UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Fiscal Year Ended December 31,
2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-11005
ARACRUZ CELULOSE S.A.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARACRUZ CELLULOSE
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
FEDERATIVE REPUBLIC OF BRAZIL
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
RUA LAURO MULLER, 116, 40TH FLOOR
22299-900 RIO DE JANEIRO, RJ, BRAZIL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT.
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
American Depositary Shares
(as evidenced by American New York Stock Exchange
Depositary Receipts), each
representing ten shares of
Class B Stock
------------------------------
-------------------
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
None
-------------------
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
-------------------
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
455,390,699 SHARES OF COMMON STOCK
40,326,290 SHARES OF CLASS A STOCK
536,837,131 SHARES OF CLASS B STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
Please send copies of notices and communications from the Securities and
Exchange Commission to:
Ross Kaufman
Greenberg, Traurig LLP
Met Life Building
200 Park Avenue New York, NY 10166
TABLE OF CONTENTS
PAGE
PART I
Item 1. Identity of Directors, Senior Management and Advisers.................................................3
Item 2. Offer Statistics and Expected Timetable...............................................................3
Item 3. Key Information.......................................................................................3
Item 4. Information on ARACRUZ...............................................................................14
Item 5. Operating and Financial Review and Prospects.........................................................34
Item 6. Directors, Senior Management and Employees...........................................................44
Item 7. Major Shareholders and Related Party Transactions....................................................49
Item 8. Financial Information................................................................................52
Item 9. The Offer and Listing ...............................................................................57
Item 10. Additional Information..............................................................................60
Item 11. Quantitative and Qualitative Disclosures About Market Risk..........................................70
Item 12. Description of Securities Other than Equity Securities..............................................71
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.....................................................71
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds................................................................71
Item 15. Controls and Procedures.............................................................................71
Item 16. RESERVED
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEE AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
Item 17. Financial Statements.................................................................................73
Item 18. Financial Statements.................................................................................73
Item 19. Exhibits.............................................................................................74
i
INTRODUCTION
Unless otherwise specified, all references in this annual report to:
o "U.S. dollars," "$" or "US$" are to United States dollars;
o "reais," "real" or "R$" are to Brazilian reais, the official currency of
Brazil;
o "Brazilian government" are to the federal government of the Federative
Republic of Brazil;
o "consolidated financial statements" are to the Consolidated Financial
Statements of Aracruz Celulose S.A. at December 31, 2002 and 2003 and
the corresponding Report of Independent Accountants;
o the "Company," "Aracruz," "we," "us" and "our" are to Aracruz Celulose
S.A. and its consolidated subsidiaries (unless the context otherwise
requires);
o "our preferred shares" and "our common shares" are to our authorized and
outstanding preferred stock and common stock, respectively;
o "Class A Stock" and "Class B Stock" are to our non-voting preferred
stock class A (acoes preferenciais classe A) and non-voting preferred
stock class B (acoes preferenciais classe B), respectively, which
together are referred to as the Preferred Shares; and
o "tons" are to metric tons of 1,000 kilograms each.
As used in this annual report, one hectare equals approximately 2.471
acres, one kilogram equals approximately 2.2 pounds and one kilometer equals
approximately 0.621 miles.
Unless otherwise indicated,
o all references in this annual report to percentages, tons and U.S.
dollar or real amounts of pulp are to "market pulp"; and
o amounts in reais stated at a particular date and followed by U.S. dollar
equivalents have been converted using the reais to U.S. dollars
commercial selling rate in effect on such date.
FORWARD-LOOKING STATEMENTS
This annual report contains statements which constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Certain such forward-looking statements can be identified by
the use of forward-looking terminology such as "believe," "expect," may," "are
expected to," "will," "will allow," "will continue," "will likely result,"
"should," "would be," "seek," "approximately," "intend," "plan," "project,"
"estimate" or "anticipate," or similar expressions or the negative thereof or
other variations thereof of comparable terminology, or by discussions of
strategy, plans or intentions. In addition, all information included herein with
respect to future operations, financial condition, financial performance or
other financial or statistical matters constitute forward-looking statements.
Those forward-looking statements are necessarily dependent on assumptions, data
or methods that may be incorrect or imprecise and that may not be realized. Such
statements appear in a number of places in this annual report, including,
without limitation, the information set forth under the headings "Item 3D. Risk
Factors," "Item 4B. Business Overview" and "Item 5. Operating and Financial
Review and Prospects," and include statements regarding our intent, belief or
current expectations or those of our directors or our executive officers with
respect to:
o general economic, political and business conditions, both in
Brazil and in our principal export markets,
1
o the declaration or payment of dividends,
o our direction and future operation,
o the implementation of our principal operating strategies, including our
potential participation in acquisition or joint venture transactions or
other investment opportunities,
o the implementation of our financing strategy and capital expenditure
plans,
o the development of solid wood products, or
o the factors or trends affecting the pulp and paper market (including its
cyclical nature and our financial condition or results of operations).
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements, as a result of various factors. We do not undertake, and
specifically disclaim, any obligation to update any forward-looking statements,
which speak only as of the date hereof.
We make statements in this annual report about our competitive position and
market share in, and the market size of, the pulp industry. We have made these
statements on the basis of statistics and other information from third-party
sources that we believe are reliable. We derive this third-party information
principally from reports published by the International Pulp Statistical
Committee, which includes the American Forest Paper Association, the Canadian
Pulp & Paper Association, the Finnish Forest Industry Federation and the
Brazilian Pulp and Paper Association, or Bracelpa, and reports published by
Hawkins Wright Ltd., or Hawkins Wright. Although we have no reason to believe
that any of this information or these reports are inaccurate in any material
respect, we have not independently verified the competitive position, market
share, market size or market growth data provided by third parties or by
industry or general publications.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States, or U.S. GAAP.
Because we exported around 98% of our production in 2003 and operate in an
industry that uses the U.S. dollar as its currency of reference, our management
believes that the U.S. dollar is the most appropriate currency in which to
present our financial statements. Accordingly, we decided to present our primary
U.S. GAAP financial statements in U.S. dollars beginning in 1994. For this
purpose, amounts in Brazilian currency for all periods presented have been
remeasured into U.S. dollars in accordance with the methodology set forth in
Statement of Financial Accounting Standards No. 52, or SFAS 52.
During 1997, the 36-month cumulative rate of inflation in Brazil fell below
the 100% threshold, and our management determined the Brazilian economy to have
ceased being a highly inflationary economy as of the fourth quarter of 1997.
Accordingly, our management reevaluated our economic profile and our operations
and determined that the U.S. dollar should remain as our functional currency, in
accordance with the criteria established by SFAS 52. Our transition from a
highly inflationary environment to a non-highly inflationary accounting
environment as of and from January 1, 1998, had no financial reporting effect on
our results of operations and financial position, because our reporting currency
(which has been, since 1994, the U.S. dollar) was also our functional currency
under highly inflationary conditions according to SFAS 52.
Pursuant to SFAS 52 as it applies to us, inventories, property, plant and
equipment, accumulated depreciation and stockholders' equity are remeasured at
historical rates of exchange, and other assets and liabilities denominated in
reais are remeasured at period-end rates. Export sales invoiced in currencies
other than the U.S. dollar are remeasured at the applicable exchange rate on the
date of sale. Cost of sales, depreciation and other expenses relating to assets
remeasured at historical exchange rates are calculated based on the U.S. dollar
values of such assets, and other statement of operations accounts are remeasured
at the rate prevailing on the date of the charge or credit to income.
In our 1999, 2000, 2001, 2002 and 2003 financial statements, gains or
losses resulting from the remeasurement of the financial statements and from
foreign currency transactions have been reported in the consolidated statement
of operations as single line items. The financial information presented below
for the period ended December 31, 1998 has been reclassified to reflect such
remeasurement. Previously, such gains or losses were allocated to the statements
of operations line items to which they relate. These allocations have no effect
on net income or loss.
We publish our financial statements in Brazil in accordance with accounting
practices adopted in Brazil, or Brazilian GAAP, which differs in certain
significant respects from U.S. GAAP. The principal differences between Brazilian
GAAP and U.S. GAAP, as applied to us, are related to disclosure requirements. In
addition, for all financial statements prepared for any period ended after
January 1, 1996, Law No. 9,249/95 abolished the requirement that companies apply
monetary correction to their financial statements, which was previously required
by Law No. 6,404 of December 15, 1976, as amended, or the Brazilian corporate
law. Accordingly, our Brazilian GAAP financial statements at and for the years
ended 1999, 2000, 2001, 2002and 2003 are not adjusted to account for the effects
of inflation. Our taxes and dividends are determined on the basis of Brazilian
GAAP financial statements.
3
During the first quarter of 2001, in an effort to conform our reporting
practices to those commonly used in the industry, we changed the classification
of freight costs in the statement of income. As a result of this change, ocean
freight and insurance charges, which had previously been classified as a
reduction to export sales of eucalyptus pulp, together with inland freight
charges, previously classified as selling expenses, are now classified as a
component of cost of sales. Additionally, certain administrative expenses were
identified as indirectly related to the production process and, beginning
January 1, 2001, classified as a component of cost of sales. Historical
information herein with respect to 1999 and 2000 was reclassified accordingly.
Therefore, some information may differ from the condensed financial statements
published elsewhere.
The following table presents our selected financial data as of the dates
and for each of the periods indicated. Our U.S. GAAP financial statements as of
December 31, 2001, 2002 and 2003 appear elsewhere herein, together with the
report of PricewaterhouseCoopers Auditores Independentes, Rio de Janeiro,
Brazil, independent accountants. The selected financial information at December
31, 1999 and 2000 has been derived from our U.S. GAAP financial statements, not
included in this annual report. The selected financial data should be read in
conjunction with "Item 5. Operating and Financial Review and Prospects."
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- ----------
(thousands of U.S. dollars, except number of shares and per share amounts)
STATEMENT OF OPERATIONS DATA
OPERATING REVENUES
Sales of eucalyptus pulp
Domestic $33,796 $43,601 $23,579 $17,126 $42,401
Export 596,242 800,634 583,365 700,622 1,056,498
-------- -------- -------- -------- ----------
Total sales $630,038 $844,235 $606,944 $717,748 $1,098,899
Sales taxes and other deductions (43,459) (63,240) (32,589) (48,765) (95,829)
-------- -------- -------- -------- ----------
Net operating revenues $586,579 $780,995 $574,355 $668,983 $1,003,070
-------- -------- -------- -------- ----------
OPERATING COSTS AND EXPENSES
Cost of sales $375,513 $412,313 $420,606 $468,875 $592,555
Selling 25,311 21,492 23,253 28,242 38,617
Administrative 18,354 22,454 22,012 22,302 22,762
Provision for loss on ICMS credit 10,754 45,093 23,178
(Gain)/Loss and provision for 26,153 4,826 9,555 1,534 4,401
loss sale of property, plant
and equipment and spareparts
inventories
Other, net 6,907 7,152 5,252 7,434 14,383
-------- -------- -------- -------- ----------
Total operating costs and expenses $452,238 $468,237 $491,432 $573,480 $695,896
-------- -------- -------- -------- ----------
OPERATING INCOME $134,341 $312,758 $82,923 $95,503 $307,174
-------- -------- -------- -------- ----------
NON-OPERATING (INCOME) EXPENSES
Equity in results of affiliated
company - $(1,313) $(1,195) $(6,076) $ 6,844
Financial income $(100,692) (64,849) (54,749) (61,611) (43,037)
Financing expense 120,336 101,461 70,215 82,014 108,209
Loss (gain) on currency
remeasurement, net 7,454 (8,812) 18,029 (14,888) (41,955)
Other, net (209) (131) (128) (276) (92)
-------- -------- -------- -------- ----------
Total other income $26,889 $28,982 $32,086 $ (837) $ 29,969
-------- -------- -------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES $107,452 $283,776 $50,794 $96,340 $277,205
-------- -------- -------- -------- ----------
INCOME TAX EXPENSE (BENEFIT)
Current $ 8,980 $ 40,461 $35,722 $(23,988) $106,549
Deferred 7,699 41,604 (2,992) 8,415 22,567
Total $16,679 $ 82,065 $32,730 $(15,573) $129,116
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX - - - -
-------- -------- -------- -------- ----------
4
NET INCOME $ 90,773 $201,711 $18,107 $111,913 $148,089
======== ======== ======== ======== ===========
BASIC AND DILUTED EARNINGS PER
SHARE(1)
Class A Stock $ 0.09 $ 0.20 $ 0.05 $ 0.11 $ 0.15
Class B Stock 0.09 0.20 0.02 0.11 0.15
Common Stock 0.08 0.18 0.01 0.10 0.14
DIVIDENDS PER SHARE
Class A Stock $ 0.06(2) $ 0.06(3) $ 0.06(4) $ 0.08(5) $0.11(6)
Class B Stock 0.02(2) 0.06(3) 0.06(4) 0.08(5) 0.11(6)
Common Stock 0.01(2) 0.05(3) 0.06(4) 0.07(5) 0.10(6)
WEIGHTED-AVERAGE NUMBER OF SHARES
OUTSTANDING (THOUSANDS OF SHARES)
Class A Stock 40,979 40,903 40,651 40,395 39,819
Class B Stock 553,279 552,889 536,512 536,768 535,969
Common Stock 454,908 454,908 454,908 454,908 454,908
-------- -------- -------- -------- ----------
Total 1,049,166 1,048,700 1,032,071 1,032,071 1,030,696
========= ========= ========= ========= =========
_______________
(1) Holders of Class B Stock have no dividend preference. Holders of Class
A Stock are entitled to an annual preferential dividend.
(2) Including the dividend declared on March 25, 1999 and paid on April 22,
1999.
(3) Including the dividend declared on April 05, 2000 and paid on April 30,
2000.
(4) Including the dividend declared on March 30, 2001 and paid on April 12,
2001.
(5) Including the dividend declared on April 30, 2002 and paid on May 13, 2002.
(6) Including the dividend declared on April 29, 2003 and paid on May 15, 2003.
(7)Including the dividend declared on April 29, 2004 and paid on May 14, 2004.
AT DECEMBER 31,
---------------------------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- ----------
(thousands of U.S. dollars)
BALANCE SHEET DATA
Cash and cash equivalents $312,590 $ 18,091 $ 20,125 $ 25,474 $ 66,284
Other current assets 190,889 261,815 215,199 250,487 390,459
Debt securities available-for-sale 189,480 323,032 405,493 248,455 285,991
Property, plant and equipment, net 1,702,747 1,664,322 1,913,191 2,000,071 2,270,369
Investment in affiliated company - 79,698 80,893 87,107 382,318
Other assets 205,297 107,500 143,296 87,220 59,012
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $2,601,003 $2,454,458 $2,778,197 $2,698,814 $3,454,433
========== ========== ========== ========== ===========
Short-term debt 473,652 272,042 325,855 182,680 392,088
Other current liabilities 40,174 55,035 99,425 55,824 121,591
Long-term debt 392,354 278,873 537,183 611,091 979,435
Other long-term liabilities 41,511 75,387 78,004 88,656 160,358
Stockholders' equity 1,653,312 1,773,121 1,737,730 1,760,563 1,800,961
---------- ---------- --------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,601,003 $2,454,458 $2,778,197 $2,698,814 3,454,433
========== ========== ========== ========== ===========
EXCHANGE RATES
The purchase and sale of foreign currency in Brazil is subject to
governmental control. There are two foreign exchange markets in Brazil that are
subject to regulation by the Central Bank of Brazil, or the Central Bank, both
of which operate at free floating rates:
o the free rate foreign exchange market, also known as the commercial
market; and
o the "floating" rate foreign exchange market.
5
In 1999, the Central Bank unified the operational limits applicable to both
markets. However, each market continues to be governed by specific regulations.
Most trade and financial foreign exchange transactions are carried out on the
commercial market. These transactions include the purchase or sale of Class B
Stock or the payment of the dividends or interest with respect to Class B Stock.
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 March 1995 through January 1999, the Central Bank allowed the gradual
devaluation of the real against the U.S. dollar, pursuant to an exchange rate
policy that established a band within which the real/U.S. dollar exchange rate
could fluctuate.
Responding to pressure on the real, on January 13, 1999, the Central Bank
widened the foreign exchange rate band. Because the pressure on the real did not
ease, on January 15, 1999, the Central Bank allowed the real to float freely. On
May 28, 2004, the commercial selling rate was R$3.0961 per US$1.00. We cannot
assure you that the real will not appreciate or depreciate substantially in the
near future.
The following table shows the commercial selling rate for U.S. dollars for
the periods and dates indicated.
EXCHANGE RATE OF R$ PER US$
----------------------------------------------------------------
YEAR ENDED DECEMBER 31, LOW HIGH AVERAGE(1) YEAR-END
1999............................................. 1.2078 2.1647 1.8158 1.7890
2000............................................. 1.7234 1.9847 1.8295 1.9554
2001............................................. 1.9357 2.8007 2.3420 2.3204
2002............................................. 2.2709 3.9552 2.9309 3.5333
2003 2.8219 3.6623 3.0715 2.8892
____________________________
Source: Central Bank, PTAX. PTAX is the average of the exchange rates negotiated in the commercial rate market on a given day.
(1) Represents the average of the exchange rates (PTAX) on the last day of each month during the relevant period.
EXCHANGE RATE OF R$ PER US$
LOW HIGH
MONTH ENDED
December 31, 2003............................................................ 2.8883 2.9434
January 31, 2004............................................................. 2.8022 2.9409
February 28, 2004............................................................ 2.9042 2.9878
March 31, 2004............................................................... 2.8752 2.9410
April 30, 2004............................................................... 2.8743 2.9522
May 31, 2004................................................................. 2.8743 3.2051
Source: Central Bank, PTAX. PTAX is the average of the exchange rates negotiated in the commercial rate market on a given day.
We pay cash dividends and make other cash distributions with respect to the
Class B Stock in reais. Accordingly, exchange rate fluctuations may affect the
U.S. dollar amounts received by holders of ADSs on conversion by the depositary
of our ADSs, or the Depositary, of such distributions into U.S. dollars for
payment to holders of ADSs. Fluctuations in the exchange rate between the real
and the U.S. dollar may also affect the U.S. dollar equivalent of the real price
of the Class B Stock on the Brazilian stock exchange. For additional
information, see "Item 10D. Exchange Controls." For information on dividends,
see "Item 8A. Consolidated Statements and Other Financial Information--Dividend
Policy and Dividends."
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
6
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
RISK FACTORS RELATING TO BRAZIL
BRAZILIAN POLITICAL AND ECONOMIC CONDITIONS HAVE A DIRECT IMPACT ON OUR
BUSINESS AND THE MARKET PRICE OF OUR PREFERRED SHARES AND ADSS.
The Brazilian economy has been characterized by volatile economic cycles.
In addition, the Brazilian government frequently, and occasionally drastically,
intervenes in the Brazilian economy. The Brazilian government has often changed
monetary, taxation, credit, tariff and other policies to influence the course of
Brazil's economy. For example, the Brazilian government has the authority, when
a serious imbalance in Brazil's balance of payments occurs, to impose
restrictions on the remittance to foreign investors of the proceeds of their
investments in Brazil, and on the conversion of Brazilian currency into foreign
currencies. The Company's business, financial condition and results of
operations may be adversely affected by changes in policy including tariffs,
exchange controls and other matters, as well as factors such as:
o currency fluctuations,
o inflation,
o price instability,
o interest rates,
o tax policy,
o energy shortages in Brazil, and
o other political, diplomatic, social and economic developments in or
affecting Brazil.
Rapid changes in Brazilian political and economic conditions that have
already occurred and that might continue will require the Company's continued
emphasis on assessing the risks associated with its activities and adjusting its
business and operating strategy. Future developments in Brazilian government
policies or in the Brazilian economy, over which the Company has no control, may
reduce demand for the Company's products in Brazil, and adversely affect the
Company's business, financial condition and results of operations.
