. Our
preferred shares are currently listed on the Brazilian over-the-counter market,
Sociedade Operadora de Mercado Ativos, or SOMA. However, trading on the SOMA is
generally limited. In particular, there has been a lack of liquidity on the SOMA
in respect of our preferred shares. Consequently, the initial public offering
price of the shares and the ADSs was determined by negotiations between us and
the representatives of the underwriters. Among the factors considered in
determining the initial public offering price were our record of operations, our
current financial conditions, our markets, the economic conditions for the
industry in which we compete, our management and currently prevailing general
conditions in the equity securities markets, including current market valuations
of traded companies considered comparable to our company. We believe that the
initial public offering price will exceed the prevailing price for our preferred
shares on the SOMA. We cannot assure you that the initial public offering price
will be indicative of the prices that will prevail in the secondary trading
market in the future, that you will be able to resell your ADSs at or above the
initial public offering price or an active trading market in the preferred
shares or the ADSs will develop and continue after this offering.
The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
In connection with the offering, the representatives on behalf of the
international underwriters may engage in stabilizing transactions,
over-allotment transactions, syndicate covering transactions and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the international underwriters of ADSs
in excess of the number of ADSs the international underwriters are
obligated to purchase, which creates a syndicate short position. The
short position may be either a covered short position or a naked short
position. In a covered short position, the number of ADSs over-allotted
by the international underwriters is not greater than the number of ADSs
that they may purchase in the over-allotment option. In a naked short
position, the number of ADSs involved is greater than the number of ADSs
in the over-allotment option. The international underwriters may close
out any covered short position by either exercising their over-allotment
option and/or purchasing ADSs in the open market.
- Syndicate covering transactions involve purchases of the ADSs in the open
market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of ADSs to close out
the short position, the international underwriters will consider, among
other things, the price of ADSs available for purchase in the open market
as compared to the price at which they may purchase ADSs through the
over-allotment option. If the international underwriters sell more ADSs
than could be covered by the over-allotment option, a naked short
position, the position can only be closed out by buying ADSs in the open
market. A naked short position is more likely to be created if the
international underwriters are concerned that there could be downward
pressure on the price of the ADSs in the open market after pricing that
could adversely affect investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the ADSs originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our ADSs
or preventing or retarding a decline in the market price of the ADSs. As a
result, the price of our ADSs may be higher than the price that might otherwise
116
exist in the open market. These transactions may be effected on The New York
Stock Exchange or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters, or selling group members, if any,
participating in this offering. The representatives may agree to allocate a
number of ADSs to international underwriters and selling group members for sale
to their online brokerage account holders. Internet distributions will be
allocated by the international underwriters and selling group members that will
make internet distributions on the same basis as other allocations.
The addresses of the representatives are: Credit Suisse First Boston
Corporation, Eleven Madison Avenue, New York, New York 10010, Salomon Smith
Barney Inc., 388 Greenwich Street, New York, New York 10013, and ABN AMRO
Rothschild LLC, 55 East 52nd Street, New York, New York 10055.
117
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the ADSs in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of ADSs are made. Any resale of the ADSs in Canada must be made under
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under available statutory
exemptions or under a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the ADSs.
REPRESENTATIONS OF PURCHASE
By purchasing ADSs in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that
- the purchaser is entitled under applicable provincial securities laws to
purchase the ADSs without the benefit of a prospectus qualified under
those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS ONLY)
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the ADSs, for
rescission against us in the event that this prospectus contains a
misrepresentation. Such a purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the ADSs. The right of action for rescission is exercisable
not later than 180 days from the date on which payment is made for the ADSs. If
such a purchaser elects to exercise the right of action for rescission, the
purchaser will have no right of action for damages against us. In no case will
the amount recoverable in any action exceed the price at which the ADSs were
offered to the purchaser and if the purchaser is shown to have purchased the
securities with knowledge of the misrepresentation, we will have no liability.
In the case of an action for damages, we will not be liable for all or any
portion of the damages that are proven to not represent the depreciation in
value of the ADSs as a result of the misrepresentation relied upon. These rights
are in addition to, and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a summary of the
rights available to an Ontario purchaser. Ontario purchasers should refer to the
complete text of the relevant statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or those persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of ADSs should consult their own legal and tax advisors
with respect to the tax consequences of an investment in the ADSs in their
particular circumstances and about the eligibility of the ADSs for investment by
the purchaser under relevant Canadian legislation.
118
EXPENSES OF ISSUANCE AND DISTRIBUTION
We estimate the expenses in connection with the global offering, other than
underwriting discounts and commissions, as follows. The depositary has agreed to
pay various of these expenses on our behalf, subject to certain conditions. The
total underwriting discounts and commissions that we are required to pay will be
US$4.2 million, or 2.0% of the gross proceeds of the global offering.
PERCENTAGE OF
NET PROCEEDS OF
AMOUNT THIS OFFERING
EXPENSE (IN US$) (%)
------- ------------ ---------------
Securities and Exchange Commission registration fee.... 27,310 0.01
New York Stock Exchange listing fee.................... 192,600 0.06
NASD filing fees....................................... 22,820 0.01
Brazilian fees, including CVM fees and Bovespa fees.... 57,300 0.03
Printing and engraving expenses........................ 130,810 0.06
Legal fees and expenses................................ 1,370,000 0.67
Auditor's fees and expenses............................ 350,000 0.17
Miscellaneous costs.................................... 100,000 0.05
------------ ----
Total............................................. US$2,250,840 1.10
============ ====
All amounts are estimated except the Securities and Exchange Commission
registration fee, the New York Stock Exchange listing fee and the NASD filing
fee.
VALIDITY OF SECURITIES
The validity of the ADSs will be passed upon for us by Milbank, Tweed,
Hadley & McCloy LLP, New York, New York, and for the underwriters by Cravath,
Swaine & Moore, New York, New York. The validity of the preferred shares and
matters governed by Brazilian law will be passed upon for us by Pinheiro
Neto-Advogados and for the underwriters by Machado, Meyer, Sendacz e Opice
Avogados.
EXPERTS
Our financial statements as of December 31, 2001, 2000 and 1999 and for
each of the three years in the period ended December 31, 2001 included in this
Registration Statement have been so included in reliance on the report of Ernst
& Young Auditores Independentes S.C., independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting. Ernst
& Young Auditores Independentes S.C. is registered with Brazilian accounting
authority Conselho Federal de Contabilidade, or CRC, and the CVM. Its address is
Al. Dr. Carlos de Carvalho, 603, 10(LOGO) andar, 80430-180, Curitiba -- PR,
Brazil.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act in connection with the offering
of our ADSs and preferred shares. This prospectus, which forms a part of our
registration statement, does not contain all of the information set forth in the
registration statement, certain items of which are contained in the exhibits and
schedules of the registration statement. For further information with respect to
our company and ADSs and preferred shares offered, you should refer to the
registration statement and the accompanying exhibits. With respect to each
contract, agreement or other document filed as an exhibit to the registration
statement, you should refer to the exhibit for a more complete discussion of the
matter. The registration statement and the exhibits thereto filed by us with the
Securities and Exchange Commission may be inspected at the public reference
facilities of the Securities and Exchange Commission listed below.
119
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act. Under the Exchange Act, we will
be required to file periodic reports and other information with the Securities
and Exchange Commission, including annual reports on Form 20-F and quarterly and
other interim reports on Form 6-K. You may inspect such reports and other
information we file with the Securities and Exchange Commission in accordance
with the Exchange Act at the public reference facilities maintained by the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, Room
1024, N.W., Washington, D.C. 20549 and at the regional offices of the Securities
and Exchange Commission located at Woolworth Building, 233 Broadway, New York,
New York 10279 and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information regarding the Washington D.C. Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the
Securities and Exchange Commission over the internet at its website at
http://www.sec.gov.
As a foreign private issuer, we will be exempt from the rules under Section
14 of the Exchange Act prescribing the furnishing and consent of proxy
statements, and our officers, directors and principal shareholders will be
exempt from the reporting and short swing profit recovery provisions contained
in Section 16 of the Exchange Act with respect to their purchases and sales of
shares. In addition, we will not be required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we intend to furnish our
shareholders with annual reports in English containing financial statements
which will be audited and reported on, with an opinion expressed, by independent
public accounting firm, prepared in accordance with U.S. GAAP.
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
We are incorporated under the laws of Brazil. Substantially all of our
assets are located in Brazil. All of our directors and officers and some of the
experts named herein reside in Brazil. As a result, it may not be possible (or
may be difficult) for investors to effect service of process within the United
States upon us or such persons or to enforce against them or us judgments
obtained in U.S. courts, including those predicated upon the civil liability
provisions of the federal securities laws of the United States or otherwise.
We have been advised by our Brazilian counsel, Pinheiro Neto - Advogados,
located at Rua Boa Vista, 254 -- 9[DEGREE SIGN] andar, 01014-907, Sao
Paulo -- Sao Paulo, Brazil, that judgments of U.S. courts for civil liabilities
based upon the federal securities laws of the United States or otherwise may be,
subject to the requirements described below, enforced in Brazil. This section
has been included with the consent of such counsel. A judgment against us or the
persons described above obtained outside Brazil would be enforceable in Brazil
without reconsideration of the merits, upon confirmation of that judgment by the
Brazilian federal supreme court. That confirmation will occur if the foreign
judgment:
- fulfills all formalities required for its enforceability under the laws
of the country where the foreign judgment is granted;
- is issued by a competent court after proper service of process is made in
accordance with Brazilian law;
- is not subject to appeal;
- is for the payment of a specified sum;
- is authenticated by a Brazilian consular office in the country where the
foreign judgment is issued and is accompanied by a sworn translation into
Portuguese; and
- is not contrary to Brazilian national sovereignty, public policy or
public morality.