At the end of 2002, Brazil elected a new president from the Workers' Party,
Luis Inacio Lula da Silva, known as Lula. In the period leading up to and
following his election, there was substantial uncertainty relating to the
policies that the new government would pursue, including the potential
implementation of macroeconomic policies that differed significantly from those
of the prior administration. This uncertainty resulted in a loss of confidence
in the Brazilian capital markets and the continued devaluation of the real.
Although the new government has not yet departed in any material way from
previous policies, it is premature to determine what policies might be
implemented, whether these policies will be effective, how these policies might
impact us and how investors and the capital markets will react to them. Any
substantial negative reaction to the policies of the Brazilian government could
adversely affect our business, operations and the market price of our preferred
shares and ADSs.
7
EXCHANGE RATE INSTABILITY MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND THE MARKET PRICE OF OUR PREFERRED SHARES AND ADSS.
Because a portion of our revenues and a significant portion of our assets
are denominated in reais and we have U.S. dollar-denominated debt and other
liabilities, we may be adversely affected by any future devaluations of the real
against the U.S. dollar. The Brazilian currency has been devalued periodically
during the last four decades. See "--Selected Financial Data--Exchange Rates."
Our cash operating expenses are substantially denominated in reais and will
generally decrease, as expressed in U.S. dollars, as a result of any devaluation
of the real. If the rate of Brazilian inflation increases more rapidly than the
rate of appreciation of the U.S. dollar against the real, then, as expressed in
U.S. dollars, our operating expenses may increase and, assuming constant U.S.
dollar sales prices, our profit margins may decrease. As expressed in reais, any
significant devaluation of the real may produce exchange losses on unhedged debt
denominated in foreign currencies.
The real devalued against the U.S. dollar by 9.3% in 2000. During 2001, the
real experienced a period of significant devaluation, due in part to the
economic and political uncertainties in Argentina, the global economic slowdown
and the energy crisis in Brazil. In 2001, the depreciation of the real relative
to the U.S. dollar totaled 18.7%. In 2002, the depreciation of the real relative
to the U.S. dollar totaled 52%, due in part to the continued economic and
political uncertainties in emerging markets and the global economic slowdown. In
2003, the appreciation of the Real relative to the U.S. dollar was 18.2%. From
January 1, 2004 through March 31, 2004, the Real depreciated 0.7%.
The Central Bank has intervened occasionally to control unstable movements
in the foreign exchange rate. At the present time, it is not possible to predict
whether the Central Bank will continue to let the real float freely.
Accordingly, it is not possible to predict what impact the Brazilian
government's exchange rate policies may have on us. We cannot assure you that
the Brazilian government will not in the future impose a band within which the
real/U.S. dollar exchange rate could fluctuate or set a fixed exchange rate, and
what impact such an event might have on our operations.
Devaluations of the real relative to the U.S. dollar also create additional
inflationary pressures in Brazil that may negatively affect us. They generally
curtail access to foreign financial markets and may require government
intervention, including recessionary governmental policies. See "--Inflation and
certain governmental measures to combat inflation may contribute significantly
to economic uncertainty in Brazil and to heightened volatility in the Brazilian
securities markets." Devaluations also reduce the U.S. dollar value of
distributions and dividends on the ADSs and the market price of our preferred
shares and ADSs.
In addition, political and economic uncertainty resulting from the new
president elected in October 2002 may have an adverse effect on the Brazilian
financial and capital markets, including the foreign exchange market. See
"--Brazilian political and economic conditions have a direct impact on our
business and the market price of our preferred shares and ADSs."
INFLATION AND CERTAIN GOVERNMENTAL MEASURES TO COMBAT INFLATION MAY
CONTRIBUTE SIGNIFICANTLY TO ECONOMIC UNCERTAINTY IN BRAZIL AND TO HEIGHTENED
VOLATILITY IN THE BRAZILIAN SECURITIES MARKETS.
Brazil has historically experienced extremely high rates of inflation.
Inflation itself, as well as certain governmental measures to combat inflation
and public speculation about possible future measures, has in the past had
significant negative effects on the Brazilian economy. Our cash operating
expenses are substantially denominated in reais and tend to increase with
Brazilian inflation because our suppliers and providers generally increase
prices to reflect the depreciation of the value of the currency. As expressed in
U.S. dollars, however, these increases are typically offset at least in part by
the effect of the appreciation of the U.S. dollar against the real. If the rate
of Brazilian inflation increases more rapidly than the rate of appreciation of
the U.S. dollar, then, as expressed in U.S. dollars, our operating expenses may
increase and, assuming constant U.S. dollar sales prices, our profit margins may
decrease. In addition, high inflation generally leads to higher domestic
interest rates, and, as a result, our costs of real-denominated debt may
increase. See "Item 5. Operating and Financial Review and Prospects--Brazilian
Economic Environment."
8
WE MAY BE IMPACTED BY GOVERNMENTAL ACTIONS AFFECTING THE BRAZILIAN MARKETS
AND ECONOMY.
The Brazilian government has exercised and continues to exercise
substantial influence over many aspects of the private sector. The Brazilian
government owns or controls many companies, including some of the largest in
Brazil. For example, Banco Nacional de Desenvolvimento Economico e Social -
BNDES, which is owned by the Brazilian government, indirectly owned
approximately 12.5% of our common stock as of December 31, 2003 and has, through
a subsidiary, advanced approximately 19% of our total consolidated indebtedness
as of such date. See "Item 7B. Related Party Transactions."
DEVELOPMENTS IN OTHER EMERGING MARKETS MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR PREFERRED SHARES AND ADSS.
The Brazilian securities markets are, to varying degrees, influenced by
economic and market conditions in other emerging market countries, especially
those in Latin America. Although economic conditions are different in each
country, investors' reaction to developments in one country can have an effect
on the securities of issuers in other countries, including Brazil. Developments
or conditions in other emerging market countries have, at times, significantly
affected the availability of credit in the Brazilian economy and resulted in
considerable outflows of funds and declines in the amount of foreign currency
invested in Brazil.
Developments in the international financial markets, in the future, especially
in Latin America, may adversely affect the Company's financial condition and its
ability to raise capital when needed. There can be no assurance that the
Brazilian securities markets will not continue to be affected negatively by
events elsewhere, especially in emerging markets, or that such events will not
adversely affect the value of the Company's preferred shares or ADS.
RISKS RELATING TO OUR PREFERRED SHARES AND ADSS
EXCHANGE CONTROLS AND RESTRICTIONS ON REMITTANCES ABROAD MAY ADVERSELY
AFFECT HOLDERS OF ADSS.
You may be adversely affected by the imposition of restrictions on the
remittance to foreign investors of the proceeds of their investments in Brazil
and the conversion of reais into foreign currencies. The Brazilian government
imposed remittance restrictions for a number of months in 1989 and early 1990.
These restrictions would hinder or prevent the conversion of dividends,
distributions or the proceeds from any sale of our preferred shares into U.S.
dollars and remitting the U.S. dollars abroad. We cannot ensure that the
Brazilian government will not take similar measures in the future. See "Item
10D. Exchange Controls." Holders of the ADSs could be adversely affected by
delays in, or a refusal to grant, any required Brazilian governmental approval
for conversion of real payments and remittances abroad in respect of the shares
of Class B Stock underlying the ADSs. In such case, the Depositary will hold the
reais it cannot convert for the account of the ADS holders who have not been
paid.
EXCHANGING ADSS FOR THE UNDERLYING CLASS B STOCK MAY HAVE UNFAVORABLE
CONSEQUENCES.
The Brazilian custodian for our Class B Stock, or the Custodian, must
obtain an electronic certificate of registration from the Central Bank to remit
U.S. dollars abroad for payments of dividends, any other cash distributions, or
upon the disposition of the shares and sales proceeds related thereto. If you
decide to exchange your ADSs for the underlying Class B Stock, you will be
entitled to continue to rely--for five business days from the date of the
exchange--on the ADS Depositary's electronic certificate of registration.
Thereafter, you may not be able to obtain and remit U.S. dollars abroad upon the
disposition of the Class B Stock, or distributions relating to the Class B
Stock, unless you obtain your own electronic certificate of registration
pursuant to Resolution No. 2,689, of January 26, 2000, of the National Monetary
Council, known as Resolution 2,689, which entitles foreign investors to buy and
sell on the Sao Paulo stock exchange. If you do not obtain a certificate of
registration under Resolution 2,689, you may not be able to obtain and remit
abroad U.S. dollars or other foreign currencies upon the disposition of Class B
Stock or distributions with respect thereto, and you will generally be subject
to less favorable tax treatment on gains with respect to the Class B Stock. If
you attempt to obtain your own electronic certificate of registration, you may
incur expenses or suffer significant delays in the application process.
Obtaining an electronic certificate of registration involves generating
significant documentation, including completing and filing various electronic
forms with the Central Bank and the Comissao de Valores Mobiliarios, or the CVM.
These expenses or delays could adversely impact your ability to remit dividends
or distributions relating to
9
the Class B Stock or the return of your capital outside of Brazil in a
timely manner. If you decide to exchange your Class B Stock back into ADSs once
you have registered your investment in the Class B Stock, you may deposit your
Class B Stock with the Custodian and rely on the Depositary's certificate of
registration, subject to certain conditions. See "Item 10D. Exchange Controls."
We cannot assure you that the Depositary's certificate of registration or any
certificate of foreign capital registration obtained by you may not be affected
by future legislative or other regulatory changes, or that additional Brazilian
restrictions applicable to you, the disposition of the underlying Class B Stock
or the repatriation of the proceeds from disposition could not be imposed in the
future.
THE RELATIVE VOLATILITY AND ILLIQUIDITY OF THE BRAZILIAN SECURITIES MARKETS
MAY ADVERSELY AFFECT HOLDERS OF ADSS.
Investments in securities, such as the Class B Stock or the ADSs, of
issuers from emerging market countries including Brazil involve a higher degree
of risk than investing in securities of issuers from more developed countries.
The Brazilian securities market is substantially smaller, less liquid, more
concentrated and more volatile than major securities markets in the United
States. These features may substantially limit holders' ability to sell the
preferred shares underlying the ADSs at a price and time at which holders wish
to do so. The Sao Paulo Stock Exchange (Bolsa de Valores de Sao Paulo), or
BOVESPA, the main Brazilian stock exchange, had a market capitalization of
approximately US$234 billion as of December 31, 2003, and an average monthly
trading volume of approximately US$271.9 million in 2003. In comparison, the
NYSE had a market capitalization of US$16.8 trillion as of December 31, 2003,
and an average monthly trading volume of approximately US$38.5 billion for 2003.
There is also significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. The ten
largest companies in terms of market capitalization represented approximately
49.8% of the aggregate market capitalization of BOVESPA as of December 31, 2003.
The top ten stocks in terms of trading volume accounted for approximately 53.5%
of all shares traded on BOVESPA.
BECAUSE WE ARE SUBJECT TO SPECIFIC RULES AND REGULATIONS AS A BRAZILIAN
COMPANY, HOLDERS OF OUR ADSS HAVE FEWER AND LESS WELL DEFINED SHAREHOLDERS'
RIGHTS THAN INVESTORS IN U.S. COMPANIES.
Our corporate affairs are governed by our by-laws and the Brazilian
corporate law, which 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 certain other jurisdictions outside Brazil. In addition, your
rights or the rights of holders of the preferred shares under the Brazilian
corporate law to protect your interests relative to actions taken by our board
of directors or the holders of common shares may be fewer and less well defined
than under the laws of other jurisdictions outside Brazil.
Although Brazilian law imposes restrictions on insider trading and price
manipulation, the Brazilian securities markets are not as highly regulated and
supervised as the securities markets in the United States or certain other
jurisdictions. For example, certain provisions of the U.S. Sarbanes-Oxley Act of
2002 that apply to U.S. companies do not apply to us. In addition, rules and
policies against self-dealing and regarding the preservation of shareholder
interests may be less well developed and enforced in Brazil than in the United
States, potentially disadvantaging holders of our preferred shares and ADSs.
When compared to Delaware general corporation law, the Brazilian corporate law
and practice have less detailed and less well established rules and judicial
precedents relating to the review of management decisions under duty of care and
duty of loyalty standards in the context of corporate restructurings,
transactions with related parties and sale-of-business transactions. In
addition, shareholders must hold 5% of the outstanding share capital of a
corporation to have the necessary standing to bring shareholders' derivative
suits. Shareholders ordinarily do not have standing to bring a class action.
Also, in accordance with Brazilian corporate law and our by-laws, holders
of our preferred shares, and therefore of our ADSs, are not entitled to vote at
meetings of our shareholders except in limited circumstances. See "Item 10B.
Memorandum and Articles of Association."
10
YOU MAY NOT BE ABLE TO EXERCISE PREEMPTIVE RIGHTS.
You may not be able to exercise the preemptive rights relating to the Class
B Stock underlying the 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. We are not
obligated to file a registration statement with respect to the shares relating
to these preemptive rights, and we cannot assure investors that we will file any
such registration statement. Unless we file a registration statement or an
exemption from registration applies, investors may receive only the net proceeds
from the sale of their preemptive rights by the Depositary, or if the preemptive
rights cannot be sold, they will be allowed to lapse.
We are incorporated under the laws of Brazil. All of our directors and executive
officers, and the experts named in this annual report, reside outside the U.S.
Substantially all of our assets, and our directors' and officers' assets and
such experts' assets are located outside the U.S. As a result, it may not be
possible for investors to effect service of process within the U.S. upon us or
our directors, executive officers or such experts, or to enforce against them or
us, judgments obtained in U.S. courts based upon the civil liability provisions
of the federal securities laws of the U.S. In addition, we have been advised by
our Brazilian counsel, that there is doubt that the courts of Brazil will
enforce against us, our officers, directors and experts named herein, judgments
obtained in the U.S. based upon the civil liability provisions of the federal
securities laws of the U.S. or will enter judgments in original actions brought
in Brazilian courts based upon the federal securities laws of the U.S.
RISK FACTORS RELATING TO ARACRUZ AND THE PULP INDUSTRY
THE MARKET PRICES FOR OUR PRODUCTS ARE CYCLICAL.
The prices we are able to obtain for our pulp depend on prevailing world
prices for market pulp. Worldwide pulp prices have historically been cyclical,
subject to significant fluctuations over short periods of time, due to a number
of factors, including:
o worldwide demand for pulp products,
o worldwide production capacity,
o the strategies adopted by major pulp producers, and
o the availability of substitutes for our products.
All of these factors are beyond our control. After reaching a peak in the
middle of 1995, market pulp prices continued to fall through the first quarter
of 1999, due primarily to a significant drop in demand, although market prices
began to increase beginning in the second quarter of 1999 and continued to
increase through the second half of 1999 and early 2000. In the second half of
2000, market prices of pulp were flat for the whole period. Weak demand and
excess inventories in the hands of pulp producers caused eucalyptus pulp list
prices to fall at the end of March 2001. Market conditions remained difficult
through 2002, with Europe being the most challenging market. In 2002 the average
list price of BEKP in North America decreased 8% compared to the average list
price in 2001; this was primarily due to the slowdown in the growth of the major
economies which began in 2001 that continued to negatively impact the global
demand for paper throughout 2002. Global product availability was limited due to
pulp production curtailments as a result of inventory adjustments, maintenance
and bad weather conditions in the Northern Hemisphere. At the same time, pulp
demand remained relatively stable in the majority of the markets, except in Asia
and especially in China, where demand was above levels of the previous year.
Consequently, global pulp inventories were driven down to below the historic
level. In 2003, shipments of BEKP increased the most when compared to other
grades. From January to November, deliveries grew 14%, mainly to Asia and
Western Europe. This compares with relatively flat shipments of northern
hardwood and a 9% decline in southern hardwood. Over the course of the fourth
quarter, an increase of approximately 300,000 tons in the aggregate stocks (5.5
million tons at the end of December) put pressure on pulp prices, resulting in a
$10 - $20/ton erosion of list prices in December. In 2003 the
11
average list price for BEKP was US$ 511/t. After slipping in January 2004,
world market pulp prices recovered since February 2004, mainly driven by
stronger demand in Asia and especially in China. At the same time, pulp supply
has been at a normal level for hardwood and tighter for softwood. Consequently,
global pulp producers' inventories remained within the normal range. This
scenario has allowed for prices to increase in all markets. Eucalyptus pulp
prices for April 2004 were adjusted to US$ 565/t in the USA, US$ 550 in Europe
and US$ 530 in Asia. It is possible that market prices for pulp will decline in
the future, or that there will not be sufficient demand for the Company's
products to enable it to operate its production facilities in an economical
manner.
The Company has long term supply contracts with various customers and no
assurance can be given that the prices for pulp or paper will stabilize or not
decline further in the future, or that demand for the Company's products will
not decline in the future. As a result, no assurance can be given that the
Company will be able to operate its production facilities in a profitable manner
in the future. The Company's results of operations would be materially adversely
affected if the price of its product were to decline significantly. See also
"Item 4B. Business Overview--Market Overview."
WE FACE SIGNIFICANT COMPETITION, WHICH MAY ADVERSELY AFFECT OUR MARKET
SHARE.
The pulp industry is highly competitive. In the international pulp markets,
we compete with larger competitors that have greater financial strength, higher
production capacities and access to cheaper sources of wood.
In addition, most markets are served by several suppliers, often from
different countries. Many factors influence our competitive position, including
plant efficiencies and operating rates in relation to our competitors, and the
availability, quality and cost of wood, energy, chemicals and labor. To the
extent that pulp from other hardwoods can be substituted for the more expensive
bleached eucalyptus kraft market pulp, we also compete with producers in the
broader segment of the pulp market. Some of our competitors in this market have
greater financial, marketing and other resources, larger customer bases and
greater breadth of product offerings than we do. If we are unable to remain
competitive with these producers in the future, our market share may be
adversely affected. See "Item 4B. Business Overview--Competition."
WE MAY BE ADVERSELY AFFECTED BY THE IMPOSITION AND ENFORCEMENT OF MORE
STRINGENT ENVIRONMENTAL REGULATIONS THAT WOULD REQUIRE US TO SPEND ADDITIONAL
FUNDS.
The Company is subject to stringent environmental laws and regulations in
Brazil on the national, state and local levels. Changes in environmental laws
and regulations or changes in the policy of enforcement of existing
environmental laws and regulations could adversely affect it. The Company's
operations are supervised by governmental agencies that are responsible for the
implementation of pollution control laws and policies. These agencies could take
action against the Company if it failed to comply with applicable environmental
regulations. These actions could include the imposition of fines and revocation
of licenses and concessions.
Although changes in laws and regulations apply only prospectively under
Brazilian law, it is possible that the relevant legislatures and/or governmental
agencies will impose additional regulations or seek a more stringent
interpretation of existing laws and regulations that would require the Company
to spend additional funds on environmental matters or limit the Company's
ability to operate as it currently does. In addition, such actions by such
governmental bodies could impose additional costs to be borne by the Company
when it renews existing licenses or applies for new ones.
ACTIONS BY STATE LEGISLATURE MAY ADVERSELY AFFECT OUR OPERATIONS.
In September 2001, the legislature of the State of Espirito Santo, where we
own approximately 140.000 hectares of forest and other land, passed a law
temporarily restricting the plantation of eucalyptus forests for purposes of
pulp production within the state. In June 2002, this law was declared to be
unconstitutional by a provisional decision of the Brazilian Federal Supreme
Court, and injunctive relief was granted in response to suits brought by the
National Confederation of Industry and by the National Brazilian Confederation
of Agriculture and Cattle Raising. The Company believes that such provisional
decision will be upheld by the court's definitive decision on the merits.
However, there can be no assurance that such definitive decision will be
favorable to the Company or that similar laws will not be enacted that would
impose a limitation or restriction on plantation of eucalyptus or that would
affect our licenses or permits.