120
Accordingly, we believe that investors may successfully seek to enforce any
such judgments in Brazil, although we cannot assure you that this will be the
case. We cannot assure you that the confirmation process described above will be
conducted in a timely manner or that Brazilian courts will enforce a monetary
judgment for violation of the U.S. securities laws or otherwise with respect to
the ADSs or preferred shares.
We have been further advised by our Brazilian counsel that:
- original actions based on the federal securities laws of the United
States may be brought in Brazilian courts and that, subject to applicable
law, Brazilian courts may enforce liabilities in such actions against us,
our directors, our executive officers and the experts named in this
prospectus, provided that provisions of the federal securities laws of
the United States are not held to contravene Brazilian public policy,
good morals and Brazilian national sovereignty, and provided that
Brazilian courts can assert jurisdiction over the particular action; and
- Brazilian law limits the ability of a judgment creditor or other persons
to satisfy a judgment against us since the assets which are essential to
render the services provided by us may not be subject to attachment or
seizure.
We cannot assure you as to the success of any such action.
A plaintiff (whether Brazilian or non-Brazilian) residing outside Brazil
during the course of litigation in Brazil must provide a bond to guarantee court
costs and legal fees if the plaintiff owns no real property in Brazil that could
secure such payment. The bond must have a value sufficient to satisfy the
payment of court fees and defendant's attorney fees, as determined by a
Brazilian judge. This requirement does not apply to the enforcement of foreign
judgments which have been duly confirmed by the Brazilian federal supreme court.
121
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000 AND 2001
PAGE
----
Report of Independent Auditors.............................. F-2
Balance Sheets as of December 31, 2000 and 2001............. F-3
Statements of Income for the Years Ended December 31, 1999,
2000 and 2001............................................. F-5
Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 2000 and 2001.................... F-6
Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001....................................... F-7
Notes to the Financial Statements........................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Companhia de Saneamento do Parana -- SANEPAR
We have audited the accompanying balance sheets of Companhia de Saneamento
do Parana -- SANEPAR as of December 31, 2001 and 2000, and the related
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. 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.
We conducted our audits 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. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Companhia de Saneamento do
Parana -- SANEPAR as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Ernst & Young
Auditores Independentes S.C.
/s/ MARCOS ANTONIO QUINTANILHA
--------------------------------------
Marcos Antonio Quintanilha
Partner
Curitiba, Brazil
April 11, 2002
F-2
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
--------------- ---------------
(EXPRESSED IN THOUSANDS OF REAIS)
ASSETS
Current assets:
Cash and cash equivalents................................. R$ 25,572 R$ 24,624
Accounts receivable....................................... 183,995 160,391
Allowance for doubtful accounts........................... (27,492) (23,087)
Accounts receivable from related parties.................. 9,714 10,923
Deferred income taxes..................................... 24,254 28,286
Inventories............................................... 10,317 9,829
Recoverable taxes......................................... 3,378 6,420
Other..................................................... 8,236 3,782
----------- -----------
Total current assets........................................ 237,974 221,168
Property, plant and equipment, net.......................... 2,547,820 2,313,688
Other assets:
Concession contract....................................... 80,200 --
Judicial deposits......................................... 21,637 18,619
Other..................................................... 5,059 4,440
----------- -----------
Total other assets.......................................... 106,896 23,059
----------- -----------
Total Assets................................................ R$2,892,690 R$2,557,915
=========== ===========
F-3
BALANCE SHEETS - CONTINUED
DECEMBER 31, 2001 AND 2000
2001 2000
--------------- ---------------
(EXPRESSED IN THOUSANDS OF REAIS,
EXCEPT NUMBER OF SHARES)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... R$ 68,132 R$ --
Current portion of long-term debt......................... 89,148 79,859
Accounts payable.......................................... 35,125 43,264
Current portion of long-term concession contract.......... 16,700 --
Taxes payable............................................. 16,131 26,164
Accrued payroll and related costs......................... 23,475 26,855
Dividends payable......................................... 69,708 72,186
Accrual for pension plan.................................. 7,108 6,416
Deferred income........................................... 9,942 8,855
Accrual for other benefit plans........................... 11,515 8,544
Advances from shareholders................................ 219,524 123,472
Other..................................................... 12,041 7,908
----------- -----------
Total current liabilities................................... 578,549 403,523
Long-term liabilities:
Long-term debt, less current portion...................... 713,866 736,425
Long-term concession contract, less current portion....... 46,100 --
Deferred income taxes..................................... 134,719 129,233
Accrual for pension plan.................................. 78,188 76,998
Accrual for other benefit plans........................... 126,660 102,530
Taxes payable............................................. 10,670 28,051
Deferred income........................................... 60,393 57,006
Provision for tax and legal proceedings................... 102,416 91,924
Other..................................................... 36,110 31,631
----------- -----------
Total long-term liabilities................................. 1,309,122 1,253,798
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value, 41,428,876 shares
authorized and issued.................................. 55,652 55,652
Common stock, no par value, 289,836,870 shares authorized
and issued............................................. 389,343 389,343
Appropriated retained earnings............................ 273,665 283,621
Unappropriated retained earnings.......................... 286,359 171,978
----------- -----------
Total shareholders' equity.................................. 1,005,019 900,594
----------- -----------
Total Liabilities and Shareholders' Equity.................. R$2,892,690 R$2,557,915
=========== ===========
See accompanying notes.
F-4
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- ----------
(EXPRESSED IN THOUSANDS OF REAIS,
EXCEPT EARNINGS PER SHARE INFORMATION)
Gross operating revenue
- Third-parties..................................... R$ 742,733 R$ 655,659 R$ 567,541
- Related parties................................... 18,859 17,140 15,161
Sales taxes........................................... (28,941) (25,186) (21,600)
Credit for prior periods' sales taxes................. 17,199 -- --
----------- ----------- ----------
Net operating revenue................................. 749,850 647,613 561,102
Costs and expenses:
Cost of operations
- Third-parties.................................. (129,799) (122,859) (112,358)
- Related parties................................ (54,503) (47,440) (41,490)
General and administrative.......................... (209,559) (216,248) (203,999)
Depreciation and amortization....................... (70,444) (63,374) (55,333)
Net gain on settlement and curtailment of defined
benefit pension plan............................. -- 28,356 --
Other income, net................................... 2,503 2,507 1,872
----------- ----------- ----------
(461,802) (419,058) (411,308)
----------- ----------- ----------
Operating income...................................... 288,048 228,555 149,794
Non-operating income (expense):
Interest expense
- Third-parties.................................. (38,116) (52,361) (65,197)
- Related parties................................ (13,329) (5,135) (2,233)
Interest income..................................... 6,818 7,383 7,709
Foreign exchange losses, net........................ (14,120) (6,417) (28,824)
Other............................................... (2,862) (1,870) (2,592)
----------- ----------- ----------
(61,609) (58,400) (91,137)
----------- ----------- ----------
Income before income taxes............................ 226,439 170,155 58,657
Provision for income taxes:
Current............................................. (36,439) (22,254) (15,813)
Deferred............................................ (12,200) (8,265) 9,006
----------- ----------- ----------
(48,639) (30,519) (6,807)
----------- ----------- ----------
Net income............................................ R$ 177,800 R$ 139,636 R$ 51,850
=========== =========== ==========
Net income applicable to preferred shares............. R$ 56,974 R$ 44,745 R$ 16,339
Net income applicable to common shares................ 120,826 94,891 35,511
----------- ----------- ----------
R$ 177,800 R$ 139,636 R$ 51,850
=========== =========== ==========
Basic and fully diluted earnings per share
Preferred shares.................................... R$ 0.4586 R$ 0.3601 R$ 0.1348
Common shares....................................... R$ 0.4169 R$ 0.3274 R$ 0.1225
Weighted average number of shares outstanding
Preferred shares.................................... 124,245,312 124,245,312 121,230,901
Common shares....................................... 289,836,870 289,836,870 289,836,870
See accompanying notes.
F-5
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
APPROPRIATED UNAPPROPRIATED
PREFERRED COMMON RETAINED RETAINED
SHARES SHARES EARNINGS EARNINGS TOTAL
--------- --------- ------------ -------------- -----------
(EXPRESSED IN THOUSANDS OF REAIS)
Balances as of December 31, 1998............ R$49,069 R$389,343 R$179,865 R$190,888 R$ 809,165
Issuance of preferred shares (3,918,645
shares)................................ 6,583 -- -- -- 6,583
Net income................................ -- -- -- 51,850 51,850
Dividends (including interest attributed
to shareholders' equity)
Common shares.......................... -- -- -- (26,251) (26,251)
Preferred shares....................... -- -- -- (3,827) (3,827)
Transfer to appropriated retained
earnings............................... -- -- 36,572 (36,572) --
-------- --------- --------- --------- -----------
Balances as of December 31, 1999............ 55,652 389,343 216,437 176,088 837,520
Net income................................ -- -- -- 139,636 139,636
Dividends (including interest attributed
to shareholders' equity)
Common shares.......................... -- -- -- (66,160) (66,160)
Preferred shares....................... -- -- -- (10,402) (10,402)
Transfer to appropriated retained
earnings............................... -- -- 67,184 (67,184) --
-------- --------- --------- --------- -----------
Balances as of December 31, 2000............ 55,652 389,343 283,621 171,978 900,594
Net income................................ -- -- 177,800 177,800
Dividends (including interest attributed
to shareholders' equity)
Common shares.......................... -- -- (63,406) (63,406)
Preferred shares....................... -- -- (9,969) (9,969)
Transfer from appropriated retained
earnings............................... -- -- (9,956) 9,956 --
-------- --------- --------- --------- -----------
Balances as of December 31, 2001............ R$55,652 R$389,343 R$273,665 R$286,359 R$1,005,019
======== ========= ========= ========= ===========
See accompanying notes.
F-6
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---------- ---------- ----------
(EXPRESSED IN THOUSANDS OF REAIS)
Operating activities
Net income........................................ R$ 177,800 R$ 139,636 R$ 51,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 70,444 63,374 55,333
Loss on disposal of fixed assets............. 5,314 2,501 4,005
Provision for doubtful accounts.............. 4,961 9,480 1,202
Pension plan................................. 1,882 (37,504) 26,136
Postretirement benefits plan................. 27,101 23,211 21,783
Deferred income taxes........................ 12,200 8,265 (9,006)
Foreign exchange losses, net................. 14,120 6,417 28,824
Changes in operating assets and liabilities:
Accounts receivable............................ (22,951) (24,683) (23,162)
Judicial deposits.............................. (3,018) (3,698) (7,457)
Inventories.................................... (488) (698) (2,086)
Recoverable taxes.............................. 3,042 (5,538) 2,427
Other assets................................... (5,073) (28) (107)
Accounts payable............................... (8,139) 12,397 (3,813)
Taxes payable.................................. (32,439) (20,754) (7,061)
Accrued payroll and related costs.............. (3,380) 12,510 327
Provision for tax and legal proceedings........ 10,492 9,760 21,900
Accrued interest............................... 43,580 46,094 45,896
Deferred income................................ 4,474 6,955 12,672
Other liabilities.............................. 8,612 24,599 (7,264)
---------- ---------- ----------
Net cash provided by operating activities........... 308,534 272,296 212,399
Investing activities
Additions to property, plant and equipment........ (251,631) (211,112) (184,297)
Concession contracts.............................. (17,400) -- --
---------- ---------- ----------
Net cash used in investing activities............... (269,031) (211,112) (184,297)
Financing activities
Proceeds from issuance of short-term debt......... 62,415 -- --
Proceeds from issuance of long-term debt.......... 33,275 61,548 88,816
Payments on long-term debt........................ (146,171) (131,308) (116,661)
Payment of dividends (including interest on
shareholders' equity).......................... (70,829) (27,206) (20,267)
Advances from shareholders........................ 82,755 43,590 25,779
---------- ---------- ----------
Net cash used in financing activities............... (38,555) (53,376) (22,333)
---------- ---------- ----------
Net increase in cash and cash equivalents........... 948 7,808 5,769
Cash and cash equivalents at beginning of the
year.............................................. 24,624 16,816 11,047
---------- ---------- ----------
Cash and cash equivalents at end of the year........ R$ 25,572 R$ 24,624 R$ 16,816
========== ========== ==========
Cash paid during the year for:
Interest (net of interest capitalized)............ R$ 3,832 R$ 22,131 R$ 1,844
========== ========== ==========
Income taxes...................................... R$ 32,975 R$ 26,714 R$ 12,596
========== ========== ==========
Supplemental disclosure of non cash investing and
financing activities:
Concession contracts.............................. R$ 62,800 R$ -- R$ --
========== ========== ==========
See accompanying notes.
F-7
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
1. THE COMPANY AND ITS OPERATIONS
Companhia de Saneamento do Parana -- SANEPAR (the Company) is a Brazilian
company, whose controlling shareholder is the state of Parana. The state of
Parana owns 60% of the Company's common shares. Substantially all of the
remaining common shares are owned by Domino Holdings S.A. (39.7%). The Company's
preferred shares are owned by municipalities in the state of Parana and various
non-governmental investors. The Company provides water and wastewater services
to 342 of the 399 municipalities in the state of Parana.
The Company relies on municipal concessions to provide water and wastewater
services. Generally those concession contracts have a term of 30 years. Of the
328 executed concessions, approximately 25.6% expire by the end of 2005 and an
additional 20.7% expire by the end of 2011. The remaining concessions will
expire after 2011. Upon any termination, non-renewal or rescission, the
municipality is required to pay to the Company the net book value of the assets
relating to that concession, and assume any related indebtedness. As of December
31, 2001 certain concessions were already successfully renewed with the
municipalities.
Although the economic situation in Brazil has remained stable in recent
years, a return to higher levels of inflation and currency fluctuations could
adversely affect the Company's operations. The devaluation of the Brazilian Real
(R$) in relation to US Dollar has had effects in the Company's financial
statements. The exchange rate of the Brazilian Real to the US Dollar was
R$1.7890:US$1.00, R$1.9554:US$1.00 and R$2.3204:US$1.00 at December 31, 1999,
2000 and 2001, respectively. At December 31, 2001 and 2000, the indebtedness of
the Company demonominated in US Dollars represented 10.0% and 10.2% of Company's
total debt.
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP), using
Brazilian Reais (R$) as the reporting and functional currency. The accounting
principles adopted under US GAAP differ in certain respects from those required
under the accounting principles generally accepted in Brazil (Brazilian GAAP),
which the Company uses to prepare its statutory financial statements as filed
with the Brazilian Securities Commission -- CVM (Comissao de Valores
Mobiliarios).
Through December 31, 1997, the Company's financial statements were prepared
on a fully indexed basis, under the constant currency method, to recognize the
effects of changes in the purchasing power of the Brazilian currency. The
restated balances of non-monetary assets and liabilities of the Company as of
December 31, 1997 became the new basis for accounting and the financial
statement items are no longer restated for inflation beginning January 1, 1998.
3. SIGNIFICANT ACCOUNTING POLICIES
a) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
b) INVENTORIES
Inventories, consisting principally of maintenance and repair items, are
stated at lower of cost or market using the average cost method.
F-8
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
c) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
based on the straight-line method over estimated useful lives as follows: 50
years for buildings, 20 years for water wells, 20 years for water towers, 33
years for storage dams, 10 years for water meters and equipment, 5 years for
computer hardware and vehicles, and 50 years for distribution systems.
Expenditures for repairs and maintenance of existing property, plant and
equipment, which extend the useful lives of the related assets, as well as the
interest computed on debts that finance the construction of property, plant and
equipment, are capitalized in accordance with SFAS No. 34.
The Company's management reviews property, plant and equipment for possible
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset or group of assets may not be recoverable on the
basis of undiscounted future cash flows. The reviews are carried out at the
lowest level of asset groups to which management is able to attribute
identifiable future cash flows. The Company analyzes the net book value of the
underlying assets and adjusts it if the sum of the expected future cash flows is
less than the net book value. These reviews to date have not indicated the need
to recognize any impairment losses.
d) INTEREST ATTRIBUTED TO SHAREHOLDERS' EQUITY
Brazilian corporations are permitted to pay interest on shareholders'
equity, which is similar to the payment of dividends, but which is deductible
for income tax purposes. The Company has elected to pay such interest to its
shareholders with respect to the years ended December 31, 2001, 2000 and 1999,
and has accrued the amount due with a direct charge to shareholders' equity. The
distribution of such interest to shareholders is subject to withholding for
income tax at the rate of 15%.
e) REGULATION
Certain utility companies in the United States account for their operations
and prepare their financial statements on the basis of the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." The provisions of SFAS No. 71 apply,
among other criteria, to an enterprise for which regulated rates are designated
to recover the specific enterprise's costs of providing the regulated services
or products. Despite the existence of comprehensive regulation, the rates of
Brazilian utilities, such as the Company, have in the past not been set at
levels that allow them to recover specific costs. Because of the regulatory
environment prevailing in Brazil, the Company believes that it would not be
appropriate to apply the provisions of SFAS No. 71.
f) RECOGNITION OF REVENUE
Water and wastewater revenues for financial reporting purposes include
amounts billed to customers on a cycle basis (monthly) and unbilled amounts
based on estimated usage from the date of the latest meter reading to the end of
the accounting period. Revenues from initial connection charges and the related
costs are deferred and amortized over ten years.
g) EMPLOYEE BENEFITS AND OTHER RELATED MATTERS
The Company maintains a defined benefit plan and a postretirement medical
benefit plan for its active and retired employees. Additionally, during 2000 the
Company introduced a defined contribution plan in which active employees could
elect participation in lieu of participation in the defined benefit plan (see
note 14). Most of the Company's employees are members of unions, with which the
Company enters into
F-9
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
collective-bargaining arrangements annually. The liability for future
compensation for employee vacations is accrued as earned.
During 2000, the Company introduced an annual incentive compensation
program for all its employees with cash payments based upon the Company's
achievement of specified financial performance goals. Bonuses of R$7,872 and
R$11,318 were earned and accrued under the program for the years ended December
31, 2001 and 2000, respectively. The basis and goals for the incentive
compensation plan are to be renegotiated on a yearly basis. However, the Company
is not obligated to continue the annual incentive compensation program.
h) INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes".
i) ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are translated
into Reais at the commercial selling exchange rate reported by the Central Bank
of Brazil at each balance sheet date. Exchange gains and losses are recognized
in income on a current basis.
j) ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred
advertising costs of R$4,865, R$4,032 and R$4,968 during the years ended
December 31, 2001, 2000 and 1999, respectively.
k) EARNINGS PER SHARE
Basic and fully diluted earnings per share are calculated in accordance
with SFAS No. 128, "Earnings per Share," for each class of shares. Since the
preferred shares are entitled to a dividend 10% greater than that of the common
shares, they are allocated 10% more net income for purposes of calculation
earnings per share. The computation has been made as if the net income for each
period will be fully distributed. Earnings may be capitalized or otherwise
appropriated; consequently, such earnings would no longer be available to be
distributed as dividends. There is no assurance that any dividend (in excess of
any required minimum) will be paid.
l) ENVIRONMENTAL MATTERS
The Company's operations are subject to a number of environmental risks,
which are mitigated by strict operating procedures and capital expenditures for
pollution control equipment and systems. Ongoing environmental compliance
expenditures are expensed as incurred and new equipment and systems are
capitalized. The Company believes that no additional provision for losses
related to environmental matters, in addition to those mentioned in note 9, is
currently required based on prevailing laws and regulations in Brazil.
m) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
F-10
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
n) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133) which was issued in June, 1998 and its amendments
Statements 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, and 138,
Accounting for Derivative Instruments and Certain Hedging Activities issued in
June 1999 and June 2000, respectively (collectively referred to as Statement
133).