12
On March 13, 2002, the Espirito Santo legislative assembly created an
investigating commission (Comissao Parlamentar de Inquerito) to investigate the
legality of our permits and the acquisition of our properties from the date we
began our operations in Espirito Santo. As the procedures in the investigation
were not concluded within the prescribed time period for such a type of
investigation, the commission was terminated without issuing a final report. The
Company is confident that it has obtained all necessary permits and that all our
property was legally acquired strictly in accordance with all laws and
regulations However, we cannot be certain that a governmental entity will not
initiate similar or other investigations in the future that would cause us to
incur significant expense and divert management's attention.
In May 2003 the Human Rights Commision of the Brazilian House of
Representatives ("Camara dos Deputados") created a Working Group to discuss the
alleged violation of economic, social, cultural and environmental rights in the
eucalyptus plantations in the State of Espirito Santo. Among other issues,
several complaints involving the Company were discussed. Representatives of the
Company participated in a Public Hearing and presented to the Commission
extensive reports, information, evidence, technical studies and governmental and
judicial decisions that demonstrate that the complaints were unjustified. The
Working Group was terminated without issuing a final report. However, the
Company cannot be certain that a governmental entity will not initiate similar
or other investigations in the future that would cause the Company to incur
significant expense and divert management's attention.
IF WE ARE UNABLE TO MANAGE POTENTIAL PROBLEMS AND RISKS RELATED TO
ACQUISITIONS AND ALLIANCES, OUR BUSINESS AND GROWTH PROSPECTS MAY SUFFER. SOME
OF OUR COMPETITORS MAY BE BETTER POSITIONED TO ACQUIRE OTHER PULP AND PAPER
BUSINESSES.
o The Company, as part of its business strategy, recently made a major
acquisition by purchasing Riocell and may acquire other businesses in
Brazil or elsewhere. In addition, the Company has made a significant
joint venture investment in Veracel and may enter into other similar
arrangements or alliances with third parties. Our management is unable
to predict whether or when any prospective acquisitions or alliances
will occur, or the likelihood of a material transaction being
completed on favorable terms and conditions. Our ability to continue
to expand successfully through acquisitions or alliances depends on
many factors, including our ability to identify acquisitions and
negotiate, finance and close transactions. Acquisitions and similar
joint ventures or other arrangements have significant risks:we could
fail to successfully integrate the operations, services and products
of any acquired company;
o we could fail to select the best partners or fail to effectively plan
and manage any alliance strategy;
o the acquisitions could increase our costs;
o our management's attention could be diverted from other business
concerns; and
o we could lose key employees of the acquired company.
Our failure to integrate any new businesses or manage our investment in
Veracel or any new alliances successfully could adversely affect our business
and financial performance. Furthermore, the world pulp industry is undergoing
consolidation, and many companies compete for acquisition and alliance
opportunities in our industry. Some of our competitors have greater financial
and other resources than we do. This may reduce the likelihood that we will be
successful in completing acquisitions and alliances necessary for the expansion
of our business or cause such acquisition or alliances to be possible only on
less favorable terms. In addition, any major acquisition we consider may be
subject to regulatory approval. We may not be successful in obtaining required
regulatory approvals on a timely basis or at all.
WE ARE CONTROLLED BY A FEW SHAREHOLDERS.
Approximately 96.5% of our voting stock is owned by four principal
shareholders, who have the ability to control the election of our board of
directors and our direction and future operations, including decisions regarding
acquisitions and other business opportunities, the declaration of dividends in
excess of the requirements under our by-laws and Brazilian corporate law, and
the issuance of additional shares and other securities. See "Item 7A. Major
Shareholders."
13
VARIOUS OTHER RISKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
RESULTS.
Our operations are subject to various other risks that affect our forests
and manufacturing processes, including fire, port closings, disease and factory
explosions. To date, the Company's experience with such hazards has not had a
material adverse effect on the Company. However, in the future, such hazards
could have a negative effect on the Company's financial results.
ITEM 4. INFORMATION ON ARACRUZ
A. HISTORY AND DEVELOPMENT OF ARACRUZ
We conduct our operations under our legal and commercial name, Aracruz
Celulose S.A. We are a corporation (sociedade anonima), with unlimited duration,
organized under the laws of the Federative Republic of Brazil. As a Brazilian
corporation, we operate under the provisions of the Brazilian corporate law. Our
headquarters and mill are located at Rodovia Aracruz - Barra do Riacho,
kilometer 25, Municipality of Aracruz, State of Espirito Santo, Brazil, and its
telephone number is 55-27-3270-2122. Our principal office is located at Rua
Lauro Muller, 116, 40th floor, 22299-900 Rio de Janeiro, State of Rio de
Janeiro, Brazil, and its telephone number is 55-21-3820-8111. Our agent for
service of process in the United States is CT Corporation, 111 Eighth Avenue,
New York, NY 10011. We maintain an Internet website at www.aracruz.com.br.
Information contained on our website is not part of this annual report.
Aracruz Florestal S.A., or AFSA, our predecessor, was incorporated in 1967,
for an unlimited duration, to plant eucalyptus forests. AFSA became a subsidiary
of Aracruz in 1972 when Aracruz was incorporated, and on July 20, 1993, AFSA was
merged into Aracruz.
We commenced pulp production operations in September 1978 with a nominal
production capacity of approximately 400,000 tons of pulp per year. In early
1991, we completed an expansion plan, known as the 1991 Expansion Project, which
increased the mill's nominal capacity (i.e., the production capacity for which
the mill was designed) to approximately 1,025,000 tons per year. In 1994, we
increased our effective production capacity to 1,070,000 tons through system
upgrades and productivity gains. From October 1995 to December 1998, we
implemented the Modernization Project, which increased the mill's nominal
capacity to 1,240,000 tons per year, as well as our production efficiency.
In 1997, as part of our strategy for diversification into other forest
businesses, we acquired all ownership interests of Gutchess International Inc.
in Tecflor Industrial S.A. (currently known as Aracruz Produtos de Madeira S.A.,
or APM), a joint venture between Gutchess International Inc. and us created in
1997 for the production of solid wood products. See "--Business
Overview--Aracruz Produtos de Madeira."
In June 2000, our board of directors approved the expansion of the nominal
production capacity of our facilities by 700,000 tons per year, known as the
Fiberline C Expansion Project. The Fiberline C Expansion Project involves the
addition of a new pulp line and certain other modifications to existing
equipment at the mill in order to further improve our cost-effectiveness.
Construction began in the second semester of 2000, and the plant began
operations at the end of May 2002, reaching full capacity this year. See
"--Business Overview--Fiberline C Expansion Project." The new production volume
resulting from the Fiberline C Expansion Project required an increase in the
Company's forest base of approximately 72,000 hectares of eucalyptus
plantations. To meet this demand, in June 2000, the Company acquired Terra
Plana, with assets comprised of 19,000 hectares of land appropriate for planting
eucalyptus trees. From July 2000 through December 31, 2001, the Company acquired
approximately 44,000 additional hectares of land in a number of separate
transactions. Additionally, in September 2002, Bahia Sul and the Company signed,
jointly with Companhia Vale do Rio Doce and its wholly owned subsidiary,
Florestas Rio Doce S/A, a contract for the acquisition of equal stakes by Bahia
Sul and the Company of forest assets comprising approximately 40,000 hectares of
lands and eucalyptus-planted forests. The Company also entered into a three-year
wood supply contract for with Veracel to provide a total of up to 3.85 million
cubic meters wood for the Fiberline C Expansion Project until the new
plantations reach harvesting time.
On October 10, 2000, we acquired a 45% stake in Veracel, a joint venture to
grow eucalyptus trees on plantations and to build a pulp mill. On January 31,
2003, the Company acquired an additional 5% stake in Veracel, bringing its total
14
stake to 50%. The remaining 50% interest in Veracel is owned by Stora Enso OYJ
("STORA ENSO"). Veracel, currently in the pre-operational stage, grows
eucalyptus on plantations in the State of Bahia, which has diversified the
sources of the Company's supply of wood for the Mill. This equity investment in
Veracel achieved two objectives: (i) a guaranteed supply of wood for the
Fiberline C Expansion Project during the first three years of the new production
unit's operation and (ii) the opportunity to expand the Company's business in
the future from another operational base in Bahia that can potentially replicate
its accomplishments in the State of Espirito Santo. In May 2003, the Company and
its joint venture partner decided to invest an additional US$940 million in
Veracel to build a 900,000-ton capacity mill (the "VERACEL MILL") for the
production of BEKP in the State of Bahia. Construction of the Veracel Mill was
started at the beginning of the second half of 2003, and completion is scheduled
for 2005. As of March 31, 2004, a total of US$717 million has been committed to
the project. See "--Business Overview--Acquisition of Veracel" and Note 4 to the
consolidated financial statements.
On October 3, 2001, Votorantim Celulose e Papel S.A., or VCP, one of our
competitors, acquired the 28% stake holding of our common stock from Mondi
Brazil Limited. See "Item 7A. Major Shareholders."
On May 30, 2003, the Company acquired all of the capital stock of Riocell
S.A. ("RIOCELL"), a major producer of BEKP, from Klabin S.A. for an adjusted
purchase price of US$567 million. Riocell owned and operated a mill (the
"RIOCELL MILL") with a capacity of approximately 400,000 tons per annum and
owned approximately 40,000 hectares of eucalyptus plantations. See " Business --
Guaiba Unit".
CAPITAL EXPENDITURES
The Company's capital expenditures for 2003, 2002 and 2001 were US$118.7
million, US$260.7 million and US$421.5 million , respectively.
The table below sets forth a breakdown of our most significant capital
expenditures for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
---------- -------- ---------- ---------
(IN US$ MILLIONS)
Fiberline C Expansion Project................................. US$55.8 US$ 185.3 US$ 355.8
Siviculture and other forestry investments.................... 41.4 39.5 48.7
Forests (includes land purchase).............................. 10.1 15.4 --
Improvements/industrial investments........................... 3,2 9.4 13.7
Acquisition of equity participation in Veracel................ -- --
Other......................................................... 8.2 10.8 3.3
---------- --------- ---------- ---------
Total.................................................... US$118.7 US$ 260.7 US$ 421.5
========== ========= =========== =========
The US$160.8 million decrease in capital expenditures in 2002 compared to
2001 and the US$283.1 million increase in capital expenditures in 2001 compared
to 2000 were primarily due to investments in the Fiberline C Expansion Project.
During the year 2003, we invested approximately US$118.7 million, of which
US$55.8 million was devoted to the Fiberline C Expansion Project, US$3.2 million
was devoted to ongoing industrial investments, US$51.5 million was devoted to
silviculture and other forestry investments and US$8.2 million was devoted to
other projects.
During 2004, the Company expects to invest approximately US$210 million, of
which US$115 million is expected to be invested in the Veracel Project and US$95
million relates to industrial, forestry and other investments.
15
B BUSINESS OVERVIEW
GENERAL
We are the world's largest producer of bleached hardwood kraft market pulp.
We produce eucalyptus pulp, which is a high-quality variety of hardwood pulp
used by paper manufacturers to produce a wide range of products, including
premium tissue, printing and writing papers, liquid packaging board and
specialty papers. Eucalyptus pulp's distinguishing characteristics are its
softness, opacity and suitability for printing. "Market pulp" is the pulp sold
to producers of paper products, as opposed to pulp produced by an integrated
paper producer, for use in paper production facilities. "Kraft" pulp is pulp
produced in a chemical process using sulphate.
During 2003, we produced approximately 2,250,000 tons of BEKP, a 36%
increase from 2002 when we had produced approximately 1,656,000 tons of BEKP,
which was a 30% decrease as compared to 2001 when it had produced approximately
1,272,000 tons of bleached eucalyptus pulp. Pulp sales for 2003 were
approximately 2,149,000 tons, a 36% increase as compared to 1,585,000 in 2002,
which had represented a 22% increase when compared to 2000 pulp sales of
1,301,000 tons. Export pulp sales in 2003 were approximately 98% of total sales.
Export pulp sales for the year 2002 were approximately 98% of total sales. See
"--Markets and Customers" and "--Competition."
Our volume and price of pulp sales during 2003 were higher than in 2002.
Our average list price increased by approximately 9% in 2003 compared with the
average in 2002.
In December 1999, we moved our headquarters from Rio de Janeiro to the
municipality of Aracruz, in the Brazilian coastal state of Espirito Santo, where
our production facilities are located. We continue to maintain executive offices
in Rio de Janeiro for our financing, administrative and trading activities. Our
production facilities consist of a eucalyptus pulp mill, or the Mill, which has
three production units, each with two bleaching, drying and baling lines. The
Mill's third production unit began production in May 2002. See "--Fiberline C
Expansion Project."
Also in December 1999, we sold our electrochemical plant that services the
Mill to the chemicals operating group of Canadian Occidental Petroleum Ltd., a
Canadian-based global oil and gas and chemical company, for approximately US$61
million. See "--Raw Materials--Chemicals."
We own approximately 405,700 hectares of forest and other land in the
States of Espirito Santo, Bahia, Minag Gerais and Rio Grande do Sul, of which
over 247,000 hectares are planted with eucalyptus forests. The Mill is located
approximately 1.5 kilometers from the port facilities at Barra do Riacho, which
are 51% owned by us. See "--History and Development of Aracruz" above.
We believe that we are one of the lowest-cost producers of bleached kraft
market pulp in the world. Our low production costs relative to some of our
competitors are due to a number of factors, including:
o economies of scale,
o advanced forestry techniques in managing the planting processes,
o growing and harvesting of our trees,
o the comparatively short harvest cycle of our trees, and
o lower energy and chemical costs.
During 2003, we were able to meet almost 63% of our wood fiber requirements
from our own eucalyptus forests. Climate and soil conditions in Brazil enable us
to harvest our eucalyptus trees in only seven years after plantation, while
harvest cycles for other types of hardwood trees in the southern United States,
Canada and Scandinavia can range from 25 to 70 years. Harvest cycles for our
principal non-Brazilian competitors in the eucalyptus pulp market, which are
located in Spain, Portugal and Chile, are approximately eight to ten years. See
"--Raw Materials--Wood" and "--Competition."
16
We internally produce approximately 98% of our electrical energy requirements,
mainly from by-products of our pulp production process, and recycle the greater
part of the chemicals used at the Mill. See "--Raw Materials--Energy."
BUSINESS STRATEGY
The key elements of our mission statement are:
o pursuing a growing position among the best global producers of forest
products, concentrating in market segments of significant size and
capable of adding value to us,
o generating strong returns to our shareholders,
o leveraging our competence in renewable forestry uses,
o developing products that add value to our customers while
concentrating on our core business as a pulp producer, and
o creating development opportunities for our employees in order to
retain our employees.
The following ongoing projects implement our business strategy:
o Economies of scale resulting from new capacity increases. The
commencement of the operation of the Fiberline C Expansion Project at
the end of May 2002 increased our nominal production capacity to over
2,000,000 tons per year in the middle of 2002. The Fiberline C
Expansion Project relies on our technology advances and benefits from
our existing overhead and management structure, which has absorbed the
new activity without significant additional fixed costs. These
enhancements will enable us to reduce pulp costs and improve quality
levels in the new production unit. ". In addition, the Company's board
of directors in 2000 approved the acquisition of Veracel.
o Improvements in forestry technology using advanced genetic techniques,
which will result in an increase in the forest yield.
o Optimization of transportation logistics. Transportation of wood to
the Mill comprises a large portion of the cost of our pulp production.
Improve in transportation logistics and costs are a priority for the
Company. At the end of 2002, we improved the logistics of our rail
transportation. We also launched our Multimodal Transportation
Systems--Maritime and Rail--, the main objective of which is to
enhance logistics and further integrate our Mill-Port-Forest system.
See "--Transportation."
o Redesign of management processes with the support of state-of-the-art
information technology in order to improve efficiency and reduce
costs. In 2001, we implemented new modules of the company-wide SAP R/3
enterprise system that controls, simplifies and integrates our
business processes. We are currently using virtually all the modules
supplied by SAP, both in the pulp mill and the sawmill operations.
Recently, we have selected the mySAP.com(R) platform to improve
connectivity with customers and suppliers.
o Increase of competitiveness. The competitiveness of our business
operations, combined with our significant cash generation
capabilities, has led us to evaluate from time to time various future
strategic alternatives, including further increase of current pulp
operations either through acquisitions or expansion of existing
capacity, and/or further acquisitions of additional forests.
FIBERLINE C EXPANSION PROJECT
The Fiberline C, our third pulp operational unit, began operations at the
end of May 2002, after being completed in 17 months (two months ahead of
schedule) at a lower cost than originally budgeted.
17
With nominal capacity of 700,000 tons per year as of December 31, 2003, the
cost of the new line was US$522.5 million. The volume of production during year
2003 by the Fiberline C totaled 712,000 tons. In September 2003, the facility
reached a monthly production record of 67,884 tons.
We entered into several supply contracts in connection with the Fiberline C
Expansion Project. Under those supply contracts, the suppliers were required to
provide products and services, installation and civil construction. Payments
under the supply contracts are made upon the completion of milestones specified
in each of the supply contracts, and the obligations of the suppliers thereunder
are guaranteed by performance bonds, in each case in the amount of 10% of the
contract price, issued by either a major financial institution or an insurance
company.
The new production volume resulting from the Fiberline C Expansion Project
requires an increase in our forest base of approximately 72,000 hectares of
eucalyptus plantations. For this reason, between June 2000 and December 2003, we
acquired approximately 67,000 hectares of net land through separate
transactions. Additionally, in September 2002, Bahia Sul and we signed, jointly
with Companhia Vale do Rio Doce and its wholly owned subsidiary, Florestas Rio
Doce S/A, a contract for the acquisition of equal stakes by Bahia Sul and us of
forestry assets comprising approximately 40,000 hectares of gross lands that
include around 28,000 hectares of eucalyptus-planted forests. By the end of
2003, the Company owned approximately 63,000 hectares of eucalyptus plantation
by using these acquired lands.
In order to meet the expected increase in production arising from the
Fiberline C Expansion Project, we built a port facility in Caravelas, State of
Bahia, and expanded our port facility in Barra do Riacho, State of Espirito
Santo.
ACQUISITION OF VERACEL
On October 10, 2000, we entered into two stock purchase and sale agreements
pursuant to which we acquired a 45% stake in Veracel, a joint venture between
Stora Enso OYJ and Odebrecht to grow and manage eucalyptus plantations and to
build a pulp mill. One agreement, for the amount of approximately US$72 million,
was entered between the Company and Odebrecht for the acquisition of 40% of the
total outstanding capital stock of Veracel. The other agreement, for the amount
of approximately US$9 million, was entered between the Company and Stora Enso
Treasury Amsterdam B.V. for the acquisition of an additional 5% of the total
outstanding capital stock of Veracel. On January 31, 2003, Odebrecht sold its
10% stake in Veracel to Stora Enso OYJ and us. We acquired shares representing
5% of the total outstanding capital stock of Veracel for US$9.7 million. This
equity investment in Veracel achieved two objectives: (i) a guaranteed supply of
wood for the Fiberline C Expansion Project during the first three years of the
new production unit's operation and (ii) the opportunity to grow our business in
the future from another operational base in Bahia that can potentially replicate
our accomplishments in the State of Espirito Santo.
Under both stock purchase and sale agreements, we have agreed to indemnify
the relevant counterparty for certain liabilities and/or damages which such
counterparty may incur as a result of a breach by us of the representations and
warranties or a default by us under a covenant under those agreements.
We have also entered into a three-year wood supply contract for a total of
up to 3.85 million cubic meters with Veracel, providing wood for the Fiberline C
Expansion Project until the new plantations reach harvesting time.
In May 2003, Stora Enso and we approved the construction of Veracel's pulp
mill for the production of bleached eucalyptus kraft market pulp in Eunapolis,
in the State of Bahia. The mill will have a nominal capacity of 900,000 tons per
year, and the overall investment is budgeted at US$1.24 billion, of which US$717
million has already been commited.