Because the Company did not engage in derivative transactions, SFAS 133 did
not have any impact on the Company's financial statements at the transition
date. During 2001, the Company entered into a swap agreement. See notes 6 and 13
for a full description.
o) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The adoption
of SAB 101 did not have a material effect on the Company's results of operations
and financial position.
Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use", was issued in March 1998 and
was adopted by the Company effective January 1, 1999. Certain costs that were
typically expensed by the Company prior to the adoption of the SOP 98-1,
primarily internal costs, are now subject to capitalization. The effect of the
adoption of SOP 98-1 was not material to the Company's financial statements for
the years ended December 31, 2001, 2000 and 1999.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that all business combinations be
accounted for by the purchase method of accounting and changes the criteria for
recognition of intangible assets acquired in a business combination. The
provisions of SFAS 141 apply to all business combinations initiated after June
30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized; however, these assets must be reviewed at
least annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for Sanepar's fiscal year 2003, with early adoption permitted at
the beginning of Sanepar's fiscal year 2002. However, goodwill and intangible
assets acquired after June 30, 2001 are subject immediately to the non-
amortization provisions of SFAS 142. Sanepar does not expect that the adoption
of SFAS 141 and 142 will have a material effect on its financial position or
results of operations.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," on the accounting for obligations associated with the
retirement of long-lived assets. SFAS 143 requires a liability to be recognized
in the financial statements for retirement obligations meeting specific
criteria. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
The Company believes that adoption of this statement will not have a significant
impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
F-11
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The provisions of SFAS 144 will be effective for Sanepar's fiscal
year 2003 and will be applied prospectively. Sanepar is currently in the process
of evaluating the potential impact that the adoption of SFAS 144 will have on
its financial position and results of operations, but believes that adoption of
this statement will not have a significant impact on its financial position or
results of operations.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
CUSTOMERS 2001 2000
--------- --------- ---------
Billed:
Municipal................................................. R$ 41,747 R$ 37,987
Federal................................................... 2,380 2,262
Third party customers..................................... 95,704 80,775
--------- ---------
Subtotal.................................................... 139,831 121,024
Unbilled.................................................... 44,164 39,367
--------- ---------
Total accounts receivable................................... R$183,995 R$160,391
========= =========
Included in accounts receivable from related parties are trade receivables
of R$7,794 and R$9,141 due from the state of Parana in 2001 and 2000,
respectively.
Changes in the allowance for doubtful accounts were as follows:
2001 2000 1999
--------- --------- ---------
Balance at beginning of year................... R$(23,087) R$(13,663) R$(12,461)
Amounts charged to expense..................... (4,961) (9,480) (1,202)
Write offs, net of recoveries.................. 556 56 --
--------- --------- ---------
Balance at end of year......................... R$(27,492) R$(23,087) R$(13,663)
========= ========= =========
In order to estimate the amount of allowance for doubtful accounts to be
recorded in each period, the Company's management performs analyses of its
accounts receivables, specifically of its past due amounts, taking into
consideration the probability of recoverability by customer class and the aging
of such past due amounts.
F-12
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
5. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2001 and 2000, property, plant and equipment consisted
of the following:
2001 2000
----------- -----------
Land..................................................... R$ 27,154 R$ 24,980
Water wells.............................................. 39,541 37,895
Storage dam.............................................. 58,911 57,790
Buildings................................................ 724,524 657,982
Distribution system...................................... 1,368,666 1,217,571
Water towers............................................. 193,153 177,295
Water meters............................................. 76,357 77,952
Equipment................................................ 126,921 112,184
Computer hardware........................................ 31,204 21,859
Vehicles................................................. 41,819 30,587
Other.................................................... 44,011 57,372
Construction in progress................................. 583,457 548,900
Material for construction in progress.................... 13,201 14,305
----------- -----------
3,328,919 3,036,672
Accumulated depreciation................................. (650,997) (596,458)
----------- -----------
2,677,922 2,440,214
Grants and customer payments............................. (163,628) (155,740)
Accumulated amortization................................. 33,526 29,214
----------- -----------
(130,102) (126,526)
----------- -----------
Total.................................................... R$2,547,820 R$2,313,688
=========== ===========
The Company receives grants from municipalities and other governmental
entities and, in certain circumstances, customers pay for the installation of
pipes and other distribution infrastructure. These grants and customer payments
are recorded as a reduction to property, plant and equipment and are amortized
using the straight-line method as a reduction of depreciation expense over the
lives of the related assets. Amortization of grants and customer payments was
R$4,312, R$4,075 and R$3,627 during the years ended December 31, 2001, 2000 and
1999, respectively.
During the years ended December 31, 2001, 2000 and 1999, interest of
R$60,940, R$42,548 and R$61,010 respectively, was capitalized as part of the
cost of property, plant and equipment.
6. SHORT-TERM DEBT
On July 3, 2001, the Company issued commercial paper notes, in the amount
of R$62,415, with interest at a fixed-rate of 18.56% per year. The balance at
December 31, 2001 is R$68,132, including accrued interest. The term of payment
is 360 days from the issuance.
F-13
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
The Company entered into a swap for a floating-rate yield which was
computed as 101.7% of the Taxa de Certificado de Deposito Interbancario
(Inter-Bank CD Rate), a market-determined inter-bank deposit rate. The floating
rate did not differ significantly from the fixed-rate during the year ended
December 31, 2001.
7. LONG-TERM DEBT
Long-term debt consists of the following:
ANNUAL INTEREST AT
DECEMBER 31, 2001 MATURITY DATES 2001 2000
------------------ --------------- --------- ---------
Foreign debt (denominated in U.S.
dollars):
Banco do Estado do Parana --
Banestado(1).................. 5.01% 2007 R$ 87,464 R$ 83,623
Local debt (denominated in reais):
Banco do Estado do Parana --
Banestado(2).................. TR + 8 to 10.14% 2005 up to 2008 57,942 62,590
Banco do Estado do Parana --
Banestado(3).................. TR + 10.18% 2003 up to 2009 69,526 78,971
Caixa Economica Federal(4)....... TR + 5 to 12.00% 2005 up to 2019 256,059 254,693
Banco do Brasil S.A.(5).......... TR + 7.50% 2014 298,215 305,560
City of Maringa.................. TR + 6.00% 2014 461 475
Supplier financing............... TJLP+5.84 to 7.72% 2001 up to 2005 33,347 30,372
--------- ---------
803,014 816,284
Less current portion............... (89,148) (79,859)
--------- ---------
Long-term portion.................. R$713,866 R$736,425
========= =========
---------------
Note: TR = "Taxa Referencial", an interest rate reset monthly by the Brazilian
Central Bank. At December 31, 2001, the TR rate was 2.29% per annum (2.10%
at December 31, 2000).
TJLP = "Taxa de Juros de Longo Prazo", a long-term interest rate reset
quarterly by the Brazilian Central Bank. At the fourth quarter ended
December 31, 2001, the TJLP rate was 10.00% per annum (9.75% at the fourth
quarter ended December 31, 2000).
(1) Banco do Estado do Parana -- Banestado -- loan from funds made available by
the International Bank for Reconstruction and Development (IBRD). The loan
is collateralized by accounts receivable in an amount equal to the
outstanding principal balance of the loan. The administration rate is 0.20%
per year, which is included in the floating interest rate. Floating interest
rate is set semi-annually by the IBRD based on market rates for similar
loans. The interest rate was 5.01% and 5.21% at December 31, 2001 and 2000,
respectively.
(2) Banco do Estado do Parana -- Banestado -- loan from funds made available by
the Inter-American Development Bank (IDB). The loan is collateralized by
accounts receivable in an amount equal to the outstanding principal balance
of the loan. The weighted average rate of interest is 8.55% for 2001, which
includes the administration rate of 0.20%.
(3) Banco do Estado do Parana -- Banestado -- loan from funds made available by
the IBRD. The loan is collateralized by accounts receivable in an amount
equal to the outstanding principal balance of the loan. The administration
rate of 0.50% is included in the interest rate.
F-14
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
(4) Caixa Economica Federal -- 39 loans from the Caixa Economica Federal
(Federal Saving Bank) used to increase and improve the water supply systems
in several cities in the state of Parana. These loans are collateralized by
accounts receivable in an amount equal to the outstanding principal balance
of the loan. One of these loans, R$34,793, is also collaterized by property,
plant and equipment with a net book value of R$145,185. Additionally, one of
these loans, R$6,692, has an additional guarantee from the state of Parana.
The weighted average rate of interest is 9.09% for 2001, which includes the
administration rate of 1.00%.
(5) Banco do Brasil S.A. -- loan from Banco do Brasil S.A. The loan is
collateralized by accounts receivable in an amount equal to the outstanding
principal balance of the loan and is also guaranteed by the state of Parana.
The administration rate is of 0.10% per year, which is included in the
interest rate.
At December 31, 2001, debt maturities were as follows:
2002...................................................... R$ 89,148
2003...................................................... 82,739
2004...................................................... 78,382
2005...................................................... 73,142
2006...................................................... 69,366
2007...................................................... 65,176
2008 and thereafter....................................... 345,061
---------
Total....................................................... R$803,014
=========
On January 29, 2002, the Company entered into a "mirror" loan agreement
with the state of Parana, which establishes guidelines for the transfer to the
Company of funds received by the state of Parana under the "Paranasan" program.