The Veracel Project has obtained commitments for long-term direct funding
from development banks in the amount of approximately US$650 million, being
US$500 million from BNDES and US$150 million from the European Investment Bank
(EIB) and the Nordic Investment Bank (NIB). During the first quarter of 2004,
BNDES made its initial disbursement of US$59.7 million. The funding of the
Veracel Project is expected to consist of 45% equity and 55% loans from
Brazilian and international development agencies. The Company is a several
guarantor of 50% of the indebtedness incurred by Veracel, including indebtedness
in connection with the financing of the Veracel Project. Stora Enso is a several
guarantor of the other 50% of such indebtedness. At March 31, 2004 the
outstanding amount of such indebtedness guaranteed by the Company was
approximately US$63.5 million.
18
The construction of the mill was started at the beginning of the second
half of 2003, and it is expected to be concluded within two years. Based on
current figures, about 39% of the total construction has already been completed.
The project is being carried out under an EPC (Engineering, Procurement and
Construction) concept and requires the prior implementation of a qualification
program to enable the local workforce to take part in the construction of the
pulp mill. The equipment and services necessary for the project are being
contracted mostly from Brazilian suppliers.
In connection with the acquisition of the 45% equity participation in
Veracel, on October 10, 2000, we, Stora Enso and Odebrecht, together known as
the Veracel Shareholders, and Veracel entered into a shareholders' agreement, or
the Original Veracel Shareholders' Agreement, which sets forth, among other
things, certain agreements among the parties with respect to the management and
operation of Veracel and the transfer of the common shares of Veracel. The
Original Veracel Shareholders' Agreement has a term of 20 years from its date
and can be automatically extended for successive 20-year terms thereafter unless
notice is given by any party to the Original Veracel Shareholders' Agreement.
The Original Veracel Shareholders' Agreement will terminate automatically if the
ownership by any of the Veracel Shareholders of common shares of Veracel exceeds
50%. The Original Veracel Shareholders' Agreement provides that Veracel will at
all times during its term have a board of directors comprised of five members,
of which (i) two will be elected from individuals appointed by Stora Enso, (ii)
two will be elected from individuals appointed by us and (iii) one will be
elected from individuals appointed by Odebrecht. The directors elected by us
(acting jointly) and the directors elected by Stora Enso (acting jointly) will
each have the right, without any action by any other directors, to request the
removal of any incumbent officer of Veracel. The Original Veracel Shareholders'
Agreement also provides that neither we nor Stora Enso may transfer (which
includes the creation of liens) any of their respective common shares of Veracel
other than (i) prior to the decision to build Veracel's pulp mill, or the
Implementation Decision, and (ii) if the Implementation Decision is made, after
the second anniversary of the start-up of Veracel's pulp mill. We each have a
right of first refusal if the other party wishes to transfer all of its common
shares of Veracel before the Implementation Decision. Under the Original Veracel
Shareholders' Agreement, Odebrecht may not transfer any of its common shares of
Veracel other than (i) on or prior to December 31, 2002, if there has been no
Implementation Decision, (ii) following the Implementation Decision, (iii) after
the start-up date of Veracel's pulp mill (if it is built) or (iv) after the
second anniversary of the start-up of Veracel's pulp mill (if it is built),
provided that, in the case of the conditions described in (i), (ii) and (iii),
Odebrecht will have the right to transfer all of its common shares of Veracel to
the other shareholders of Veracel, for different prices, in accordance with the
terms set forth in the Veracel Shareholders' Agreement. Any of the Veracel
Shareholders may transfer its common shares of Veracel to an affiliate, subject
to certain limitations, or with the prior written consent of each of the other
Veracel Shareholders. The Original Veracel Shareholders' Agreement also requires
that each person or entity who acquires shares of Veracel pursuant to the
provisions thereof become a party to such agreement. The Original Veracel
Shareholders' Agreement provides that, under certain circumstances, the Veracel
Shareholders may be required to make capital contributions to Veracel, on a pro
rata basis. The Original Veracel Shareholders' Agreement also provides that we,
so long as neither we nor any of our subsidiaries is a shareholder of Veracel,
shall not acquire (or caused to be acquired) any interest in real property in
Veracel. The same covenant applies to Veracel with respect to real property in
our core area.
In connection with the further acquisition by us and by Stora Enso, on
equal basis, of the stake then held by Odebrecht in Veracel on January 31, 2003
and as a consequence of the Implementation Decision adopted by the remaining
shareholders, the Original Veracel Shareholders' Agreement was amended.
According to the amended agreement, or the Veracel Shareholders' Agreement, the
board of directors of Veracel is to be comprised of four members, of whom two
will be elected from individuals appointed by Stora Enso, and two will be
elected from individuals appointed by us. The Original Veracel Shareholders'
Agreement provides that if any of the shareholders, known as the Defaulting
Shareholder, fails to comply with any of its obligations regarding Veracel's
funding needs in connection with the business plan, the Investment Plan and
Capital Contributions, the other shareholder (the Calling Shareholder) shall
have the right to require the Defaulting Shareholder to transfer all (but not
less than all) of its shares to the Calling Shareholder at a discounted market
value calculated according to the provisions of the Original Veracel
Shareholders' Agreement. The Original Veracel Shareholders' Agreement governs
the management and operation of Veracel.
19
GUAIBA UNIT
On June 30, 2003 the Company announced that it had acquired Riocell S.A.
("RIOCELL") from Klabin S.A., which operated the Riocell Mill situated in
Guaiba, Rio Grande do Sul, in the south of Brazil, for an adjusted purchase
price of US$567 million. As a consequence, Riocell was included in the Financial
Information of the Company at and for the year ended December 31, 2003 included
herein. On January 7, 2004, Riocell was merged into the Company and the Riocell
Mill and related forestry assets are now operated as the Guaiba Unit of the
Company.
The nominal production capacity of the Guaiba Unit is approximately 400,000
tons of bleached eucalyptus market pulp and 40,000 tons of printing and writing
paper, equipped with advanced environmental protection resources. The Guaiba
Unit has approximately 63,700 hectares of forest and other land and 7,000
hectares of plantations are kept in association with third parties. The average
distance of the wood supply to the mill is approximately 85 kilometers. Since
paper production is not its core business, the Company is working on feasability
studies related to the possible divestiture of the paper machinery at the Guaiba
Unit.
ARACRUZ PRODUTOS DE MADEIRA
As part of our earlier strategy of diversification into other forest
product businesses, we established a joint venture with the Gutchess
International group of the United States in 1997 to create a new company,
Tecflor Industrial S.A., for the production of solid wood products. In 1998, we
acquired all ownership interests of Gutchess International Inc. in Tecflor
Industrial S.A., now called Aracruz Produtos de Madeira S.A., or APM, which then
became our wholly owned subsidiary. APM's high-tech hardwood lumber sawmill,
which is located in the State of Bahia, was commissioned in the first quarter of
1999 and started sales during the third quarter of 1999. APM manufactures and
markets Lyptus(R), a new concept renewable, high-grade hardwood lumber produced
using eucalyptus trees, computer-optimized sawing technology and advanced drying
and finishing processes. The sawmill has a nominal production capacity of 37,500
cubic meters per year. As of March 31, 2004, APM had nominated 11 sales
representatives in major furniture markets in Brazil and was supplying an
industrial customer base of of nearly 150 manufacturers.
Having consolidated the production process and trained its workforce during
the preceding two years, in 2001 APM sought to expand the presence of its
Lyptus(R) brand of high-quality sawn wood in domestic and international markets
while ensuring that its quality standards were maintained.In 2001, APM
established a commercial partnership with the U.S.-based Weyerhaeuserr Co., or
Weyco, one of the largest forestry companies in the world, for the exclusive
distribution of Lyptus(R) in the North American markets. This new partnership
arrangement gave APM access to over 70 Weyco points of sale in the U.S. and
Canada, increasing the presence of Lyptus(R) in one of the largest markets in
the world for high-quality hardwood. The first shipments to Weyco took place in
the months of May and August 2001. Another initiative that advanced the
internationalization of APM was its affiliation with the International Wood
Products Association at the beginning of 2002.
We have expanded the 2001 agreement with Weyco of the U.S. to extend sales
of Lyptus(R) to the European and Asian markets, thus assuring the presence of
the product in over 100 points of distribution in those regions.
The initial impact of this agreement was to increase Lyptus(R) sawn wood
exports from 4.2% in 2001 to 10.6% in 2002, in addition to 47,223m2 of Lyptus(R)
flooring. In 2002, 15% of total production was exported. In 2003, 23.5% of total
production was exported.
Consistent with the strategies set forth above, we have been seeking to
divest our interest in APM, since it is outside our core business.
MARKET OVERVIEW
GENERAL
Wood pulp is the principal raw material used in manufacturing paper and
paperboard. Whether or not a specific type of wood pulp is suitable for a
particular end-use depends on the type of wood used to make the pulp, as well as
the
20
process used to transform the wood into pulp. Hardwood pulp is produced
using hardwood trees, such as oak, eucalyptus, aspen, birch and acacia trees.
Hardwood pulp has short fibers and is generally better suited for manufacturing
coated and uncoated printing and writing papers, tissue and specialty papers.
Softwood pulp is produced using softwood trees, such as pines. It has long
fibers and is generally used to add strength to the paper. We do not produce
softwood pulp.
The pulp manufacturing process also can determine a pulp's suitability for
particular end-uses. Chemical pulp refers to pulp made using chemical processes
to dissolve the lignin and other organic materials holding the wood fibers
together. Among the various chemical processes, the most common is the "kraft"
process, which is used by us to produce our pulp. The kraft process helps to
maintain the inherent strength of the wood fibers and thus produces a pulp
especially well suited for manufacturing printing and writing papers, specialty
papers and tissue papers. Pulp producers may sell their pulp in the worldwide
market or use it internally to manufacture various types of papers.
Bleached pulp is used for a variety of purposes, including printing and
writing papers, specialty papers and tissues. Unbleached pulp, which is brown in
color, is used in the production of wrapping papers, corrugated containers and
other paper and cardboard transportation materials.
As a result of the variety of wood types and processes used to produce
pulp, which have evolved significantly over time, the pulp market has become
increasingly specialized in terms of technical characteristics. Many of the
physical and chemical properties most valued by printing and writing paper
manufacturers and other bleached pulp consumers, such as opacity and brightness,
are exhibited by hardwood and, particularly, eucalyptus pulp. In addition, the
increasing specialization of paper manufacturers has resulted in many such
manufacturers developing their own customized mix of pulp inputs, also known as
furnish, for use in their paper manufacturing. Furthermore, as more paper
manufacturers have come to appreciate the technical characteristics of hardwood
pulp and to rely on a significant hardwood pulp component in their furnish, the
market for hardwood pulp has grown more rapidly than the market for softwood
pulp. Within the hardwood segment, bleached eucalyptus kraft market pulp has
demonstrated the highest annual rate of growth in demand from 1993 to 2003. Over
the same ten-year period, the annual rate of growth in demand for bleached
eucalyptus pulp was estimated at 5.7%, while the annual rate of growth in demand
for hardwood pulp during the same period was estimated at 5.0% and the market
for softwood for the same period was estimated at a 2.6% annual rate.
Eucalyptus is only one of many types of hardwood used to make pulp.
Eucalyptus trees generally grow straight and have few branches. This allows for
dense growth, easy harvesting and less need for pruning. Since 1980, eucalyptus
kraft market pulp has steadily increased as a percentage of the total worldwide
production of bleached hardwood kraft market pulp (from 29% in 1980 to
approximately 50% in 2003) primarily due to its high quality, and because of
properties, such as its softness, opacity and printability.
INTERNATIONAL MARKETS
From 1992 to 2003, the worldwide production capacity of bleached hardwood
kraft market pulp is estimated to have grown an average of approximately 4.8%
per year, from 13.2 million tons to 21.4 million tons. The start-up of new or
expanded production facilities has increased the total worldwide capacity for
bleached hardwood kraft market pulp by approximately 3.3 million tons from 2000
to 2003. Worldwide demand for bleached hardwood kraft market pulp is strongly
influenced by the demand for paper and board products, which correlates to world
GDP growth. Demand for bleached hardwood kraft market pulp has grown in recent
years, increasing from 11.5 million tons in 1992 to 18.9 million tons in 2003.
Consumption of market pulp is concentrated mainly in Europe, North America and
Asia. In 2001, demand for bleached hardwood kraft market pulp amounted to
approximately 7.1 million tons in Europe, 2.6 million tons in North America and
6.4 million tons in Asia, 42%, 16% and 38%, respectively, of the world's total
demand. In 2002, demand for bleached hardwood kraft market pulp amounted to
approximately 7.9 million tons in Europe, 2.8 million tons in North America and
6.6 million tons in Asia, 44%, 15% and 36%, respectively, of the world's total
demand. In 2001, we supplied approximately 475,000 tons or 7% of the total
European demand, approximately 480,000 tons or 18% of the total North American
demand, and approximately 306,000 tons, or 5%, of the total Asian demand. In
2002, we supplied approximately 637,000 tons, or 8%, of the total European
demand, approximately 623,000 tons or 23% of the total North American demand,
and approximately 280,000 tons, or 4%, of the total Asian demand. In 2003, we
supplied approximately 765,000 tons or 9% of the total European demand,
approximately 690,000 tons or 26% of the total North American demand, and
approximately 470,000 tons or 7% of the total Asian demand.
21
The market pulp industry is highly competitive and is also sensitive to
changes in industry capacity, producer inventories and cyclical changes in the
world's economies, all of which may significantly affect pulp prices and thereby
our profitability. The price of pulp generally increases as economies expand
around the world. Strong demand during most of the 1980s caused the market price
per ton of bleached eucalyptus kraft market pulp delivered in the United States
by us to peak in 1989 at US$775 per ton. A global recessionary environment and a
substantial increase in worldwide pulp supply during the early 1990s led to a
sharp decline in the prices of market pulp, reaching US$410 per ton in December
l993, the lowest price level since 1983. Prices began to increase in the second
quarter of 1999 through the second half of 1999. In 1999, the average F.O.B.
price per ton of bleached eucalyptus kraft market pulp delivered in the United
States was US$479, an increase of approximately 4% as compared to 1998. In 2000,
prices continued increasing during the first half of the year, led mainly by the
strong demand in Europe.
However, in the second half of 2000, prices remained stable. The average
F.O.B. price per ton of bleached eucalyptus kraft market pulp delivered in the
United States was US$618, an increase of approximately 29% as compared to 1999.
While the Company's volume of pulp sales during 2002 was higher than in
2001 or 2000, the price of pulp declined throughout 2002. The Company's average
list price decreased 2.2% in 2002 compared with the average in 2001, primarily
due to the slowdown in the growth of the major economies, which began in 2001
and continued to negatively impact the global demand for paper throughout 2002.
The high level of the world pulp inventories witnessed at the beginning of
the year caused prices to fall to their lowest levels by the end of the first
quarter of 2002. From then on, the recovery in demand, coupled with expectations
of renewed growth in the world economy during the second half of 2002 and
underpinned by improved control over supply, prompted consecutive increases in
the price of eucalyptus pulp, which reached US$510 per ton delivered to the
United States in the third quarter of 2002.
Despite the satisfactory performance of the main consumer markets, high
quality tissue and printing and writing papers, the price of pulp still was
depressed throughout 2003. Considering these factors, the average list price of
eucalyptus pulp in 2003 was US$511 per ton.
The following chart shows, for the periods indicated, average annual prices
for BEKP produced by us as compared to northern hardwood (NBHK) and southern
hardwood (SBHK) prices:
22
[OBJECT OMITTED]
Sources: For all eucalyptus pulp prices and for 2000 southern and northern
hardwood pulp prices, the Company's databank; for 2001 northern and southern
hardwood pulp prices, Hawkins Wright 2001; for 1988-99 southern and northern
hardwood pulp prices, Hawkins Wright, November 2000. For 2002, 2003 and First
Quarter 2004 eucalyptus prices, the Company's databank, and for hardwood and
softwood pulp prices, Hawkins Wright, December 2002 and 2003.
DOMESTIC MARKET
In 2003, we supplied approximately 36,000 tons of the aggregate domestic
demand for bleached eucalyptus kraft market pulp, compared to 27,000 tons in
2002. In the first quarter of 2004, the Company supplied 5,903 tons of the
aggregate domestic demand for BEKP, compared to 7,592 tons supplied for the same
period in 2003. Demand for bleached hardwood kraft market pulp in Brazil
decreased from 530,740 tons in 1998 to 511,760 tons in 1999, due to the adverse
economic situation in Brazil during most of 1999. See "Item 5. Operating and
Financial Review and Prospects--Brazilian Economic Environment." However, in
2000, the Brazilian economic scenario improved and the demand for bleached
hardwood kraft market pulp reached 517,000 tons, an increase of 1% compared to
1999. In 2001, the demand for bleached hardwood kraft market pulp reached
489,000 tons, a 5% decrease compared to 2000, primarily due to the energy
rationing in Brazil, which had a negative impact on paper production. In 2002,
the demand for bleached hardwood kraft market pulp reached 512,000 tons, a 5%
increase compared to 2001, primarily due to the paper production growth, mainly
on the tissue segment (8.4%). In 2003 demand grew by 2% compared to 2002,
reaching 520,579 tons, reflecting an increase in the tissue and printing and
writing segments.
The six largest Brazilian producers of bleached hardwood kraft market pulp
are:
o Aracruz Celulose S.A.,
o Votorantim Celulose e Papel S.A,
o Celulose Nipo-Brasileira S.A., or Cenibra,
23
o Bahia Sul Celulose S.A.,
o Jari Celulose S.A., and
o Lwarcel Celulose e Papel
Together the six largest Brazilian producers accounted for 77% of total
domestic sales in 2003, with us accounting for 7% of total domestic sales. In
the first two months of 2004, the six largest Brazilian producers accounted for
43% of the total domestic sales, with us accounting for 4%. Our domestic sales
volume of bleached hardwood kraft market pulp was 2% of its total sales volume
in 2002 and 2003 as compared to 3% in 2001, and for the first quarter of 2004
its domestic sales volume of bleached hardwood kraft market pulp was 1% as
compared to 2% in the same period in 2002, as a result of our increase in sales
in international markets and other producers increasing their own share of the
Brazilian market. See "--Competition." Although domestic pulp prices are
affected to a certain degree by general economic conditions in Brazil, domestic
pulp prices have been, and are expected to continue to be, correlated with
international pulp prices.
EUCALYPTUS FORESTS
At December 31, 2003, we owned approximately 405,700 hectares of forest and
other land in the Brazilian States of Espirito Santo, Bahia, Minas Gerais and
Rio Grande do Sul,, of which over 247,000 hectares are planted with eucalyptus
forests. The average distance from our forest areas currently in use to the Mill
site is 207 kilometers. See "--Raw Materials--Wood." Because of the cost of
transportation, the average distance from the forest to the Mill has an
important effect on our cost structure, and we have sought to reduce the
distance in various ways, including by accelerating the substitution of cloned
trees with higher productivity near the Mill, as discussed in "--Raw
Materials--Wood." We are always evaluating opportunities for acquiring land with
forest in the State of Espirito Santo that is close to the Mill in order to
reduce the distance, and the associated costs, of hauling wood between the
forest and the Mill as well as any system of logistics that could reduce the
cost of transportation, such as transportation by barges using our port facility
in the state of Bahia. See "--Business Strategy". Of the 405,700 hectares owned
by us, approximately 247,000 hectares are currently used for the planting of
trees to supply pulp production and solid wood production, approximately 128,000
hectares are reserved for preservation, approximately 17,300 hectares have been
used in the construction of roads and the remainder is used for research and
development and other activities. Brazilian law requires that 20% of our land,
at any given time, either remain uncultivated with eucalyptus trees or planted
with indigenous species.