Under this program, the state of Parana receives funds from JBIC -- Japan Bank
for International Cooperation. The Company will pay the same interest and
exchange rates and terms agreed to by the state of Parana and JBIC.
8. TAXES PAYABLE
The balances as of December 31, 2001 and 2000 were as follows:
2001 2000
----------------------- -----------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
---------- --------- ---------- ---------
COFINS (Federal sales tax)............ R$ 7,697 R$ 2,277 R$19,487 R$19,638
ICMS (State value added tax).......... -- -- 581 --
Income taxes.......................... 3,222 6,175 2,880 8,401
ISS (Taxes on Services Rendered)...... 1,795 2,218
Other taxes........................... 3,417 -- 3,216 12
-------- -------- -------- --------
Total................................. R$16,131 R$10,670 R$26,164 R$28,051
======== ======== ======== ========
In previous years, the Company did not pay certain federal sales taxes
(COFINS), state value added taxes (ICMS) and income taxes due to disputes with
the government.
On March 27, 2001, the Company obtained a final judicial decision whereby
it received a R$17,199 credit for sales taxes paid during a period between 1989
and 1991. The Company used this credit to offset other taxes payable. Segment
operating revenue and segment operating income of water and wastewater for
F-15
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
the year ended December 31, 2001 have been increased by R$12,022 and R$5,177,
respectively, as a result of this favorable decision.
At December 31, 2001 maturities of tax liabilities were as follows:
2002...................................................... R$16,131
2003...................................................... 7,295
2004...................................................... 3,375
--------
Total....................................................... R$26,801
========
9. PROVISION FOR TAX AND LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings in Brazil and has
recorded provisions when management believes that it can reasonably estimate
probable losses. The Company believes that the provisions made are sufficient to
cover probable losses and does not believe there is a reasonable possibility of
any material losses in excess of the amounts provided. In connection with some
of these proceedings the Company has made judicial deposits, which will only be
released upon a favorable judgment. The amount of such provisions for civil,
labor and tax matters is as follows:
TYPE OF PROCEEDING 2001 2000
------------------ --------- --------
Civil(1).................................................... R$ 11,283 R$ 9,857
Labor(2).................................................... 23,253 18,096
Income tax(3)............................................... 46,755 46,707
COFINS (Federal sales tax)(4)............................... 18,497 17,264
Environmental(5)............................................ 2,505 --
Other....................................................... 123 --
--------- --------
Total....................................................... R$102,416 R$91,924
========= ========
---------------
(1) Civil provisions are for claims related to the amounts paid for property
easements and claims for damages due to various accidents and other matters.
(2) Labor provisions relate to claims against the Company primarily by former
employees, regarding salaries or overtime pay.
(3) Income tax provisions relate to the assessments made by tax authorities for
the payment of taxes for fiscal years 1991 to 1993. The Company has not made
the payments due to a dispute about the constitutionality of the related
tax. The Company has offered a pledge of property, plant and equipment with
a net book value of R$3,568 guarantee this amount.
(4) COFINS -- Federal sales taxes provisions relate to disputed tax amounts,
interest and penalties. The total amount of R$18,497 is composed of R$4,472,
relating to the tax not paid during 1998, for which the Company has made a
judicial deposit. The remaining amount of R$14,025 (R$12,791 in 2000),
relates to an additional COFINS penalty, which is under judicial
discussions.
(5) Environmental matters relate to instances in which the Company is a
defendant in environmental actions seeking damages, cleanup costs, or
injunctive relief related to property damage, personal injury or pollution
allegedly resulting from the Company's operations. The amount accrued refers
to penalties and estimated amounts related to the suits awaiting a court
decision.
F-16
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
In addition, some environmental protection agencies, including the state
environmental authority (Instituto Ambiental do Parana -- IAP, or the Parana
Environmental Institute) and the federal environmental authority (Instituto
Brasileiro do Meio Ambiente e dos Recursos Naturais Renovaveis -- IBAMA, or the
Brazilian Institute for the Environment and Renewable Natural Resources), have
served the Company with notices relating to allegations of noncompliance with
environmental laws, including the wrongful release of effluents and operating in
environmentally protected areas. In order to remedy such alleged violations, the
Company entered into a formal agreement with IAP in March 1999. Those
authorities also set forth the terms and conditions for the Company to implement
certain technological upgrades and other pollution controls required by the
legislation over a period of three years with the possibility to renew the
contract an additional three years. The estimated total cost of compliance with
the environmental legislation is R$97,000 as of December 31, 2001, and the
upgrades will be recognized as property, plant and equipment when constructed.
On January 29, 2002 the Company received correspondence from IAP, which
indicated that agency's current intention to extend the term of the agreement
for an additional three years, in order to facilitate the Company's compliance
with the conditions of such agreement.
Changes in the provision for tax and legal proceedings were as follows:
2001 2000
--------- --------
Balance at beginning of year................................ R$ 91,924 R$82,164
Interest on long-term provision............................. 4,217 7,487
Provisions for new legal proceedings........................ 14,407 6,165
Amounts paid to settle litigation........................... (8,132) (3,892)
--------- --------
Balance at end of year...................................... R$102,416 R$91,924
========= ========
10. INCOME TAXES
Income taxes in Brazil include income and social contribution taxes. The
composite statutory rate was 34% for 2001 and 2000 and 37% for 1999. Income tax
expense at the statutory rate is reconciled to income tax expense in the
statements of income as follows:
2001 2000 1999
--------- --------- ---------
Income before income and social contribution
taxes........................................ R$226,439 R$170,155 R$ 58,657
--------- --------- ---------
Income tax expense at statutory tax rate....... R$(76,989) R$(57,853) R$(21,703)
Reconciliation of statutory to effective rate:
Benefit from deductibility of interest
attributed to shareholders' equity........ 24,948 25,709 11,129
Reduction through offset with 1% of COFINS... -- -- 3,509
Reversion of penalties....................... 2,614 -- --
Other........................................ 788 1,625 258
--------- --------- ---------
Total.......................................... R$(48,639) R$(30,519) R$ (6,807)
========= ========= =========
F-17
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
Deferred tax assets and liabilities consist of the following:
2001 2000
---------- ----------
Deferred tax assets:
Tax loss carry-forwards................................. R$ 7,553 R$ 19,316
Pension plan............................................ 29,001 38,370
Postretirement benefits plan............................ 46,980 37,765
Grants and customer payments............................ 44,235 43,019
Provision for tax and legal proceedings................. 25,134 25,661
Deferred income......................................... 23,914 22,393
Others.................................................. 2,370 2,592
---------- ----------
Total deferred tax assets............................... 179,187 189,116
Deferred tax liabilities:
Property, plant and equipment........................... (289,652) (290,063)
---------- ----------
Total deferred tax liabilities.......................... (289,652) (290,063)
---------- ----------
Net deferred tax liabilities............................ R$(110,465) R$(100,947)
========== ==========
Current portion......................................... R$ 24,254 R$ 28,286
Long-term portion....................................... R$(134,719) R$(129,233)
At December 31, 2001 the Company had operating loss carry-forwards of
R$30,196 for income tax purposes. The loss carry-forwards have no expiration
date and are available to offset up to 30% of the Company's future taxable
income in any given year. The Company believes it is more likely than not that
the operating loss carry-forwards will be realized.
11. ADVANCES FROM SHAREHOLDERS
Advances from shareholders were received primarily from the state of Parana
under the Paranasan program in order for the Company to partially finance the
construction of certain water and wastewater systems in an aggregate original
amount of R$136,950 at December 31, 2001. In addition, between 1996 and 2000,
the state of Parana paid R$43,986 to COPEL (a shareholder of Domino Holdings
S.A. and controlled by the state of Parana) on our behalf. Also during the same
period, we had accrued amounts owed to the state of Parana for loans (R$6,568)
and dividends (R$11,066).
The above-mentioned amounts resulted in an aggregate advanced amount of
R$198,570. There were no contractual due dates or interest charges for these
advances.
On January 29, 2002, the Company and the state of Parana signed an
agreement through which a portion of the total amount advanced to the Company
will be returned to the state of Parana, including interest based on the average
interest rate of borrowings obtained by the Company during the periods the
advances have been outstanding, amounting to R$20,954 through December 31, 2001.
As of December 31, 2001, such advances amounted to R$179,552.
In accordance with a separate agreement also reached on January 29, 2002,
R$39,972 of the advances from shareholders outstanding at December 31, 2001,
consisting of part of the amount paid by the state of Parana to COPEL
(R$22,338), loans (R$6,568) and dividends due to the state of Parana (R$11,066),
will not be owing to and will not be repaid to the state of Parana. The R$39,972
is non-interest bearing. This amount has been transferred to additional
paid-in-capital in shareholders' equity in 2002.
F-18
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
12. SHAREHOLDERS' EQUITY
The Company's by-laws require payment of mandatory dividends to its common
and preferred shareholders of at least 25% of annual net distributable income
determined in accordance with Brazilian Corporate Law. In addition, under the
shareholders' agreement between the state of Parana and Domino Holdings S.A., at
least an additional 25% of annual net distributable income is required to be
distributed as dividends. The preferred shareholders are entitled to receive a
dividend per share 10% higher than any dividends paid to common shareholders.
On May 5, 1997, the Brazilian government enacted a law granting preferred
shareholders, who did not have a right to fixed or minimum dividends, a
statutory right to receive dividends in an amount per share of at least 10% more
than the amount per share paid to common shareholders. Although the law became
effective in 1997, the Company began paying the additional 10% to preferred
shareholders in 2000, when the Company became public in Brazil. Income is
allocated between preferred and common shareholders based on the same criteria
as dividend allocations.
The preferred shareholders only have the right to vote in certain
circumstances but have the right to participate, in the same manner as the
common shareholders, in distributions of shares, other securities or assets, and
have priority in repayment of capital in the case of the Company's liquidation.
At the December 18, 2001 General Shareholders' Meeting, the Company was
authorized to increase its capital by a maximum amount of R$250,000, through the
utilization of appropriated retained earnings to be used in a share dividend to
be provided to all shareholders in equal proportion. This General Shareholders'
Meeting also authorized the Company to increase its capital by an additional
maximum amount of R$900,000, exclusively through the issuance of preferred
shares in Brazil and the issuance of American Depositary Shares (representing
preferred shares) in foreign countries.
In accordance with the Brazilian Corporate Law and the Company's by-laws,
the Company is required to make annual appropriations to certain reserves (which
are reflected on the balance sheet as appropriated retained earnings). These
reserves consist mainly of: (a) a legal reserve of 5% of the net income in the
Company's statutory accounts, which must be transferred to the legal reserve
until such reserve reaches an amount equal to 20% of the Company's share capital
under Brazilian Corporate Law, which may be used to increase capital or to
absorb accumulated deficits, but is not available for the payment of cash
dividends; (b) a reserve for unrealized gains, arising from inflationary income
computed in past years which is transferred to retained earnings in proportion
to the depreciation and sale of property, plant and equipment, which is not used
to increase capital or to absorb losses and is not available for the payment of
cash dividends until it is transferred to retained earnings as reflected in the
financial statements prepared in accordance with Brazilian Corporate Law; and
(c) a reserve for capital expenditures which consists of undistributed statutory
retained earnings which are transferred to the reserve for capital expenditures
at the end of each year, which may be used to increase capital or to absorb
accumulated deficits and is available for the payment of cash dividends.
F-19
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
At December 31, 2001 and 2000 appropriated retained earnings are comprised
of the following:
2001 2000
--------- ---------
Appropriated retained earnings
Legal reserve............................................. R$ 28,909 R$ 21,303
Unrealized gains.......................................... -- 106,217
Reserve for capital expenditures.......................... 244,756 156,101
--------- ---------
Total....................................................... R$273,665 R$283,621
========= =========
As permitted by Brazilian Corporate Law, the Company's management has
decided to realize the total amount of unrealized gains. Such decision will be
presented to the shareholders at a future shareholders' meeting to obtain their
concurrence and approval.
On October 8, 1999, the Company issued 3,918,645 preferred shares as a
result of a R$6,583 reduction in advances previously received from
municipalities.
Brazilian law permits the payment of dividends only in Reais. The payment
of dividends is limited to the retained earnings as reflected in the financial
statements prepared in accordance with Brazilian Corporate Law.
Brazilian companies are permitted to pay limited amounts to shareholders
and treat such payments as an expense for Brazilian income and social
contribution tax purposes. This notional interest distribution is treated for
accounting purposes as a deduction from shareholders' equity in a manner similar
to a dividend. A 15% tax is withheld and paid by the Company upon credit of the
interest. Interest attributed to shareholders' equity is treated as a dividend
for purposes of the mandatory dividend payable by the Company.
The Company declared dividends in the form of a distribution of interest on
shareholders' equity as of December 31, 2001, 2000 and 1999 (see note 3-d). The
amount distributed was greater than the mandatory dividends.
Dividends (including interest on shareholders' equity) declared were
calculated as follows:
(1)
2001 2000 1999
--------- --------- --------
Net income (Brazilian GAAP)..................... R$152,110 R$136,478 R$59,217
Creation of legal reserve....................... (7,606) (6,824) (2,960)
Realization of unrealized gains................. 106,217 2,791 2,829
--------- --------- --------
Basis for computation of mandatory dividends.... 250,721 132,445 59,086
Mandatory dividends (25%)....................... 62,680 33,111 14,771
Additional dividends............................ 10,695 43,451 15,307
--------- --------- --------
Distributions declared (includes dividends and
interest on shareholders' equity)............. R$ 73,375 R$ 76,562 R$30,078
========= ========= ========
---------------
(1)In 2000, the Company distributed R$946 in the form of dividends. All other
distributions were made in the form of interest of shareholders' equity.
F-20
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
Dividends (including interest on shareholders' equity) per share were:
2001 2000 1999
-------- -------- --------
Preferred shares.................................. R$0.2406 R$0.2511 R$0.0916
Common shares..................................... 0.2188 0.2283 0.0916
13. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts receivable,
short-term and long-term debt and other accounts. Cash and cash equivalents are
held in various financial institutions, which are evaluated periodically by
management to minimize the risk associated with excess account balances in any
of those financial institutions. The Company minimizes its exposure to credit
risk relating to accounts receivable by discontinuing service to private sector
customers (except for hospitals and charitable organizations) with overdue
accounts. The Company does not require collateral on accounts receivable. The
proceeds from the Company's debt have been used principally for purchases of
property, plant and equipment. The foreign currency risk associated with the
Company's debt is mitigated as approximately 90% of the debt is denominated in
reais. The Company entered into an interest rate swap agreement in connection
with its short-term debt (see Note 6). The Company's management considers the
risk associated with this swap agreement as low due to the short term of such
agreement and the immateriality of the applicable amounts.
The Company used the following methods and assumptions in estimating the
fair values of its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair values.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate their
fair values.
LONG-TERM DEBT: The fair values of long-term debt are estimated using
discounted cash flow analyses, based on the Company's current borrowing rates
for similar types of borrowing arrangements. The carrying amount of debt,
including advances from shareholders, approximate their fair values.
The Company provides water supply and wastewater collection, treatment and
disposal in 342 of the 399 municipalities in the state of Parana. For 328 of
these municipalities the Company has the respective concessions. The Company has
several risks associated with these concessions. However, those risks are
managed to reduce the impact on the results of the Company. The following
factors are associated with the risks:
CONCESSIONS -- the Company relies on concessions to provide water and
wastewater services and there is the risk of non-renewal of the concessions or
that the renewal could be conditioned on the payment of a concession fee, as
occurred with the Curitiba municipality concession. This risk is mitigated by
the legal requirement that the municipality must pay the net book value of the
assets and assume any related indebtedness related to each concession, in case
of termination or non-renewal.
CREDIT RISK -- almost all of the people and businesses of the state of
Parana are customers of the Company. Considering the nature of its business,
there is no credit analysis of customers and the Company
F-21
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
practices the procedure of cutting services to private sector customers (except
for hospitals and charitable organizations) in cases of default. The losses in
accounts receivable are considered normal for this industry. However, the
Company's management has concentrated its efforts to reduce the level of losses,
primarily through negotiations with municipalities that are in default on their
obligations to the Company.
EXCHANGE RATE RISK -- as of December 31, 2001, the Company has just one
loan of R$87,464 denominated in US Dollars. This loan did not have a significant
impact on results.
14. PENSION AND OTHER BENEFIT PLANS
The Company sponsors a defined benefit pension plan, a defined contribution
pension plan and a medical plan in order to supplement the Brazilian
Government's pension and other benefit plans.
The defined benefit pension plan covers all retired employees. All active
employees are covered by the defined contribution plan. Benefits paid to
retirees are based primarily on age at retirement, years of credited service and
compensation earned during employment. The Company adopted SFAS No. 87
"Employers' Accounting for Pensions" on December 31, 1997 since adoption prior
to that date was not feasible. Upon the adoption of SFAS No. 87, the Company
recorded an accrual for pensions of R$74,048 directly to shareholders' equity.
The transition obligation of R$123,420 is being amortized over 15 years
beginning retroactively on January 1, 1989.
Effective December 31, 2000, the Company finalized the process of migrating
approximately 100% of the employees from the defined benefit pension plan to a
defined contribution pension plan. Plan assets of R$90,183 were transferred to
the employees' accounts in the defined contribution plan. Additionally,
concurrently with the settlement and curtailment on December 31, 2000, the
Company agreed to make an additional contribution to the defined contribution
plan of R$29,432 by incurring a 15-year note payable to the plan. Under the
provisions of SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the
effects of employees withdrawing from the defined benefit plan in order to
participate in the defined contribution plan constitutes a curtailment which
resulted in the recognition of a gain of R$32,911 to the Company. Additionally,
the transference of plan assets to the defined contribution plan and the
additional contribution of R$29,432 constitute a settlement, which resulted in
the recognition of a settlement loss of R$4,555 to the Company.
During 2001, the Company began a defined contribution plan for actives
employees, as mentioned above. Contributions to this plan are based on a
percentage of the employee's salary and the Company fully matches certain
employee contributions. The expense recognized for the year ended December 31,
2001 for the defined contribution plan was R$3,489.
In addition to pension benefits, the Company provides certain health care
insurance and postretirement benefits to the Company's current and retired
employees and their dependents. Upon the adoption of SFAS No. 106 "Employers
Accounting for Postretirement Benefits Other Than Pensions" on December 31,
1997, the Company recorded an accrual for other benefit plans of R$55,218
directly to shareholders' equity. Included in this accrual was the transition
obligation of R$46,935, which the Company chose to immediately recognize as the
effect of an accounting change. Effective October 1, 1998, the Company enhanced
the benefits provided under the postretirement medical plan, resulting in
unrecognized prior service cost of R$76,050.