Throughout 2003, one of our principal objectives was to establish
partnerships with farmers, known as the Forestry Partners Program, for the
establishment of new plantations to ensure the future supply of wood for
Fiberline C. During 2003, we established approximately 14,500 additional
hectares of eucalyptus plantation through this program. In 2001, we consolidated
our seedling production technology at our nursery, producing gains in our
productivity. A typical plantation of ours grows 42 cubic meters of pulpwood per
hectare per year. A typical eucalyptus tree grows an average of approximately
three inches per week and will grow to a height of 90 feet in seven years, at
which point it is harvested.
We pioneered the use of cloned seedlings from rooted cuttings, a method
also known as vegetative propagation, to carry out large-scale planting of
eucalyptus trees. Our method of cloning results in trees whose fibers are
extremely homogeneous, which we believe results in a more streamlined industrial
process and higher-quality pulp. Today, approximately 89% of our eucalyptus
forests are grown from this type of seedling. Rather than growing from seeds,
clones are the "offspring" of asexual propagation. By means of this type of
generation, the descendant receives the entire genetic code of the original
tree. Accordingly, the risk of disease and pests can be lessened by choosing
parent trees better adapted to the region. Other benefits of vegetative
propagation include significantly less bark per cubic meter of wood and
"self-pruning" trees with fewer branches.
24
RAW MATERIALS
WOOD
We rely exclusively on eucalyptus trees to meet our pulp wood requirements.
Eucalyptus is a short-fibered hardwood that grows back from the stump after
being cut, with each tree capable of regenerating twice. Eucalyptus trees are
among the fastest growing trees in the world. Climate and soil conditions in
Brazil allow for approximately seven-year eucalyptus tree harvest rotations as
compared to eight to ten-year harvest rotations in Spain, Portugal and Chile. As
part of our growth strategy, we have sought to eliminate the need for external
sources of wood and to maximize both the yield and quality of fiber grown on our
timberlands through advanced forestry and tree-cloning techniques.
In 2003, we supplied most of our 7.4 million cubic meter wood requirements
from our own eucalyptus forests in the State of Espirito Santo and in the
southernmost region of the State of Bahia. During the same period, we also
purchased 2.7 million cubic meters of wood, which is equivalent to 37% of our
wood consumption, of which approximately 623,000 cubic meters were purchased
through the Forestry Partners Program, compared to 905,000 cubic meters in 2002.
Through the development of cloned trees selected on the basis of certain
characteristics, the Company was able to reduce its wood consumption per ton of
pulp produced from 4.5 solid cubic meters in 1985 to 3.9 solid cubic meters in
2003. The optimal time to harvest the Company's trees is approximately seven
years from the time of planting.
ENERGY
Reducing our need for outside sources of energy and chemicals is an
important component of our low-cost production strategy. In 2002 and 2003,
approximately 97% and 98% of our electrical energy needs were met by burning
by-products generated from the pulp production process compared with 79% in
1999. The remainder of our energy needs were met through purchases of
electricity, fuel oil and natural gas from third sources.
CHEMICALS
We use several chemicals in the pulp bleaching process. Until December
1999, we maintained and operated an electrochemical plant on the same site as
the Mill to produce some of the chemicals used in the pulp bleaching process,
specifically chlorine, caustic soda and sodium chlorate.
On December 16, 1999, we entered into a series of transactions with
Canadianoxy Chemicals Ltd. for the transfer of our electrochemical plant to a
subsidiary of Nexen Inc., or Nexen, a Canadian company formerly known as
Canadian Occidental Petroleum, for approximately US$61 million. Nexen, with head
offices in Calgary, Canada, is a major producer of sodium chlorate. Its
principal shareholder is Occidental Petroleum Corporation, which owns
approximately 80% of its share capital. The transfer closed on December 17,
1999. The sale of the electrochemical plant, located adjacent to the Mill, is
part of our strategy to concentrate on our core business, transferring the
production of chemicals to a specialized producer. We built the plant during the
construction of the pulp mill in 1979. We subsequently expanded the plant in
1991. At the time of the sale, the electrochemical plant had the capacity to
produce approximately 36,000 tons per year of sodium chlorate, 36,000 tons per
year of caustic soda and 32,000 tons per year of chlorine. The plant also
produces hydrochloric acid and sodium hypochlorite (liquid bleach).
Under the terms of the purchase agreement, we have agreed to indemnify
Nexen for certain liabilities relating to: (i) the manufacturing of
electrochemical products prior to the sale, (ii) any legal proceedings that
relate to the manufacture of the electrochemical products in which the basis of
the claim occurred prior to the sale and (iii) any misrepresentation by us in
connection with the purchase agreement. Our indemnity obligations expire, with
respect to tax, labor, product liability and environmental matters, upon the
passage of the relevant statute of limitations and, with respect to other
matters, three years from the closing of the sale.As part of the sale of the
electrochemical plant, we and two subsidiaries of Nexen entered into a
successively renewable contract for the reciprocal supply of raw materials,
services and products over a 25-year period. The agreement obligates us to
provide a continuous supply of raw materials, primarily water and steam, to the
electrochemical plant, and the plant to provide bleaching chemicals to us, at
competitive prices. The agreement
25
includes clauses of performance incentives, such as sharing of productivity
gains, preference prices and "take-or-pay" obligations pursuant to which we are
committed to purchase from the electrochemical plant a volume of chemical
products projected for six years from the date of the agreement. If, in a given
year, we purchase volumes of chemical products in excess of the minimum agreed
to volume, our obligations to purchase may be reduced in subsequent years. For
the take-or-pay quantities, we will pay unit prices which equal cost plus a
margin as determined in the contract. See Note 2 of the consolidated financial
statements. The agreement also may not be assigned by a party without the
consent of the other party and includes provisions relating to: (i) the
extension of the agreement for an additional 10-year period upon the agreement
of both parties not less than two years prior to the expiration of the initial
25-year term, (ii) the suspension of service by each party, (iii) the
termination of service and (iv) the termination of the agreement by a party upon
18 months' notice that such party intends to permanently cease operation at its
facility. In the event of termination of the agreement or a proposed sale by
Nexen, the agreement provides that we have the right of first negotiation for
the acquisition of the electrochemical plant. As a result of the sale, we no
longer have responsibility for the electrochemical plant and, accordingly, any
interruption of the operations of the electrochemical plant could require us to
seek alternative sources in the market for certain chemicals essential to our
production of pulp.
To date, there has been one temporary shutdown of the plant during which we
met our chlorine and caustic soda production requirements through purchases in
the open market.
WATER
Large amounts of water are required in the pulp production process and in
the cultivation of seedlings. Water is primarily provided by several rivers,
which feed into a 35 million cubic meter reservoir on the Mill site. The
reservoir holds enough water to supply the Mill's needs for a five-year period
in the event of a drought (based on statistical information regarding periods of
very low rainfall). Wastewater undergoes a two-stage purification treatment
process before it flows into the ocean.
Beginning in the latter half of 1998, the State of Espirito Santo experienced a
severe drought which reduced our water supply and caused us to pursue
alternative long-term sources of water to meet our current operating needs as
well as any foreseeable expansion plans. As a result, in May 1999, we, together
with the municipal governments of Aracruz and Linhares, a neighboring city,
began a project to obtain water from the Rio Doce river through a system of
canals and rivers which in turn feed into our reservoir. The project was
completed in June 1999 and now provides water for the industrial and chemical
districts of the Municipality of Aracruz as well as for irrigation of
agricultural activities in the northern region of the State of Espirito Santo.
During 2000 and the beginning of 2001, we made the necessary adjustments in the
Mill to receive the water supply from Rio Doce. The project was approved by
federal, state and local authorities. Despite the low average rainfall during
2003, the use of water from the Rio Doce river enabled us to obtain all of our
water supply requirements.
THE MILL
Our principal pulp mill, located in the State of Espirito Santo, is the
largest bleached hardwood kraft market pulp production facility in the world.
From 1991 to 1998, we successfully increased the Mill's nominal capacity from
1,025,000 tons of pulp per year to 1,240,000 tons of pulp per year. The Mill's
third production unit, known as the Fiberline C Expansion Project, began
production in May 2002, increasing the production capacity of the Mill to
approximately 2,000,000 tons of pulp per year. The Company's total production in
2003 was 2,250,000 tons (comprising the Mill and the Guaiba Unit) (1,656,000
tons in 2002), representing approximately 10% of the total worldwide bleached
hardwood kraft market pulp production capacity. In the first quarter of 2004,
the Company's pulp production was 628,000 tons, compared to 497,000 tons in the
same period last year.
Due to the successful implementation of the Modernization Project in 1999,
the Mill now has a nominal production capacity of approximately 1,240,000 tons
of pulp per year. In 1994, we increased our effective production capacity to
1,070,000 tons through system upgrades and productivity gains. From 1995 to
1999, we invested in the Modernization Project, increasing the nominal
production capacity of the Mill to 1,240,000 tons of pulp per year. Our total
production in 2002 was 1,656,000 tons (1,272,000 tons in 2001), representing
approximately 8% of the total worldwide bleached hardwood kraft market pulp
production capacity.
26
The production facility in the State of Espirito Santo consists of
large receiving yards for the logs, debarking, chipping and digesting equipment,
packaging and warehousing facilities capable of holding 80,000 tons of pulp and
a fully computerized control system that continuously monitors the entire
production process. The Mill's pulp systems have five steam turbines, and
generators that provide a continuous power supply for that system. Fuel for the
generation of steam is mainly provided by waste products from the pulp
production process. External backup power supplies are also available on site. A
tree nursery capable of producing approximately 43 million seedlings per year
and a research facility are located nearby as well. The electrochemical plant,
which was transferred in December 1999 to Nexen and that provides most of the
chemicals used in the pulp bleaching process, is located within the boundaries
of the production facility. For a discussion of the sale of our electrochemical
plant to Nexen, see "--Raw Materials--Chemicals."
In May 2002, the Fiberline C Expansion Project commenced operation adding a new
pulp line and certain other modifications to the existing equipment at the Mill.
See "--Fiberline C Expansion Project."
PULP PRODUCTION
When operating at full capacity, the Mill can process over 23,000 solid
cubic meters of timber each day. The logs are either debarked in the forest or
debarked at the Mill using tumbling drums and then cut into chips, which are
transferred by conveyors system to the digesters where they are mixed with
chemicals and heated under pressure. During this chemical cooking process, the
lignin and cellulose are separated. Once removed, the lignin is used as fuel to
produce steam and electrical energy for the milling process. The used chemicals
are removed at various stages of the production process and recycled within the
plant. The cellulose fibers are then washed, bleached using bleaching chemicals
(which are produced on site), filtered, pressed and dried. The dried pulp is
then cut into sheets, packed into bales and transported by truck to domestic
destinations and to the port at Barra do Riacho, located approximately 1.8
kilometers from the Mill, for shipments abroad. See "--Transportation."
We have produced four types of pulp:
o Standard Pulp;
o ECF Pulp; and
o ACF Pulp.
Standard Pulp is pulp bleached with regular levels of chlorine. Standard
Pulp is in high demand in North America and Asia. Although most of the
production is represented by ECF Pulp and ACF Pulp, the production of Standard
Pulp is still relevant because there is high demand for such pulp. During 2003,
we produced approximately 79,536 tons of Standard Pulp, as compared to 203,848
in 2002, and 284,678 tons in 2001.In the first quarter of 2004, the Company
produced 11,516 tons of Standard Pulp, as compared to 38,784 tons and 73,690
tons in the same period of 2003 and 2002, respectively.ECF Pulp, or Elemental
Chlorine Free Pulp, is pulp bleached with lower levels of chlorine. ECF Pulp is
in high demand in Europe, where our customers have preferred pulp that is
bleached with little or no chlorine due to the environmental concerns relating
to the pulp production process, particularly the bleaching process (although
recently we have detected a shift in environmental concerns away from the
bleaching process to forestry management and efficient control). We first
produced ECF Pulp in November 1990. During the period from 1991 to 1994, we
equipped the Mill so that it would have the capacity to produce enough ECF Pulp
to meet the growing demand for ECF Pulp. From 1993 to 1997, we produced 75% ECF
pulp. Commencing in 1998, with the completion of the Modernization Project, we
were to produce 100% ECF pulp. See "--The Mill." During 2003, approximately 92%
of our production, or 2,078,284 tons, was comprised of ECF Pulp as compared to
1,372,172 tons during 2002 and 926,356 tons during 2001. In the first quarter of
2004 we produced 610,405 tons of ECF Pulp, as compared to 433,864 tons and
221,352 tons in the same period of 2003 and 2002, respectively.
ACF Pulp, or Aracruz Chlorine Free Pulp, was developed by us with lower
levels of Organo Halogens (OX) than ECF pulp. ACF pulp is sold primarily in the
European market. We have produced ACF since 1998. During 2003, approximately 4%
of our production, or 91,744 tons80,028 tons, was comprised of ACF Pulp as
compared to 80,028 tons
27
during 2002 and 60,578 tons during 2001. In the first quarter of 2004, the
Company produced 6,004 tons of ACF Pulp, as compared to 24,210 tons and 24,048
tons in the same period of 2003 and 2002, respectively.
TRANSPORTATION
Wood from our three forest areas is transported by truck (owned by
independent contractors) to the Mill site for processing into pulp. The distance
from our main forest areas in Espirito Santo and the State of Bahia to the Mill
site ranges from one to 340 kilometers with an average distance of 207
kilometers for wood currently in use.
Our pulp produced for export is transported from the Mill to the port of
Barra do Riacho, which is located approximately 1.5 kilometers from the Mill
site. This port is used almost exclusively to hold and load pulp and provides us
with convenient access to ocean transport vessels. The port is a modern facility
that currently has the capacity to handle approximately 2,900,000 tons of pulp
per year. The port includes a warehouse capable of holding approximately 140,000
tons of pulp.
We own 51% of Portocel, the company that operates the port of Barra do
Riacho. The remaining 49% of Portocel is owned by Cenibra, another pulp
manufacturer and one of our competitors. We do not own any ships for
transportation of our pulp.
In 2003 and 2002, approximately 98% of our sales were shipped from the
port, as compared to 97% in 2001. The remaining 2% of our sales were transported
to the domestic market by truck.
Our integrated, coastal wood shipment project was completed in December
2002. It involves a system of sea-going barges and tugboats and two port
terminals that link the extreme south of Bahia to the north of Espirito Santo.
The port complex of Portocel, adjacent to the Mill, is to begin receiving wood
from plantations in southern Bahia via an alternative transportation system that
is more efficient than truck-based highway shipments. Another improvement to our
wood transportation operations was the construction and start-up of a nearly
4km-long rail spur used for unloading wood shipments directly at the Mill's
yard. The first phase of the operation between Caravelas and Portocel, with
annual capacity for transporting 1.7 million cubic meters of wood, began at the
end of 2002.
MARKETS AND CUSTOMERS
Our principal markets are in North America, Europe, Asia and Brazil. The
relative geographic distribution of our sales by volume and percentages of total
production were as set forth below:
1999 2000 2001 2002 2003 1Q2004
-------------- --------------- --------------- ----------------- ------------- --------------
% OF % OF % OF % OF % OF
TONS TOTAL TONS TOTAL TONS TOTAL TONS % OF TOTAL TONS TOTAL TONS TOTAL
---- ----- ---- ----- ---- ----- ---- ---------- ---- ----- ---- -----
Europe......... 561.0 44% 594.6 47% 475.3 37% 637.0 40% 813.7 38% 253.7 47%
North
America........ 406.4 32 433.5 34 479.8 37 623.2 39 767.8 36 113.1 21
Asia........... 217.9 17 180.8 14 306.2 23 280.1 18 509.0 23 164.7 30
Latin
America........ 20.6 2 9.0 1 3.6 0 17.6 1 21.4 1 2.9 1
--------------- ------- --- ------- --- ------- --- ------- --- ------- --- ----- ---
Total
Exports........ 1,205.9 95% 1,217.9 96% 1,264.9 97% 1,557.9 98% 2,111.9 98% 534.4 99%
=============== ======= === ======= === ======= === ======= === ======= === ===== =====
28
Brazil......... 59.4 5 54.7 4 36.4 3 27.0 2 37.1 2 5.9 1
--------------- ------- --- ------- --- ------- --- ------- --- ------- --- ----- ---
Total.......... 1,265.3 100% 1,272.6 100% 1,301.3 100% 1,584.9 100% 2,149.0 100% 540.3 100%
=============== ======= === ======= === ======= === ======= === ======= === ===== =====
The average net prices per ton of eucalyptus pulp for 1999, 2000, 2001,
2002, 2003 and first quarter of 2004 were US$463, US$611, US$438, US$418, US$453
and US$452, respectively.
In 2003 and 2002, approximately 2% of our sales volume was sold in the
domestic market (3% in 2001). In the first quarter of 2004, approximately 1% of
the Company's sales was sold in the domestic market compared to 2% in the same
period of 2003. In the past, Brazilian pulp prices have been subject from time
to time to price restrictions imposed by the Brazilian government. There can be
no assurance that the Brazilian government will not seek to impose such
restrictions again.
One of our marketing strategies is to develop long-term relationships with
customers that will purchase our production year after year. Stable long-term
relationships permit us to reduce our marketing expenses, to better understand
our customers' needs, and to take advantage of our competitive strengths,
including the consistency of our pulp and our efficient logistic and technical
support to our clients. In 2003, our ten largest customers accounted for
approximately 75% of our sales and our two largest customers accounted for
approximately 46% of our sales (71% and 44%, respectively, in 2002 and 67% and
41%, respectively, in 2001). These customers include leading North American
tissue manufacturers and leading global manufacturers of printing and writing
paper. In 2002,2003 and for the first quarter of 2004, demand for our pulp has
been in line with our production capacity; however, we cannot guarantee that
such balance between demand and production capacity will happen in the future.
We believe that the loss of either of our two largest customers could have a
material adverse effect on our results of operations.We have long-term sales
contracts with some of our customers, including several of our largest
customers. These contracts generally provide for sales of specified amounts of
pulp at prices announced from time to time by us, which are in line with the
prevailing market prices for pulp sold to customers in the geographic area of
the purchaser under the contract. Early termination is provided for in the
contracts in the event of a material breach, the insolvency of one of the
parties or force majeure events of extended duration. Certain sales contracts
include provisions that permit us to reduce the quantities to be shipped if
sales to the purchaser and our affiliates would exceed a specified percentage of
our annual production capacity.
We have sought to diversify our sales among different market segments, such
as consumer products (for example, tissue paper), specialty papers and high
quality printing and writing papers. Producers of these products, as opposed to
producers of commodity papers, value the consistency of our pulp as well as the
reliability of our service.
The following table shows the breakdown by end uses of our pulp production
in 1999, 2000, 2001, 2002 and 2003.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 2000 2001 2002 2003
---------- --------- -------- --------- ----------
Tissue.................................... 48% 51% 51% 57% 55%
Printing, and Writing Paper............... 27 28 28 29 26
Specialty Papers(1)....................... 22 19 20 13 18
Cartonboard............................... 3 2 1 1 1
---------- --------- -------- --------- ----------
100% 100% 100% 100% 100%
========== ========= ======== ========= ==========
------------------------------------
(1)Includes liquid packaging board, carbonless paper, base paper for
laminated paper and coated wood-free specialties.
COMPETITION
While we compete with other producers of bleached hardwood kraft market
pulp, our most direct competitors are other producers of eucalyptus pulp due to
the special characteristics of this fiber. To a lesser degree, all producers of
hardwood pulp compete with producers of softwood pulp and with other raw
materials, such as recycled paper.
29
Competition is based primarily on quality (particularly consistency of
product), service, price and reliability. We and other Brazilian eucalyptus pulp
producers have significant cost advantages over producers in other regions. See
"--Raw Materials--Wood." We, however, do not generally compete on the basis of
price alone. Instead, we emphasize quality, reliability and stable long-term
relationships with customers.
If demand for recycled paper increases in the future, demand for pulp could
be adversely affected. While no assurance can be given, we believe that
increases in demand for recycled paper would not materially affect our results
of operations, at least in the near future, because (i) it is more costly to
produce recycled paper using current technology due to the high costs of sorting
out wastes and de-inking the recycled fiber, and (ii) customers are
predominantly manufacturers of higher-quality paper products such as premium
tissue paper, coated papers and specialty papers, which are less likely to use
recycled fibers for their products.
BLEACHED EUCALYPTUS KRAFT MARKET PULP
We are the largest producer and exporter of bleached eucalyptus kraft
market pulp in the world. Our main competitors in this market are located in
Brazil, Portugal, Chile and Spain and are listed by country (without any
priority as to order) in the following table:
PRODUCER COUNTRY
------------------------------------------------------------------------------------------ ------------------
Cenibra......................................................................... Brazil
Bahia Sul Celulose S.A.......................................................... Brazil
Jari Celulose S.A............................................................... Brazil
Votorantim Celulose e Papel S.A................................................. Brazil
Empresa de Celulose e Papel de Portugal SGPS, S.A. (Portucel)................... Portugal
Celulose Beira Industrial S.A................................................... Portugal
CMPC Papeles S.A................................................................ Chile
Celulosa Arauco y Constituicion SA.............................................. Chile
Empresa Nacional de Celulosas S.A............................................... Spain
Grupo Rottneros (Miranda mill).................................................. Spain
Management estimates that the five major producers of bleached eucalyptus
kraft market pulp in the world (i.e., Aracruz, Cenibra, Empresa Nacional de
Celulosas S.A., Portucel, and Votorantim Celulose e Papel S.A) currently account
for 63% of the total world production capacity of bleached eucalyptus kraft
market pulp. Management estimates that in 2003, we accounted for 26% of the
world production capacity of bleached eucalyptus kraft market pulp, 5% of the
world production capacity of chemical market pulp and 11% of the world
production capacity of bleached hardwood kraft market pulp.
BLEACHED HARDWOOD KRAFT MARKET PULP
To the extent that pulp from other hardwoods can be substituted for the
slightly more expensive bleached eucalyptus kraft pulp, we also compete with
producers of pulp from other hardwoods. Such competition is based more on cost
and less on quality or suitability of the pulp for use in higher quality paper
products. Although bleached hardwood kraft market pulp is produced in most
regions of the world, the dominant producers are located in North America, Latin
America, Western Europe and the Scandinavian countries (Finland, Norway and
Sweden), which in 2003 are estimated to have accounted for 69% in the aggregate,
and 23%, 25%, 13% and 8%, respectively, of the world's total bleached hardwood
kraft market pulp production capacity. Producers in the United States sold
approximately , 2,802,000 tons during 2001, 2,527,000 tons during 2002, and
2,347,000 during 2003 while Brazilian producers sold approximately 3,663,000
tons, 3,927,000 tons and 4,767,000 respectively, in such periods. Several of our
competitors in this market are larger than we are and may have greater economic
and other resources than we do.
Worldwide production capacity for bleached hardwood kraft market pulp grew
approximately 4.77% per year from 1993 to 2003, totaling 21.4 million tons, and
is expected to grow at an annual rate of 4.1% during the period of 2003 to 2007
(or approximately 4.2 million tons in total during this period). Approximately
64% of this growth in capacity is expected to occur in Latin America, where
bleached eucalyptus kraft market pulp capacity is expected to grow from
approximately 5.3 million tons in 2003 to approximately 8.5 million tons in
2007. Mixed tropical hardwood market pulp
30
capacity in Indonesia is expected to increase from 3.21 million tons in
2003 to 3.5 million tons in 2007, accounting for 5% of the total increase in the
world bleached kraft pulp market. Worldwide demand for bleached hardwood kraft
market pulp is expected to grow by 4.1% per year from 2004 through 2007, adding
5.6 million tons to the current demand.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
Our mill and forestry operations are subject to federal, state and local
laws, regulations and permit requirements relating to the protection of the
environment. Law No. 6,938, dated August 31, 1981 established strict liability
for environmental damage, mechanisms for enforcement of environmental standards
and licensing requirements for activities that are effectively or potentially
damaging to the environment. Environmental laws and regulations also govern the
conduct of forest operations and the protection of Brazilian fauna and flora. A
violation of environmental laws and regulations may result in fines and
penalties which may be material. Law No. 9,605, dated February 12, 1998 provides
that individuals or entities whose conduct or activities cause harm to the
environment are subject to criminal and administrative sanctions and are liable
for any costs to repair the damages resulting from such harm. Criminal sanctions
for individuals and entities that commit environmental crimes range from fines
to imprisonment (individuals) or dissolution (legal entities). In addition, Law
No. 9,605 also establishes that the corporate structure of a company may be
disregarded if the structure impedes the recovery for harm caused to the
environment. We are not aware of any successful assertion of claims against
shareholders under this provision of Law No. 9,605.
The State of Espirito Santo requires local manufacturing concerns to obtain
various permits including operating permits for manufacturing facilities.
Pursuant to state law, state authorities are empowered to regulate a company's
operations by prescribing company-specific environmental standards in such
company's operating permit. On February 10, 1998, the State of Espirito Santo
issued to us a two-year operating permit, which was renewed for an additional
five years commencing on February 10, 2000. The operating permit requires that
we maintain certain emissions, effluent and waste disposal standards. Beginning
in March 1997, we became subject to an environmental audit every three years.
The audit is conducted by subcontracted auditors, approved by the Environmental
Secretary of the State of Espirito Santo, or SEAMA. The audit was not carried
out in 2000, since SEAMA has not published the result of the 1997 audit. The
2000 audit was conducted in June 2001. Our forestry activities are regulated by
the Brazilian federal government and the governments of the States of Espirito
Santo, Minas Gerais and Bahia. Our operating permit for our forest operations in
Espirito Santo was renewed for a six-year period commencing on March 4, 1998. In
order to meet the increasing wood requirements resulting from the Fiberline C
Expansion Project, we purchased 126,971 hectares of land in the Brazilian States
of Bahia, Minas Gerais and Espirito Santo. These areas are sufficient to permit
the Company to plant 64,934 of the 72,000 additional hectares that it needs for
Fiberline C. Since 2000, the Company has obtained from the environmental state
agencies from those three states, 18 implementation and operational permits for
implanting 258 projects accounting for 56,741 hectares of eucalyptus
plantations. The remaining area is going to have operational permits during
2004.
We also entered into contracts with farmers in the State of Espirito Santo,
Minas Gerais and Bahia pursuant to which the farmers have agreed to grow trees
for sale to us. See "--Raw Materials--Wood."
Plantings may be undertaken only pursuant to a plan presented to and
approved by the appropriate governmental authorities. In accordance with federal
law, at least 20% of our landholdings, at any given time, must be preserved
uncultivated or planted with indigenous species. We currently exceed this
requirement, since such land accounts for approximately 31% of our total
landholdings.
In September 2001, the legislature of the State of Espirito Santo, where we
own approximately 164,400 hectares of forest and other land, passed a law
temporarily restricting the plantation of eucalyptus forests for purposes of
pulp production within that State. This law was declared to be unconstitutional
by a provisional decision of the Brazilian Supreme Federal Court and injunctive
relief was granted in response to suits brought by the National Confederation of
Industry and by the National Confederations of Acquisitions and Cattlle Raising.
The Company believes that such provisional decision will be upheld by the
count's definitive decision on the merits. However, there can be no assurance
that such definitive decision will be favorable to the Company nor that other
similar laws will not be enacted that would impose a limitation or restriction
on plantation of eucalyptus or that would affect our licenses or permits.
31
On March 13, 2002 the State of Espirito Santo legislative assembly created
an investigating commission (Comissao Parlamentar de Inquerito) to investigate
the legality of our permits and the acquisition of our properties since we began
operating in the State of Espirito Santo. As the investigative procedures were
not concluded within the prescribed term for such type of investigation, the
commission was terminated without issuing a conclusive report. We are confident
that all our permits and acquisition documents are strictly in accordance with
all laws and regulations.
We believe that we are in compliance in all material respects with all
applicable environmental regulations. In addition, environmental considerations
are fundamental to our development of new technologies. Our integrated pest
management relies on biological control of pests and diseases. Soil and plant
nutrients are continuously monitored to guarantee an adequate balance. At the
Mill, methods for the evaluation of environmental effects of effluents on
receiving detriments have been developed and used. The origins of pulp and
effluent toxicity have been studied, considering all possible sources, from the
raw material (wood) to bleaching effluents. In addition, environmental quality
is considered in the development of new technologies and products. Pulp products
are continuously evaluated in terms of their possible effects on the quality of
effluents in our customers' paper machines as well.
The State of Espirito Santo renewed our operating permit for the Forestry
Partners Program for the six-year period beginning in June 1998. See "--Raw
Materials--Wood."
In 1996, the State of Bahia granted us a permit for the location of our new
sawmill, APM. In 1998, the State of Bahia granted an operating permit for APM,
valid until August 2003. In June 2003, the State of Bahia renewed APM's
operating permit, valid until June 2007. See "--Business Strategy."
As part of the licensing process in connection with the Fiberline C
Expansion Project, we contracted independent consultants to prepare the required
environmental impact assessment reports. Those reports were discussed in public
hearings (two in Bahia and one in Espirito Santo) in 2000 as well as during six
public meetings with communities in both states. There was ample discussion at
each meeting of the environmental and social questions involved. The results of
the discussions were taken into consideration by the government regulatory
agencies in their technical analyses and their subsequent approval of the
permits.
During 2002, supplemental environmental licenses were obtained for
Fiberline C Expansion Project relating to our industrial installations, our own
plantations and those of the Forestry Partners Program and the wood
transportation system via seagoing barges.
We also obtained 258 licenses for forest plantations, of which 52 were
installation licenses issued by the Espirito Santo Agriculture, Cattle-Raising
and Forest Protection Institute (IDAF), 199 were projects incorporated in
installation licenses issued by the Bahia Environmental Resources Center
(CRA-BA) and two projects approved for operating licenses by the Minas Gerais
State Forestry Institute (IEF-MG).
In addition, the following licenses were obtained in 2003:
o Operating Licenses: administrative ruling CRA 2732;
o Simplified Permit for bark landfill: issued by Caravelas Municipality,
administrative rule 131; and
o Operation License for eucalyptus plantations in Minas Gerais State:
administrative rule IEF 131.
In December 2003, the Bureau Veritas Quality International ("BVQI")
recommended CERFLOR certification of 95,300 hectares covering all of the
Company's own plantations in the State of Bahia. CERFLOR is the Brazilian System
of Forest Certification. We initiated this certification process in August 2003,
including pre-audit, initial audit and a certification audits. For this process
more than 3,000 of Companys employees were trained. The certification audit was
publicized through local radio stations and newspapers as well as the sending
out of letters to more than 600 persons or entities. Five public meetings were
held in respect of the Certification, with the presence of more than 300
persons.
32
The CERFLOR Certification Plan for plantations in Espirito Santo is
expected to be prepared and approved in 2004.
All of the Company's own plantation areas in the State of Rio Grande do Sul
(Guaiba Unit) are certified by the Forestry Stewardship Council (FSC), totaling
66,700 hectares.
INSURANCE
We believe that our insurance coverage of our production facilities and
forests is in line with Brazilian market and international pulp industry
standards.
In 2003, the Company received the Highly Protected Risk (HPR) seal of
approval from FM Global. The certification, which is renowned worldwide in the
field of insurance, attests to the Company's low risk of interruption of its
operations as result of an industrial accident. The Company is the first
Brazilian company to earn the certificate from FM Global, the world's largest
property risk insurance company and leader in the field of risk management and
loss prevention.
C. ORGANIZATIONAL STRUCTURE
SIGNIFICANT SUBSIDIARIES
Our operations are conducted by Aracruz Celulose S.A., as the controlling
and principal operating company. The following table sets forth the significant
subsidiaries owned directly or indirectly by us and our ownership interest in
each of them as of December 31, 2003:
AS OF DECEMBER 31, 2003*
------------------------
TOTAL CAPITAL VOTING
------------- --------------
(IN PERCENTAGES) (IN PERCENTAGES)
Portocel Terminal Especializado de Barra do Riacho S.A.(1)..................... 51% 51%
Mucuri Agroflorestal S.A.(1)................................................... 100% 100%
Aracruz Trading S.A.(2)........................................................ 100% 100%
Aracruz Celulose (USA), Inc.(3)................................................ 100% 100%
Aracruz (Europe) S.A.(4)....................................................... 100% 100%
Aracruz Produtos de Madeira S.A. (formerly named Tecflor Industrial S.A.)(1)... 100% 100%
Veracel Celulose S.A.(1)....................................................... 50% 50%
Terra Plana Agropecuaria Ltda.(1)*............................................. 100% 100%
______________________
* In the process of being dissolved.
(1) Incorporated in Brazil.
(2) Incorporated in the Republic of Panama.
(3) Incorporated in the United States under the laws of the State of Delaware.
(4) Incorporated in Switzerland.
D. PROPERTY, PLANT AND EQUIPMENT
In December 1999, we moved our headquarters from Rio de Janeiro to the City
of Aracruz in the Brazilian coastal State of Espirito Santo, where our
production facilities are located. We maintain offices in Rio de Janeiro for our
financing, administrative and trading activities.
Our principal production facilities consist of a eucalyptus pulp mill
located in Aracruz that has three production units, each with three production
lines. When operating at full capacity, the Mill can process over 23,000 solid
cubic meters of timber each day.
33
As of December 31, 2003, we had an aggregate principal amount outstanding
of approximately US$263.3 million under certain loans granted to us by BNDES,
which loans are secured by liens on our industrial site in the Municipality of
Aracruz. See "Item 7B. Related Party Transactions."
We own approximately 405,700 hectares of land in the Brazilian States of
Espirito Santo, Bahia, Minas Gerais and Rio Grande do Sul, of which
approximately 247,000 are planted eucalyptus forests. The pulp mill is located
approximately 1.5 kilometers from the port facilities at Barra do Riacho, which
are 51% owned by us. See "--Business Overview--Eucalyptus Forests."
We own, through APM (our wholly owned subsidiary), a hardwood lumber
sawmill which is located in the State of Bahia.
ITEM 5. SEE "--ENVIRONMENTAL AND OTHER REGULATORY MATTERS" FOR THE
ENVIRONMENTAL RULES AND REGULATIONS AFFECTING OUR
OPERATIONS. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements, including the respective notes thereto,
included elsewhere in this annual report, and in conjunction with the discussion
of the method of presentation of financial information under Item 3. As from the
1999 financial statements, gains or losses resulting from the remeasurement of
the financial statements and from foreign currency transactions have been
reported in the consolidated statement of operations as single-line items. The
financial information presented herein has been reclassified to reflect such
remeasurement. Previously, such gains or losses were allocated to the statements
of operations line items to which they relate. These allocations have no effect
on net income or loss.
OVERVIEW
We are the world's largest producer of bleached hardwood kraft market pulp.
During 2003, we produced approximately 2,250,000 tons of bleached eucalyptus
pulp, a 36% increase from 2002 when we had produced approximately 1,656,000 tons
of bleached eucalyptus pulp, and a 30.2% increase as compared to 2001 when we
had produced approximately 1,272,000 tons of bleached eucalyptus pulp. In 2003,
eucalyptus accounted for approximately 41% of the total worldwide production
capacity of bleached hardwood kraft market pulp. In each of 2003 and 2002, sales
to customers located outside Brazil, especially in North America, western Europe
and Asia, accounted for approximately 98% of the Company's sales volume.
Pulp sales for 2003 were approximately 2,149,000 tons, a 36% increase as
compared to 1,585,000 in 2002, which had represented a 22% increase when
compared to 2000 pulp sales of 1,301,000 tons. In 2003, the Company sold
US$1,003.1 million of eucalyptus pulp compared to US$669 million in 2002 and
US$574 million in 2001.
The Company's volume and price of pulp sales during 2003 were higher than
in 2002. The Company's average list price increased by approximately 9% in 2003
compared with the average in 2002.
The primary factors affecting our results of operations are:
o prevailing world market prices for pulp;
o the amount of pulp produced and sold by us;
o our costs of production, which principally consist of the costs of
materials (primarily wood and chemicals), labor and depreciation; and
o the relationship between the real, the currency in which substantially
all of our cash operating expenses (i.e., operating expenses other
than depreciation and amortization of property, plant and equipment)
are incurred, and foreign currencies, principally the U.S. dollar, in
which more than 90% of our sales are made. See "--Brazilian Economic
Environment--Effects of Inflation and Currency Exchange Fluctuations."
34
The prices that we are able to obtain for our pulp depend upon prevailing
world market prices, which historically have been cyclical, with prices subject
to significant fluctuations over relatively short periods of time. See "Item 4B.
Business Overview--Market Overview--International Markets."
We believe that we are one of the lowest cost producers of bleached kraft
market pulp in the world. Our relatively low production costs are due to
economies of scale, advanced forestry techniques, a comparatively short regional
harvest rotation and low energy and chemical costs. See "Item 4B. Business
Overview--General."
RECENTLY ISSUE ACCOUNTING PRONOUNCEMENTS UNDER U.S. GAAP
The FASB has recently issued (i) Interpretation No. 46 ("FIN 46") -
Consolidation of Variable Interest Entities in January 2003, (ii) SFAS No. 145 -
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections ("SFAS 145") in April 2002 and (iii) SFAS No. 146 -
Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146") in
July 2002.
FIN 46 provides guidance on when certain entities should be consolidated or
the interests in those entities should be disclosed by enterprises that do not
control them through majority voting interest. Under FIN 46, entities are
required to be consolidated by interposes that lack majority voting interest
when equity investors of those entities have significant capital risk, the
obligation to absorb expected losses, or the right to receive expected returns.
Entities identified with these characteristics are called variable interest
entities and the interest that enterprises have in these entities are called
variable interests. These interests may derive from certain guarantees, leases,
loans or other arrangements that result in risks and rewards, which finance the
variable interest entities, despite the voting interest in the entities.
The interpretation requires that if a business enterprise has a controlling
financial interest in a variable entity, the assets, liabilities and results of
the activities of the variable interest entity must be included in the
consolidated financial statements with those of the business enterprise. This
interpretation applies immediately to variable interest entities created after
January 31, 2003. For variable interest entities created before February 1,
2003, FIN 46 must be adopted in the first reporting period beginning after June
15, 2003. We are evaluating the impact of this interpretation on our financial
condition, results of operations and cash flows.
There have been no variable interest entities created after January 31,
2003 in which we have an interest. We are reviewing our financial arrangements
entered into before February 1, 2003 to identify any that might qualify as
variable interest entities. There is a reasonable possibility that certain
project finance arrangements in which we have an interest might be variable
interest entities. These arrangements involve operating entities and the other
investors are third parties independent from the corporation. Our share of
commitments and debt obligations as well as fixed asset contributions of these
entities is included in our consolidated balance sheet. The variable interests
arise primarily because of certain guarantees extended by the corporation to the
arrangements. These guarantees are disclosed in note 9 to our consolidated
financial statements.
SFAS 145 addresses how to report gains or losses resulting from the early
extinguishment of debt. Under current accounting rules, any gains or losses are
reported on early extinguishment of debt as extraordinary items. SFAS 145
requires an evaluation of whether the debt extinguishment is truly extraordinary
in nature. If the debt is routinely being extinguished early, the gain or loss
would be included in income from continuing operations. This statement became
effective for us in 2003. Adoption of SFAS 145 did not have a significant impact
on our financial condition, results of operations and cash flows.
SFAS 146 requires recognition of costs associated with exit or disposal
activities when they are incurred rather than when an exit or disposal plan
occurs. Examples of costs covered by this guidance include lease termination
costs, employee severance costs that are associated with a restructuring,
discontinued operations, plant closings or other exit or disposal activities.