F-22
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
The statement of changes in benefit obligation and changes in plan assets
for the years ended December 31, 2001 and 2000 are as follows:
PENSION PLAN OTHER BENEFITS
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Change in benefit obligation
Net benefit obligation at
beginning of year............ R$158,373 R$309,385 R$185,487 R$149,721
Service cost.................... 1,649 11,403 5,874 4,940
Interest cost................... 15,335 30,439 18,369 14,816
Actuarial (gain) loss........... 6,325 (31,123) (34,280) 19,449
Curtailment..................... -- (57,472) -- --
Settlement...................... -- (94,172) -- --
Benefits paid................... (12,500) (10,087) (4,036) (3,439)
--------- --------- --------- ---------
Benefit obligation at end of
year......................... R$169,182 R$158,373 R$171,414 R$185,487
========= ========= ========= =========
Change in plan assets
Fair value of plan assets at
beginning of year............ R$109,967 R$185,308 R$ -- R$ --
Actual return on plan assets.... 1,234 13,696 -- --
Employer contributions.......... 1,140 6,409 -- --
Settlement...................... -- (90,183) -- --
Plan participants'
contributions................ 1,489 4,824 -- --
Benefits paid................... (12,500) (10,087) -- --
--------- --------- --------- ---------
Fair value of plan assets at end
of year...................... R$101,330 R$109,967 R$ -- R$ --
========= ========= ========= =========
The following provides a reconciliation of the funded status of the plans:
PENSION PLAN OTHER BENEFITS
---------------------- ------------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Funded status
Funded status at end of
year....................... R$(67,852) R$(48,406) R$(171,414) R$(185,487)
Unrecognized net actuarial
(gain) loss................ (17,525) (35,129) (20,405) 13,875
Unrecognized prior service
cost....................... -- -- 53,644 60,538
Unrecognized net transition
obligation................. 81 121 -- --
--------- --------- ---------- ----------
Net amount recognized at end of
year.......................... (85,296) (83,414) (138,175) (111,074)
Less short term portion......... 7,108 6,416 11,515 8,544
--------- --------- ---------- ----------
Long term portion............... R$(78,188) R$(76,998) R$(126,660) R$(102,530)
========= ========= ========== ==========
F-23
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
The weighted average assumptions used in accounting for the Company's plans
at December 31 were as follows:
PENSION PLAN OTHER BENEFITS
------------ --------------
2001 2000 2001 2000
---- ---- ----- -----
Discount rate............................................ 10% 10% 10% 10%
Rate of compensation increase............................ 6% 6% -- --
Expected return on plan assets........................... 10% 10% -- --
Health care cost trend on covered charges................ -- -- 7% 7%
Components of net periodic benefit cost for the plans are as follows:
PENSION PLAN OTHER BENEFITS
--------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
--------- --------- --------- -------- -------- --------
Service cost................... R$ 1,649 R$ 11,403 R$ 13,002 R$ 5,874 R$ 4,940 R$ 4,598
Interest cost.................. 15,335 30,439 30,522 18,369 14,816 13,042
Expected return on assets...... (10,617) (18,553) (14,839) -- -- --
Amortization of transition
obligation................... 40 8,228 8,228 -- -- --
Amortization of prior service
cost......................... -- -- 6,894 6,894 6,894
Amortization of gain........... -- -- -- -- --
Employee contribution.......... (3,385) (4,824) (4,837) -- -- --
--------- --------- --------- -------- -------- --------
Total net periodic benefit
cost......................... R$ 3,022 R$ 26,693 R$ 32,076 R$31,137 R$26,650 R$24,534
========= ========= ========= ======== ======== ========
The effects of the settlement and curtailment, recognized as of December
31, 2000 were as follows:
BEFORE AFTER
CURTAILMENT EFFECT OF EFFECT OF CURTAILMENT
AND SETTLEMENT CURTAILMENT SETTLEMENT AND SETTLEMENT
-------------- ----------- ---------- --------------
Actuarial present value of benefit
obligations:
Present value of the obligation.... R$(310,017) R$ 57,472 R$ 94,172 R$(158,373)
Plan assets at fair value.......... 200,150 -- (90,183) 109,967
---------- --------- --------- ----------
Funded status...................... (109,867) 57,472 3,989 (48,406)
Unrecognized actuarial gain........ (56,017) -- 20,888 (35,129)
Unrecognized transition
obligation...................... 24,682 (24,561) -- 121
---------- --------- --------- ----------
Accrued pension cost................. R$(141,202) R$ 32,911 R$ 24,877 R$ (83,414)
========== ========= ========= ==========
F-24
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effects:
2001 2000 1999
--------- --------- ---------
Effect of a one percentage point increase in
assumed health care cost trend:
- on total service and interest cost
components................................ R$ 5,182 R$ 6,236 R$ 4,875
- on postretirement benefit obligation....... 36,760 42,925 33,217
Effect of a one percentage point decrease in
assumed health care cost trend:
- on total service and interest cost
components................................ (3,971) (4,728) (3,711)
- on postretirement benefit obligation....... (28,597) (33,005) (25,653)
15. RELATED PARTIES
Revenue from water and wastewater services provided to state of Parana was
R$18,859, R$17,140 and R$15,161 during 2001, 2000 and 1999, respectively. Costs
of energy provided by "Companhia Paranaense de Energia Eletrica -- COPEL" (a
shareholder of Domino Holdings S.A. and controlled by the state of Parana) was
R$54,503, R$47,440 and R$41,490 during the years ended December 31, 2001, 2000
and 1999, respectively. These sales and purchases have been made on the same
terms and conditions as similar transactions with third parties.
On March 8, 2000, the Company entered into a construction contract for the
expansion of its network and operations with a consortium that includes an
affiliate of an indirect holder of the Company's common shares. The amount of
the contract is for R$31.8 million.
Other related party transactions are disclosed in notes 4, 7 and 11.
16. CONCESSION CONTRACT
On December 6, 2001, the Company signed an exclusive concession contract
with the Curitiba municipality to provide water supply and wastewater
collection, treatment and disposal for a period of 30 years. The terms of the
contract require the Company to pay to the Curitiba municipality a concession
fee of R$125,000. In December 2001, the Company paid R$17,400 of this concession
fee. The remaining amount is payable over 30 years and bears interest based on
the "IPCA -- Indice de Precos ao Consumidor" (IPCA Rate), the Brazilian consumer
price index, whose annual rate was 7.67% in 2001. Since the IPCA Rate is below
the commercial interest rates for borrowings of similar duration, the Company
has discounted the obligation. The market average rate of 12% was used to
compute this adjustment in relation to the IPCA Rate. The adjustment resulted in
a R$44,800 reduction in the value assigned to the concession.
The Company recognized R$80,200, net of adjustments to present value as an
intangible asset, which will be amortized over a 30 year period. The
amortization will be recorded as a cost relating to the Curitiba municipality
services. The liability at December 31, 2001 amounts to R$62,800.
F-25
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
At December 31, 2001, concession contract maturities were as follows:
2002........................................................ R$ 16,700
2003........................................................ 10,000
2004........................................................ 10,000
2005........................................................ --
2006........................................................ 2,845
2007 and thereafter......................................... 68,055
107,600
---------
Less: Present value discount................................ (44,800)
---------
Total....................................................... R$ 62,800
=========
17. SEGMENT INFORMATION
The following information about segments is based upon information used by
the Company's management to assess the performance of operating segments and to
decide on the allocation of resources. This approach is required by SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information," and has
been applied for all periods presented.
The Company has two identifiable reportable segments: water and wastewater.
Segment operating profit is revenue less direct and allocable operating
expenses. Segment identifiable assets are those, which are directly used in or
identified to the segment operations. Corporate assets include cash and cash
equivalents, certain non-trade receivables, recoverable taxes, judicial
deposits, deferred taxes and certain non-operating fixed assets.
The Company evaluates segment performance based on information generated
from its statutory accounting records which have been adjusted for US GAAP in
the following presentation:
2001 2000 1999
----------- ----------- -----------
OPERATING REVENUE
Water................................... R$ 561,600 R$ 486,935 R$ 433,779
Wastewater.............................. 192,724 167,633 139,995
----------- ----------- -----------
Total net operating revenue allocated to
segments................................ 754,324 654,568 573,774
=========== =========== ===========
RECONCILING ITEMS
US GAAP adjustments
Water................................... (1,874) (3,224) (4,599)
Wastewater.............................. (2,600) (3,731) (8,073)
Total water............................... 559,726 483,711 429,180
Total wastewater.......................... 190,124 163,902 131,922
----------- ----------- -----------
Total net operating revenue............... 749,850 647,613 561,102
DEPRECIATION EXPENSE
Water................................... R$ 37,544 R$ 35,058 R$ 32,604
Wastewater.............................. 18,255 15,843 13,228
----------- ----------- -----------
Total depreciation expense allocated to
segments................................ 55,799 50,901 45,832
F-26
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
2001 2000 1999
----------- ----------- -----------
Reconciling items
Depreciation allocated to administrative
expenses............................. 14,756 13,230 11,318
US GAAP adjustments
Water................................ (2,501) (4,145) (4,161)
Wastewater........................... 1,964 2,589 1,882
Administrative....................... 426 799 462
----------- ----------- -----------
Total depreciation expense................ 70,444 63,374 55,333
SEGMENT OPERATION PROFIT
Water................................... R$ 223,166 R$ 181,059 R$ 141,850
Wastewater.............................. 93,376 77,666 63,951
----------- ----------- -----------
Total segment operating profit............ 316,542 258,725 205,801
Reconciling items
US GAAP Adjustments
Difference in depreciation expense
Water................................... 2,501 4,145 4,161
Wastewater.............................. (1,964) (2,589) (1,882)
Other Adjustments
Water................................... (12,102) (22,399) (42,241)
Wastewater.............................. (16,929) (9,327) (16,045)
----------- ----------- -----------
Total water............................... 213,565 162,805 103,770
Total wastewater.......................... 74,483 65,750 46,024
----------- ----------- -----------
Total operating income.................... 288,048 228,555 149,794
Interest expense........................ (51,445) (57,496) (67,430)
Interest income......................... (14,120) (6,417) (28,824)
Foreign exchange losses, net............ 6,818 7,383 7,709
Other expense........................... (2,862) (1,870) (2,592)
----------- ----------- -----------
Income before income tax and social
contribution taxes...................... R$ 226,439 R$ 170,155 R$ 58,657
=========== =========== ===========
SEGMENT ASSETS
Water................................... R$1,211,272 R$1,122,899 R$1,049,541
Wastewater.............................. 1,197,182 1,038,906 948,207
Administrative.......................... 139,366 151,883 131,448
----------- ----------- -----------
Total segment assets...................... 2,547,820 2,313,688 2,129,196
Reconciling items -- corporate assets
Cash and cash equivalents............... 25,572 24,624 16,816
Trade accounts receivable............... 166,217 148,226 133,024
Other corporate assets.................. 153,081 71,377 57,135
----------- ----------- -----------
Total assets.............................. R$2,892,690 R$2,557,915 R$2,336,171
=========== =========== ===========
F-27
COMPANHIA DE SANEAMENTO DO PARANA -- SANEPAR
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS OF REAIS, UNLESS OTHERWISE INDICATED)
2001 2000 1999
----------- ----------- -----------
CAPITAL EXPENDITURES
Water................................... R$ 90,195 R$ 97,770 R$ 67,287
Wastewater.............................. 129,700 74,346 92,701
----------- ----------- -----------
Total segment capital expenditures........ 219,895 172,116 159,988
Reconciling items
Other................................... 31,736 38,996 24,309
----------- ----------- -----------
Total capital expenditures.............. R$ 251,631 R$ 211,112 R$ 184,297
=========== =========== ===========
18. SUBSEQUENT EVENT
The Company is proposing an initial public offering (IPO) for the issuance
in the Brazilian and international capital markets of new preferred shares and
American Depositary Shares (ADSs) representing preferred shares.