The provisions of this statement are effective for fiscal years beginning after
December 31, 2002 and will impact any exit or disposal activities initiated
after January 1, 2003. Adoption of SFAS 146 did not have a significant impact on
our financial condition, results of operations and cash flows.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
35
In connection with the preparation of the financial statements included in
this annual report, we have relied on variables and assumptions derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operation often requires our management to make judgments regarding the effects
of matters that are inherently uncertain on the carrying value of our assets and
liabilities. Actual results may differ from those estimated under different
variables, assumptions or conditions. Note 1 of the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. In order to
provide an understanding about how management forms its judgments about future
events, including the variables and assumptions underlying the estimates, and
the sensitivity of those judgments to different variables and conditions, we
have included below a brief discussion of the more significant accounting
policies and methods used by us.
GENERAL
The financial statements were prepared in accordance with U.S. GAAP, which
in certain respects differ from the accounting principles we apply when
preparing financial statements in accordance with Brazilian GAAP.
We have reported in U.S. dollars since 1994 when the US Securities and
Exchange Commission permitted foreign registrants to report in U.S. dollars
rather than in the currency of the country in which they are incorporated. The
U.S. dollar amounts have been remeasured from Brazilian reais (R$) in accordance
with the criteria set forth in Statement of Financial Accounting Standards N(0)
52 "Foreign Currency Translation" ("SFAS 52"). The Board of Directors and
management have historically considered the U.S. dollar as our functional
currency as this has been, and remains in our opinion, the currency in which we
principally operate as well as being our primary unit of economic measure.
Accordingly, our management has concluded that our functional currency is and
will continue to be the U.S. dollar.
DEFERRED TAXES
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities. We regularly review the deferred tax assets for recoverability and
establish a valuation allowance, as required, based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. Although the realization of net
deferred tax assets is not assured, management believes that, except where a
valuation allowance has been provided, such realization is more likely than not
to occur. The amount of deferred tax asset considered realizable could, however,
be reduced if estimates of future taxable income during the tax loss
carryforwards period are reduced.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings. As discussed in
note 16 to our financial statements, we have accrued our estimate of the
probable costs for the resolution of these claims. This estimate has been
developed in consultation with outside legal counsel handling our defense in
these matters and is based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies. We do not believe these
proceedings will have a material adverse effect on our financial position. It is
possible, however, that future results of operations could be materially
affected by changes in our assumptions and the effectiveness of our strategies
with respect to these proceedings.
BRAZILIAN ECONOMIC ENVIRONMENT
The Brazilian economy has been characterized by frequent and occasionally
drastic intervention by the Brazilian government and volatile economic cycles.
The Brazilian government has often changed monetary, taxation, credit, tariff
and other policies to influence the course of Brazil's economy. For example, the
Brazilian government has the authority, when a serious imbalance in Brazil's
balance of payment occurs, to impose restrictions on the remittance to foreign
investors of the proceeds of their investments in Brazil, and on the conversion
of Brazilian currency into foreign currencies. Furthermore, in late September
1999, a court in the state of Minas Gerais ruled that the representatives of the
board of directors of the minority foreign private partners of Companhia
Energetica de Minas Gerais, a privatized electric
36
utility in that state, could no longer have veto power over corporate
actions. Also in late September 1999, Brazil's Federal Supreme Court ruled that
pension taxes on retired federal employees and pensioners, as well as the
increase of pension taxes charged to active employees, are unconstitutional.
Changes in monetary, taxation, credit, tariff and other policies could adversely
affect our business, as could inflation, currency and interest rate
fluctuations, social instability and other political, economic or diplomatic
developments, as well as the Brazilian government's response to such
developments.
Rapid changes in Brazilian political and economic conditions that have
already occurred and that might continue will require continued emphasis on
assessing the risks associated with our activities and adjusting our business
and operating strategy. Future developments in Brazilian government policies,
including changes in the current policy and incentives adopted for financing the
export of Brazilian goods, or in the Brazilian economy, over which we have no
control, may materially adversely affect our business. See "Item 3D. Risk
Factors--Risk Factors Relating to Brazil."
Brazilian economic conditions may be affected negatively by events
elsewhere, especially in emerging markets. For instance, the Argentine
government's default on certain of its debt obligations, the devaluation of the
Argentine peso and the terrorist attacks of September 11, 2001 present causes
for concern relating to Brazil's economic stability. Instability in the
Brazilian financial markets caused by developments in the international
financial markets may adversely affect our financial condition and,
specifically, our ability to raise capital when needed and the market price of
the preferred shares and ADSs. See "Item 3D. Risk Factors--Risk Factors Relating
to Brazil."
The Tax reform recently approved by the Brazilian government has resulted
so far in Law No. 10.833/03, extending to Brazil's Social Security Financing
Contribution (Contribuicao para o Financiamento da Seguridade Social - "COFINS")
the "non-cumulative regime" already mandatory since 2002 for contributions made
to Social Integration Program (Programa de Integracao Social e de Formacao do
Patrimonio do Servidor Publico "PIS/PASEP"), as per Law No. 10.637/02. Law No.
10.833/03 also provided an increase in the tax rate for COFINS now at 7.6% on
revenues of Brazilian companies (the rate was formerly 3%). Although the tax is
not assessed on export transactions, the Company may have a higher tax burden
for the fiscal year ending in 2004.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS
Until July 1994, Brazil had for many years experienced high and generally
unpredictable rates of inflation and steady devaluation of its currency relative
to the U.S. dollar. The following table sets forth Brazilian inflation as
measured by the Indice Geral de Preco-Mercado, the General Market Price Index or
IGP-M, and the devaluation of Brazilian currency against the U.S. dollar for the
periods shown:
1999 2000 2001 2002 2003
------------- ------- ------ ------- ------ ------
Inflation (General Market Price Index) 20.1% 9.8% 10.4% 25.3% 8.7%
Devaluation (R$ v. US$) 48.0% 9.3% 18.7% 52.3% (18.2)%
Inflation and exchange rate variations have had, and may continue to have,
substantial effects on our financial condition and results of operations.
Inflation and exchange rate variations significantly affect our operating
expenses. Our cash operating expenses (i.e., operating expenses other than
depreciation and amortization of property, plant and equipment) are
substantially all in reais and tend to increase with inflation in Brazil. As
expressed in U.S. dollars, however, these increases are typically offset at
least in part by the effect of devaluation of the Real against the U.S. dollar.
If the rate of inflation increases more rapidly than the rate of devaluation,
then, as expressed in U.S. dollars, our operating expenses increase and
(assuming constant sales prices) our profit margins decrease. If the rate of
devaluation exceeds the rate of inflation, then, as expressed in U.S. dollars,
our operating expenses decrease, and our profit margins increase. In 2001 and
2002, after eliminating nonrecurring expenses, our operating expenses, as
expressed in U.S. dollars, decreased because the rate of the devaluation of the
real exceeded the rate of Brazilian inflation. In 2003, selling and distribution
expenses were US$38.6 million, 37% higher than in 2002, due primarily to higher
sales volume. Administrative expenses were US$22.8 million, US$0.5 million lower
than in 2002, and other operating expenses were US$42 million, compared with
US$54.1 million in 2002. In 2003, our operating expenses, as expressed in U.S.
dollars, decreased mainly due to a lower provision for loss on
37
credit of ICMS, partially offset by a higher provision for fines on tax
contingencies. ICMS is the Brazilian value added tax.
Inflation and exchange rate variations affect our monetary assets and
liabilities denominated in reais. The value of such assets and liabilities as
expressed in U.S. dollars declines when the real devalues against the U.S.
dollar and increases when the real appreciates. In addition, many financial
instruments denominated in reais are indexed for inflation. In periods of
devaluation of the real, we report (a) a remeasurement loss on real-denominated
monetary assets, which is offset, at least in part, by monetary indexation of
real-denominated financial instruments and (b) a remeasurement gain on
real-denominated monetary liabilities, which is offset, at least in part, by the
monetary indexation of real-denominated financial instruments.
We have adopted a conservative policy of having most of our financial
assets denominated in U.S. dollars. At December 31, 2003, approximately 83%% of
our cash and cash equivalents and marketable securities were invested in Real
denominated deposits and financial assets. See "--Liquidity and Capital
Resources--Financial Strategy."
A. OPERATING RESULTS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Net operating revenues in 2003 were US$1,003.1 million, compared to
US$669.0 million in 2002. The US$334.1 million increase was primarily due to a
US$235.7 million increase in pulp sales volume and US$76.3 million increase in
the average prices of pulp. In 2003, total cost of pulp and sawn wood sales was
US$592.6 million, compared to US$468.9 million in 2002. This increase was mainly
due to a US$162.6 million increase in the sales volumes, offset by a US$50.3
million decrease in production costs. Production costs per ton in 2003 were
US$226, compared to US$238 in 2002. Cash production cost in 2003 was US$144 per
ton as against US$138 per ton in 2002, mainly due to higher wood costs as a
consequence of purchased wood volume and longer average distance from the forest
to the mill.
Selling expenses were US$38.6 million in 2003, compared to US$28.2 million
in 2002, mainly due to higher sales volume.
Administrative expenses were US$22.8 million, compared to US$22.3 million
in 2002, mainly due to the local currency appreciation against the dollar.
Other operating expenses, net, totaled US$42.0 million in 2003, compared to
US$54.1 million in 2002, mainly due to a lower provision of US$21.9 million for
loss of the ICMS tax credit, partially offset by a higher provision for fines on
tax contingencies of US$8.9 million.
Financial income in 2003 was US$43.0 million, compared to US$61.6 million
in 2002. The difference was mainly due to lower interest rates and lower
interest on tax credits, given the reduction in the amount of credits.
Financial expense was US$108.2 million in 2003, compared with US$82.0
million in 2002, mainly due to (i) an increase of US$17.9 million in interest
financing, (ii) an increase of US$7.3 million in provision for PIS/COFINS and
CPMF taxes, and (iii) an increase of US$7.4 million for interest on fiscal
contingencies provisions.
Currency re-measurement resulted in a net gain of US$42.0, compared with
US$14.9 million in 2002, the differences arising from fluctuations in the
exchange rate of reais versus dollars. The closing exchange rate on December 31,
2003 was US$1 = R$2.8892.
Income tax totaled US$129.1 million in 2003, compared with income tax
credit of US$15.6 million in 2002. Given the fact that tax charges are
calculated based on Brazilian GAAP results, the increase was mainly due to the
profits in local currency, a record for the Company.
38
As a result of all of the above-described factors, net income in 2003
totaled US$148.1 million, compared to US$111.9 million in 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Net operating revenues in 2002 were US$669.0 million, compared to US$574.4
million in 2001. The US$94.6 million increase was primarily due to a US$124.2
million increase in pulp sales volume, partially offset by a decrease in the
average prices of pulp, which lower pulp prices, corresponding to US$32.1
million.
In 2002, total cost of pulp and sawn wood sales was US$468.9 million,
compared to US$420.6 million in 2001. This increase was mainly due to a US$89.5
million increase in the sales volumes, offset by a US$43.1 million decrease in
production costs. Production costs per ton in 2002 were US$238, compared to
US$268 in 2001. This decrease was due to (i) a US$138 million decrease in cash
costs, (ii) a decrease in real-denominated costs due to the devaluation of the
real, and (iii) a decrease in the consumption of chemicals. This decrease was
partially offset by an US$11 per ton increase in the costs of wood purchased
from Veracel.
Selling expenses were US$28.2 million in 2002, compared to US$23.3 million
in 2001. This increase was mainly due to the increase in distribution costs.
Administrative expenses in 2002 totaled US$22.3 million, compared to
US$22.0 million in 2001. This increase was mainly due to higher costs of
services.
Other operating expenses, net, totaled US$54.1 million in 2002, compared to
US$25.6 million in 2001. This increase was mainly due to a US$34.3 million
increase in provision for loss of the ICMS tax (VAT) credit, partially offset by
a US$5.9 million decrease in the write-off of fixed assets.
Financial income in 2002 totaled US$61.6 million as compared to US$54.7
million in 2001. This increase was mainly due to a higher yield on investments
made in reais, partially offset by lower average returns on cash.
Financial expense was US$82.0 million in 2002 compared to US$70.2 million
in 2001. This increase was mainly due to (i) a US$2.0 million increase in
interest financing, (ii) a US$1.1 million increase in the CPMF contribution and
a US$2.4 million increase in the provision for PIS and COFINS in cash
investments, and (iii) a US$5.4 million decrease on the capitalization of
interest charges relating to the Fiberline C Expansion Project.
Loss (gain) on currency remeasurement, net, reflects the fluctuations in
the exchange rate of reais to U.S. dollars and resulted in a gain of US$14.9
million in 2002, compared to a net loss of US$18.0 million in 2001. This
difference was due to a decrease in our liabilities indexed to reais and by the
devaluation of the real against the U.S. dollar (15.7% in 2001 as compared to
34.3% in 2002).
Income tax benefit totaled US$15.6 million in 2002 compared to an income
tax expense of US$32.7 million in 2001. This difference was mainly due to the
change from taxable profit in 2001 as compared to a tax loss in 2002 (tax effect
of US$82.0 million), partially offset by an increase in the taxable profits
generated by our offshore subsidiaries (tax effect of US$28.9 million).
Net income in 2002 totaled US$111.9 million, compared to US$18.1 million in
2001.
B. LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had total debt outstanding of US$1,371.5 million,
an increase of 72.8% over total debt outstanding at December 31, 2002 of
US$793.8 million. This increase in 2003 was primarily due to the second tranche
of the securitization program in the amount of US$ 650.0 million. At March 31,
2004, the Company's total debt outstanding decreased to US$1,312.3 million,
primarily due to the reduction of trade financing in the form of export sale
advances, or ACC, and discounted export account receivables, or ACE.
39
The breakdown of our total debt outstanding at December 31, 2003 and
December 31, 2002 is set forth in the table below:
AT DECEMBER 31,
2002 2003
---------- ----------
(millions of U.S. dollars)
SHORT-TERM DEBT
Current portion of long-term debt
Local currency 27.3 41.1
Foreign currency 140.0 226.6
Short-term debt instruments
Local currency 3.3 1.1
Foreign currency (ACC/ACE) 7.5 117.2
Accrued finance charges
Local currency 0.3 0.9
Foreign currency 4.3 5.2
---------- ----------
Subtotal 182.7 392.1
LONG-TERM DEBT
Local currency 163.9 169.8
Foreign currency 447.2 809.6
---------- ----------
Subtotal 611.1 979.4
---------- ----------
TOTAL DEBT 793.8 1,371.5
---------- ----------
At December 31, 2003, our outstanding debt in local currency totaled
US$213.0 million and was comprised primarily of loan agreements with Banco
Nacional de Desenvolvimento Economico e Social--BNDES. BNDES is a major
shareholder of the Company.
At December 31, 2003, the Company's principal outstanding debt was
approximately US$771.4 million based on fixed interest rates, US$336.3 million
based on Libor, US$46.7 million based on a basket of currencies and US$211.0
million based on TJLP.
At December 31, 2003, our long-term debt maturities were as follows:
MATURING IN
---------------------------------------------------------------------------------------
2009 AND
2005 2006 2007 2008 BEYOND TOTAL
-------- ------- ------- -------- -------- -------
Long-term debt
(in millions of US$) 123.3 216.3 266.9 160.7 212.2 979.4
At December 31, 2003, we had cash, cash equivalents and debt securities
available for sale of US$352.3 million, an increase of US$78.4 million from
US$273.9 million at December 31, 2002. The equivalent of US$289.1 million was
invested in local currency instruments and US$63.2 million was invested abroad,
mostly in U.S. dollar time deposits with leading financial institutions. At
March 31, 2004, the Company had cash, cash equivalents and time deposits of
US$355.6 million.
Net debt reached US$519.9 million at December 31, 2002 as compared to US$
437.4 million at December 31, 2001. The increase was mainly due to capital
expenditures of US$260.7 million, and dividends of US$73.8 million, paid to
shareholders partly offset by cash generated from operations.
40
Net debt reached US$437.4 million at December 31, 2001 as compared to
US$209.8 million at December 31, 2000. This significant increase in gross debt
was a result of the increase of the capital expenditures in 2001 relating to
Fiberline C Expansion Project, totaling US$355.8 million in 2001. The net debt
increase of US$227.6 million was mainly due to capital expenditures of US$421.5
million and dividends of US$63.2 million paid to shareholders.
Our short-term debt consists primarily of trade financing in the form of
export sales advances, or ACC, discounted export accounts receivables, or ACE,
and prepayments for exports and Euro-commercial paper borrowings, all
denominated in foreign currency. ACC and ACE are forms of financing available
from Brazilian financial institutions or Brazilian branches of foreign financial
institutions at a fixed rate with a maturity of up to 360 days prior to shipment
of pulp for export, in the case of ACC, and with a maturity of up to 180 days
after shipment of pulp for export, in the case of ACE. Prepayments for exports
are a form of financing available from importers or foreign financial
institutions at a fixed rate with maturity of either up to 180 days or more than
one year, in each case prior to the shipment. As of December 31, 2003, the
outstanding principal amount of such short-term trade financing was US$117.8
million at an average annual interest rate of 1.7% and an average month-end
balance of US$181.1 million during 2003. As of December 31, 2002, the
outstanding amount of such short-term trade financing was US$7.5 million at an
average annual interest rate of 4.7% and an average month-end balance of US$24.6
million during 2002.The Company's long-term debt consists primarily of U.S.
dollar-denominated debt issued outside Brazil in the amount of US$984.0 million
at December 31, 2003 and loans from BNDES, one of the Company's principal
shareholders, denominated in Reais and in foreign currencies. At December 31,
2003, the Company had loans from BNDES with an aggregate principal amount
outstanding of R$765.7 million (US$263.3 million) (as compared to R$925.9
million (US$265.2 million) at December 31, 2002), which represented
approximately 19% of the Company's total indebtedness at such date. At December
31, 2003, of the total aggregate principal amount of the BNDES debt, US$211.0
million was denominated in Reais and adjusted by the Taxa de Juros de Longo
Prazo (the Long-term Interest Rate or "TJLP"), US$5.6 million was U.S.
dollar-denominated and US$46.7 million was adjusted by a currency basket. On
June 13, 2001, the Company entered into an 8-year loan agreement with BNDES for
an aggregate principal amount of R$666.3 million (US$230.6 million at the
exchange rate of R$2.8892 per US$1.00 at December 31, 2003) with maturities from
2003 to 2009 and annual interest rates ranging from 7.8% to 11.4%. The Company
had outstanding indebtedness under this agreement of US$246.5 million at
December 31, 2003. The loan is divided into three tranches. A portion of the
debt incurred by the Company under the above-mentioned loan is subject to
interest equal to the TJLP plus 1.8% or 3.3% per annum, as applicable, and
another portion is subject to interest equal to 3.3% per annum over the interest
rate published quarterly by BNDES. The proceeds of this loan were used
principally to finance the Fiberline C Expansion Project. The Company's
obligations under this agreement are secured by liens on the Company's
industrial site at the Municipality of Aracruz.
In February 1995, the Company completed the first tranche, totaling US$50
million, of a transaction pursuant to which Trading securitized existing and
future accounts receivable payable by certain customers. The securitization was
limited to an aggregate principal amount of US$200 million, and the second and
third tranches for the remaining US$150 million were completed in July 1995.
During 1997, US$38 million of the five-year certificates relating to the third
tranche were fully redeemed. As of December 31, 2001, there was US$13.2 million
outstanding under the securitization. The outstanding amount due under the
securitization was prepaid on March 31, 2002.
On January 30, 2002, Arcel Finance Limited issued 5.984% Senior Secured
Notes due 2009, in the amount of US$250 million,; on August 6, 2003 it issued
its US$400 million of its 7.048% Senior Secured Notes due September 1, 2011 and
further, on April 30, 2004, a new tranche of 6.361% Senior Secured Notes due May
1, 2012 in the total amount of US$175,000,000 was issued, as part of a new
program for the issuance of collateralized debt securities. Subsequent to the
offer and sale of those notes, additional series of notes may be issued,
provided that certain conditions are met. We unconditionally and irrevocably
guaranteed all obligations of Aracruz Trading and Aracruz Trading Hungary under
the notes. The notes rank pari passu in priority of payment (subject to
mandatorily preferred debts under applicable laws) with all of our other present
and future unsecured and unsubordinated obligations. The first tranche has a
financial guaranty insurance policy by a financial guaranty insurance company
guaranteeing the timely payments of interest on and scheduled principal of the
first tranche of notes.