On March 22, 2002, a share dividend was declared and approved for the
issuance of one-quarter preferred share for every common and preferred share
outstanding. Basic and fully diluted earnings per share reflect the share
dividend for all periods presented in the accompanying financial statements.
F-28
[SANEPAR LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Neither the estatuto social (by-laws) of Companhia de Saneamento do
Parana -- SANEPAR (the "Registrant"), contained in Exhibit 3.1 hereto, nor the
Acordo de Acionistas (Shareholders Agreement) between the state of Parana and
Domino Holding S.A., contained in Exhibit 10.4 hereto, provide for
indemnification of the Registrant's officers or directors.
Brazilian law does not permit a company to indemnify a director or an
officer of the company or any person employed by the company as auditor against
any liability which by virtue of any rule of law would otherwise attach to him
in respect of negligence, default, breach of duty or breach of trust in relation
to the company, except liability incurred by such director, officer or auditor
in defending any legal proceedings (whether civil or criminal) in which judgment
is given in his favor or in which he is acquitted or in certain instances where,
although he is liable, the court finds that such director, officer or auditor
acted honestly and reasonably and that having regard to all the circumstances he
ought fairly to be excused and relief is granted by the court.
Reference is also made to Section 7 of the Underwriting Agreement between
the Registrant and contained in Exhibit 1.1 hereto, indemnifying the officers
and directors of the Registrant against certain liabilities.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has made only two offerings of
securities, which are described in the following table:
SECURITY DATE OF FACE DISCOUNTS AND NET
SOLD SALE AMOUNT COMMISSIONS PROCEEDS
--------------------- --------------- --------------- ------------- --------------
Preferred Shares October 8, 1999 R$6,583,323.60 R$0.00 R$6,583,323.60
Commercial paper July 3, 2001 R$74,000,000.00 R$11,791,900 R$62,208,100
The preferred shares were offered on a private-placement basis to certain
municipalities in the state of Parana.
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following is a list of exhibits to this registration
statement:
EXHIBIT NO.
-----------
1.1 Underwriting Agreement(*)
3.1 Estatuto social (By-laws) of the Registrant(*)
4.1 Deposit Agreement
5.1 Opinion of Milbank, Tweed, Hadley & McCloy LLP as to the
legality of the securities being registered hereby(*)
5.2 Opinion of Pinheiro Neto - Avogados as to certain matters
under Brazilian law(*)
8.1 Opinion of Milbank, Tweed, Hadley & McCloy LLP as to certain
U.S. federal income tax matters(*)
8.2 Opinion of Pinheiro Neto - Advogados as to certain Brazilian
tax matters(*)
10.1 Form of Concession Contract(**)
10.2 Concession Contract with the Municipality of Curitiba(**)
10.3 Capital Contribution Agreement between Sanepar and the state
of Parana(**)
10.4 Shareholders agreement between the state of Parana and
Domino Holdings S.A.(**)
10.5 Loan Agreement relating to the Paranasan Financing between
the state of Parana and Japan Bank of International
Cooperation(**)
Part II-1
EXHIBIT NO.
-----------
10.6 "Mirror" Loan Agreement with the state of Parana Relating to
the Paranasan Financing(**)
10.7 Agreement re Capital Advances between Sanepar and the state
of Parana(*)
23.1 Consents of Milbank, Tweed, Hadley & McCloy LLP (included in
Exhibit 5.1 and 8.1)(*)
23.2 Consents of Pinheiro Neto - Avogados (included in Exhibit
5.2 and 8.2)(*)
23.3 Consent of Ernst & Young Auditores Independentes S.C.
24.1 Powers of Attorney(**)
---------------
(*) To be filed by amendment.
(**) Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES. Not applicable.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 9. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and (2) for the
purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Part II-2
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, Companhia de
Saneamento do Parana-SANEPAR certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form F-1 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the municipality of Curitiba, state of Parana,
Brazil, on April 16, 2002.
COMPANHIA DE SANEAMENTO DO
PARANA -- SANEPAR
By
------------------------------------
Name: Carlos Afonso Teixeira de
Freitas
Title: Chief Executive Officer and
Board Member
By
------------------------------------
Name: Ricardo Del Guerra Perpetuo
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board April 16, 2002
------------------------------------------------
Ingo Henrique Hubert
Chief Executive Officer and Board April 16, 2002
------------------------------------------------ Member
Carlos Afonso Teixeira de Freitas
Chief Financial Officer April 16, 2002
------------------------------------------------ (Controller)
Ricardo Del Guerra Perpetuo
Chief Operating Officer April 16, 2002
------------------------------------------------
Jean Marie d'Aspe
Vice-Chairman of the Board April 16, 2002
------------------------------------------------
Jose Carlos Irago Garcia
Part II-3
SIGNATURE TITLE DATE
--------- ----- ----
Board Member April 16, 2002
------------------------------------------------
Miguel Salomao
Board Member April 16, 2002
------------------------------------------------
Jose Antonio Andreguetto
Board Member April 16, 2002
------------------------------------------------
Armando Martinho Bardou Raggio
Board Member April 16, 2002
------------------------------------------------
Rodrigo Bhering Andrade
Board Member April 16, 2002
------------------------------------------------
Hamilton Aparecido Gimenes
Board Member April 16, 2002
------------------------------------------------
Ricardo Coutinho de Senna
Puglisi & Associates
By: Authorized Representative in the April 16, 2002
----------------------------------------- United States
Donald J. Puglisi
Part II-4
[FOR CONFORMED SIGNATURE REQUIREMENTS, THE FOLLOWING TABLE IS ALSO PROVIDED]
COMPANHIA DE SANEAMENTO DO
PARANA -- SANEPAR
By /s/ CARLOS AFONSO TEIXEIRA DE
FREITAS
------------------------------------
Name: Carlos Afonso Teixeira de
Freitas
Title: Chief Executive Officer and
Board Member
By /s/ RICARDO DEL GUERRA
PERPETUO
------------------------------------
Name: Ricardo Del Guerra Perpetuo
Title: Chief Financial Officer
SIGNATURE TITLE DATE
--------- ----- ----
/s/ INGO HENRIQUE HUBERT Chairman of the Board April 16, 2002
-------------------------------------------------
Ingo Henrique Hubert
/s/ CARLOS AFONSO TEIXEIRA DE FREITAS Chief Executive Officer and April 16, 2002
------------------------------------------------- Board Member
Carlos Afonso Teixeira de Freitas
/s/ RICARDO DEL GUERRA PERPETUO Chief Financial Officer April 16, 2002
------------------------------------------------- (Controller)
Ricardo Del Guerra Perpetuo
Attorney-in-fact
/s/ JEAN MARIE D'ASPE Chief Operating Officer April 16, 2002
-------------------------------------------------
Jean Marie d'Aspe
/s/ JOSE CARLOS IRAGO GARCIA Vice-Chairman of the Board April 16, 2002
-------------------------------------------------
Jose Carlos Irago Garcia
/s/ MIGUEL SALOMAO Board Member April 16, 2002
-------------------------------------------------
Miguel Salomao
/s/ JOSE ANTONIO ANDREGUETTO Board Member April 16, 2002
-------------------------------------------------
Jose Antonio Andreguetto
/s/ ARMANDO MARTINHO BARDOU RAGGIO Board Member April 16, 2002
-------------------------------------------------
Armando Martinho Bardou Raggio
/s/ RODRIGO BHERING ANDRADE Board Member April 16, 2002
-------------------------------------------------
Rodrigo Bhering Andrade
/s/ HAMILTON APARECIDO GIMENES Board Member April 16, 2002
-------------------------------------------------
Hamilton Aparecido Gimenes
Part II-5
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICARDO COUTINHO DE SENNA Board Member April 16, 2002
-------------------------------------------------
Ricardo Coutinho de Senna
Puglisi & Associates
By: /s/ DONALD J. PUGLISI Authorized Representative April 16, 2002
----------------------------------------- in the United States
Donald J. Puglisi
Part II-6