We agreed, among other things:
41
o that at least 80% of our export sales of bleached eucalyptus kraft
market pulp in the most recent four calendar quarters of certain dates
must be made to Aracruz Trading S.A.;
o to limitations on our winding-up or dissolution or possible future
mergers and our consolidation for as long as the notes are
outstanding; and
o to perform certain acts in the event of bankruptcy of Aracruz Trading
S.A. or Aracruz Trading Hungary Limited, including the replacement of
Aracruz Trading S.A. or Aracruz Trading Hungary Limited, as the case
may be, for another company .
The Company is a several guarantor of 50% of the indebtedness incurred by
Veracel in connection with the financing of the Veracel Project. Stora Enso is a
several guarantor of the other 50% of such indebtedness. At March 31, 2004 the
outstanding amount of such indebtedness guaranteed by the Company was
approximately US$63.5 million. As of December 31, 2003, the Company had no
off-balance sheet arrangements that have, or are reasonably likely to have, a
material effect on its financial condition, revenues, expenses, results of
operations, liquidity, capital expenditures or capital resources.
CAPITAL EXPENDITURES
The Company's capital expenditures for 2003, 2002 and 2001 were US$118.7
million, US$260.7 million and US$421.5 million , respectively.
During the year 2003, the Company invested approximately US$118.7 million,
of which US$55.8 million was devoted to the Fiberline C Expansion Project,
US$3.2 million was devoted to ongoing industrial investments, US$51.5 million
was devoted to silviculture and other forestry investments and US$8.2 million
was devoted to other projects.
During 2004, the Company expects to invest approximately US$210 million, of
which US$115 million is expected to be invested in the Veracel Project and US$95
million relates to industrial, forestry and other investments. See "Item
4--Information on Aracruz--History and Development of Aracruz--Capital
Expenditures."
FINANCIAL STRATEGY
Because the Company operates internationally, it is exposed to market risks
from changes in foreign exchange and interest rates. To protect against these
market risks, the Company from time to time enters into forward foreign exchange
contracts and interest-rate swap agreements. The Company may be exposed to
counterparty credit risk in the event of nonperformance by the counterparties to
the forward exchange-rate contracts and the interest-rate-swap agreements. The
Company believes that an event of nonperformance by its counterparties is
unlikely to occur due to the Company's credit risk policies.
In the past, a major element of our financial strategy was to take
advantage of the interest rate differential available in Brazil only to
exporting companies. Funds obtained through lower cost trade financing were
invested, together with cash flow from operations, in Brazilian financial
instruments at a generally higher yield. Our ability to generate profits from
this arbitraging activity has been reduced as a result of the declining interest
rates in Brazil as well as from the change in our financial strategy in 1997.
Since August 1997, most of our financial investments were denominated in U.S.
dollars to minimize currency risk exposure.
The issuance of the Notes under the securitization program for
collateralized debt securities in 2002 and 2003 is part of the Company's current
financial strategy, which includes increasing the average maturity of its debt.
Brazilian companies have limited sources of long-term debt financing denominated
in Reais, and the we do not intend to incur short-term debt denominated in Reais
due to the higher associated costs. At December 31, 2003, 85% of the Company's
total indebtedness was denominated in foreign currencies, as compared to 75% at
the end of 2002. Although the Company's access to debt financing denominated in
foreign currencies, beyond pre-export and receivables financing, may also be
42
limited, the Company believes that it has access to a sufficient number of
financing sources to meet its needs without resorting to expensive short-term
Real-denominated financing.
Our guidelines for our financial investments are as follows:
o investments in fixed income obligations of the Brazilian government
have no limit;
o investments in banks in Brazil are subject to the following
requirements:
o the bank must have a minimum rating of "A-" or equivalent from
rating agencies; and
o the maximum investment per bank is limited to the lesser of (i)
US$100 million, and (ii) 15% of the bank's net worth (the net
worth limit does not apply to wholly owned local subsidiaries of
foreign banks having an international rating equivalent to at
least "A-" from rating agencies);
o investments in banks abroad:
o for investments up to 180-day maturity, the bank must have a
minimum rating equivalent to "BBB" in the international scale
from rating agencies;
o for investments above 180-day maturity, the bank must have a
minimum rating equivalent to "A-" in the international scale from
rating agencies.
DIVIDENDS
Subject to certain exceptions, we are required, according to our by-laws
and under Brazilian corporate law, to pay a minimum annual dividend equal to 25%
of our Adjusted Net Income. In addition, we may pay interim dividends either
based on our net income for any period within our fiscal year or from retained
earnings or certain other revenue reserves established in prior years. See "Item
8A. Consolidated Statements and Other Financial Information--Dividends."
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
During 2001, 2002 and 2003, our research and development expenditures
totaled approximately US$4.0 million, US$3.8 million and US$3.8 million,
respectively. The Company believes that its research and development activities
are an important part of its ongoing effort to maintain its competitiveness. The
Company strives to develop high quality forests, with high productivity at
minimum cost, in specific ecosystems, and to produce the highest quality wood
pulp with minimum environmental impact. This strategy has enabled the Company to
obtain productivity gains and reduce overall production costs, while supplying
the market with improved products and reinforcing the Company's long-term
relationships with key customers.
The main objective of the Aracruz Research and Technology Center is to add
value to the overall business. With activities ranging from the seedling nursery
to final product development, we achieved important results in 2003. We made
further progress in the genetic enhancement of the Aracruz Eucalyptus. Of
particular note was the obtaining of a new generation of superior trees to be
planted on an operational scale from 2004. The results showed that the new trees
offer potential for a higher productivity per hectare then those currently
planted, adding value in terms of fiber quality to attend the market demands.
Furthermore, Aracruz is a member of the Eucalyptus Genome Consortium
(Genolyptus), with the aim of obtaining additional tools and products to speed
up the results of our tree improvement program.
The development of forest management techniques that insure the high
performance of the Company's plantations continues to be one of the Company's
priorities. As part of the Company's activities in the "Brazil Eucalyptus
Potential Productivity" consortium, a number of parameters that influence the
biological process of productivity and sustainability of eucalyptus plantations
are being measured.
43
Work on the Aracruz Watershed Project continued during 2003. The project
consists of long-term studies to evaluate the forest sustainability of the
Company's production. Conducted in partnership with renowned research institutes
and universities in Brazil and abroad, the project integrates studies based on
the systematic monitoring of the principal environmental components - climate,
soil, water resources, biodiversity - and the analysis of their
inter-relationships. This approach has brought about wide-ranging results with
practical applications as well as generated a database that has allowed
continuous enhancement of the Company's forestry management procedures, thus
helping minimize the impact of its activities on the environment.
The results indicate that - after successive eucalyptus planting cycles -
the Company's practices assure the maintenance or improvement of the natural
condition of the soil as well as making an effective contribution to the
preservation of biodiversity and water resources. The project associated with
additional monitoring in different ecosystems, is allowing the use of
process-based models to predict forest growth. A system was developed and
implemented that will more precisely evaluate outbreaks of pest and diseases,
leading to more effective control measures and reducing the risk of a loss of
productivity.
As with pulp, advances were also made in forestry operations for solid wood
products. In 2003, the Company continued to conduct studies focusing on a new
concept of forestry management for the growing of large trees.
The development of new types of fibers in line with the commercial
objectives and needs of our customers continued to be one of the priorities of
our research and technology team. The results indicate that we are nearing
important strategic advances that will result in improved wood quality and
enhanced environmental performance.
D. TREND INFORMATION
The trends that influence our sales and production and inventory levels are
primarily the patterns of pulp purchases by paper producers in the United
States, Europe and Asia and the level of pulp inventory held by pulp producers
worldwide.
For 2004, it is expected that there will be an increase in supply in the
bleached hardwood kraft market pulp segment as a result of new facilities coming
online in the market.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
We are managed by our Conselho de Administracao, or board of directors, and
our Diretoria, or board of executive officers.
Set forth below are the names and positions at June 15, 2004 and brief
biographical descriptions of our directors and officers:
44
BOARD OF DIRECTORS
NAME AGE POSITION
------------------------------------------------------------------------ ----------- ------------------
Carlos Alberto Vieira.................................................. 70 Chairman
Ernane Galveas......................................................... 81 Member
Acyr Frederico Horta Barbosa Pinto da Luz 68 Member
Luiz Aranha Correa do Lago 53 Member
Eliezer Batista da Silva............................................... 80 Member
Haakon Lorentzen....................................................... 49 Member
Jose Roberto Ermirio de Moraes......................................... 47 Member
Leon Chant Dakessian................................................... 50 Member
Nelson Koichi Shimada 51 Member
Sandra Meira Starling 60 Member
EXECUTIVE OFFICERS
NAME AGE POSITION
------------------------------------------------------------------------ ----------- ------------------
Carlos Augusto Lira Aguiar............................................. 58 CEO
Joao Felipe Carsalade.................................................. 49 Officer
Walter Lidio Nunes..................................................... 55 Officer
Isac Roffe Zagury...................................................... 52 Officer
_______________...
BIOGRAPHICAL INFORMATION
CARLOS ALBERTO VIEIRA. Since April 29, 2004 Mr. Vieira has been the
Chairman of our Board of Directors , of which he had been a member since April
15, 1988. He is also President of the board of directors of Banco Safra S.A.,
Safra Leasing S.A. Arrendamento Mercantil, Agropecuaria Potrillo S.A., and
Pastoril Agropecuaria Couto Magalhaes S.A. He is also an officer of Safra
Seguradora S.A.
ERNANE GALVEAS. Mr. Galveas has been a Director since April 29, 1994. He
has also been a member of the Technical Committee of the Brazilian Association
of Commerce since 1975 and, since 1988 he has been the Economic Counsel for the
Presidency of that Committee. Mr. Galveas has been the President of the Managing
Committee of the Brazilian Association for Economic Studies Promotion since
1988, and was the Minister of Finance of Brazil during the period from January
1980 to March 1985, and President of the Central Bank twice. He was also our
chief financial officer during the period from 1974 to 1978 and Executive Vice
President in 1979.
ACYR FREDERICO HORTA BARBOSA PINTO DA LUZ. Mr. Luz has been a Director of
the Company since April 29, 2003. He is also a lawyer in Rio de Janeiro.
LUIZ ARANHA CORREA DO LAGO. Mr. Correa do Lago was an alternate member of
our Board of Diretors from April 1998 to April 2004, when he was elected member
of the board. He has been the Planning Director of Lorentzen Empreendimentos S/A
since 1988. He also held office as Capital Markets Director of the Central Bank
of Brazil from 1987 to 1988.
ELIEZER BATISTA DA SILVA. Mr. Batista da Silva has been a Director since
June 28, 1996. He was also Chairman of Rio Doce Internacional. In 1992, he
served as the Brazilian Government's Secretary for Strategic Affairs. From 1979
to 1986, he was Chairman of Companhia Vale do Rio Doce and also the President of
its board of directors. He was the President of Mineracoes Brasileiras Reunidas
S.A. (Caemi Group) from 1964 to 1968, and Minister of Mines and Energy from 1962
to 1964. His first term as Chairman of Companhia Vale do Rio Doce was from 1961
to 1962.
HAAKON LORENTZEN. Mr. Lorentzen has been a Director since April 29, 1991
and is the son of Mr. Erling Lorentzen, formerly our Chairman. He is the
Executive Vice President of Lorentzen Empreendimentos S.A., as well as Chairman
of Carbo Industrial S.A., Carbo Derivados S.A. and Provida ASA.
45
JOSE ROBERTO ERMIRIO DE MORAES. Mr. Moraes has been a Director since April
18, 2002. He is also the Chairman of VCP, of which he was the Chief Executive
Officer until April 2002.
LEON CHANT DAKESSIAN. Mr. Dakessian has been a Director since April 18,
2002. He has also been the Corporate Planning Director of Votorantim group since
August 1998. Prior to joining Votorantim, he worked for Bunge Group from 1984 to
1998 in strategic planning, business development and corporate treasury areas.
NELSON KOICHI SHIMADA. Mr. Shimada has been working for Votorantim Group
since 1989. At present, he is a Vice President of VBC and Votorantim
Internacional.
SANDRA MEIRA STARLING. Ms. Starling has been a Director of the Company
since April 29, 2003. She is also Executive Secretary of the Department of Labor
and Jobs since January 2003. She was previously Director of Research and
Extension of the Pontifical Catholic University of Minas Gerais and a professor
in the Department of Sociology and Anthropology of the University of Philosophy
and Humanities and in the Department of Private Rights at the Federal University
of Minas Gerais.
CARLOS AUGUSTO LIRA AGUIAR. Mr. Aguiar became President on April 17, 1998.
He has been an Officer since October 25, 1985 and he was a Vice President from
April 1993 to April 17, 1998. Due to the resignation of Mr. Armando da Silva
Figueira as President, effective at February 11, 1993, Mr. Aguiar was also the
Acting President from such date until November 16, 1993. Since 1981, Mr. Aguiar
has held various managerial positions with our operations department. JOAO
FELIPE CARSALADE. Mr. Carsalade has been an Officer since September 6, 1993.
Since 1976, Mr. Carsalade has held various managerial positions with our
commercial department.
WALTER LIDIO NUNES. Mr. Nunes has been an Officer since May 27, 1998. Since
1977, Mr. Nunes has held various managerial positions with our industrial
department.
ISAC ROFFE ZAGURY. Mr. Zagury was elected a member of our board of
executive officers on June 6, 2003. Prior to that, he worked for 26 years at
BNDES in various positions. Since 2000, he was acting as an officer of BNDES.
FISCAL COMMITTEE
Although we are not required under the Brazilian corporate lawto maintain a
permanent fiscal committee (conselho fiscal), our by-laws were amended in April
2004 to establish that such corporate body shall be maintained on a regular
basis. Under the Brazilian corporate law, the Conselho Fiscal, or fiscal
committee, is a corporate body independent of management. A Conselho Fiscal is
not equivalent to, or comparable with, a U.S. audit committee. Our fiscal
committee is composed of three members, as required by the Brazilian corporate
law, and three alternates. Two members of the fiscal committee represent the
controlling shareholders, and one represents the minority shareholders'
interests. The members of the fiscal committee are elected for one-year terms,
but can be reelected. The primary responsibility of the fiscal committee is to
review management's activities and the financial statements, and to report its
findings to the shareholders. Under the Brazilian corporate law, the fiscal
committee may not contain members that (i) are on the board of directors, (ii)
are on the board of executive officers, (iii) are employed by us or a controlled
company, and (iv) are spouses or relatives of our management, up to the third
degree. In addition, the Brazilian corporate law requires that the fiscal
committee members receive as remuneration at least 10% of the average amount
paid to each executive officer. The Brazilian corporate law requires a fiscal
committee to have a minimum of three and a maximum of five members.
At the annual shareholders' meeting held on April 29, 2004, our
shareholders decided to appoint, for the fiscal year ending on December 31,
2004, the members of our fiscal committee and their respective alternates as set
forth below:
Name Position
---- --------
Wagner Braz................................... Member
Sheila Periard Henrique Silva................. Alternate
Fernando Octavio Martins Alves................ Member
Jorge Juliano de Oliveira..................... Alternate
46
Luiz Antonio Perdigao......................... Member
Luiz Coelho Repis............................. Alternate
We do not currently have an audit committee. We do, however, expect to have by
July 31, 2005 an audit committee with all of the attributions, including
independence, required by Sarbanes-Oxley Act, relevant U.S. regulations and the
corporate governance rules of the New York Securities Exchance or to avail
ourselves of permitted exemptions.
B. COMPENSATION
For the year ended December 31, 2003, the aggregate compensation of all of
our directors and officers was approximately US$1.8 million, which includes
bonuses in the aggregate amount of US$0.3 million.In addition, for 2003, we paid
an aggregate of approximately US$0.08 million into our pension plan on behalf of
our directors and officers. For the year ended December 31, 2002, the aggregate
compensation of all of our directors and officers was approximately US$2.0
million, which includes bonuses in the aggregate amount of US$0.6 million. In
addition, for 2002, we paid an aggregate of approximately US$0.07 million into
our pension plan on behalf of our directors and officers.
C. BOARD PRACTICES
Our board of directors (i.e., Conselho de Administracao), which may consist
of no fewer than nine and no more than twelve members (each, a director), is
responsible for, among other things, establishing our general business policies.
Our board of directors is currently comprised of ten members and ten alternates,
who were elected for a term of three years by the shareholders at the annual
shareholders' meeting held on April 29, 2004. The term of office of the current
board of directors will end on the date of the ordinary shareholders' meeting to
take place in 2007. Our by-laws provide that, in the absence of a director, an
alternate director may attend board meetings. We have no service contracts with
our directors providing for benefits upon termination of employment.
Our board of executive officers (i.e., Diretoria), which may consist of no
fewer than two and no more than eight officers (each, an officer), is
responsible for our day-to-day management. The executive officers are elected by
the board of directors for a term of three years. The term of office of each
officer will end on July 24, 2006.
REMUNERATION COMMITTEE
We have an ad hoc remuneration committee, formed by three members, the
purpose of which is to decide on various matters regarding the compensation of
our officers and directors. The current members of the remuneration committee
are Luiz Aranha Correa do Lago, Isaac Selim Sutton and Mauricio Luis Luchetti.
The members of the remuneration committee do not receive compensation.
BOARD PRACTICES
Under Brazilian corporate law, the members of the board of directors must
be shareholders of the company. There is no requirement as to the number of
shares an individual must own in order to act as a member of the board of
directors.
According to Brazilian corporate law, officers and directors of a company
are prohibited from voting on or acting in matters in which their interests
conflict with those of the company.
Our by-laws provide that the shareholders are responsible for determining
the global annual remuneration of the members of our management bodies. Our
board of directors is responsible for dividing such remuneration among the
members of the management. There are no specific provisions regarding a
directors' power to vote its compensation in the absence of an independent
quorum.
With respect to the borrowing powers of the board of directors, the
approval of the board of directors is necessary to issue commercial paper, but
any other financing arrangements may be entered into by us upon the joint
signatures of:
47
o two officers;
o one officer and one attorney-in-fact; and
o two attorneys-in fact.
There are no age limit requirements for retirement of the members of our
board of directors. There are no provisions in our by-laws regarding reelection
of directors in staggered intervals.
D. EMPLOYEES
We employed a total of 2,145 people at December 31, 2003, compared to 1,601
people at December 31, 2002. For the years ended December 31, 2002 and 2001, 76%
of our workforce were directly involved in the production process, 4% were
engaged in research and development and 20% were administrative employees. As of
December 31, 2003, 61% of our employees were employed at the Mill site in
Aracruz, 22% were employed at the Guaiba Unit, 2% were employed at the offices
in Rio de Janeiro and 15% were employed at the offices in Bahia.
All of our employees are subject to collective bargaining agreements with
seven unions. Each collective bargaining agreement is renegotiated annually in
November. The agreements currently in effect will expire in October 2004.
In December 1994, the Executive Branch of the Brazilian government issued a
provisional measure, which was converted into Law No. 10,101 of December 19,
2000 giving employees the right to receive a bonus based on certain operating
results of their employer, as such right is contemplated in the Brazilian
Constitution. The law provides that each company and its employees shall agree
on the details of such bonus, including the calculation of the amount of the
bonus and the applicable payment periods. Pursuant to such legislation, since
1995 the Company and its employees' labor unions have negotiated the terms of
two different bonus plans on an annual basis, one for the Company's management
and another for non-management employees, which plans meet the requirements of
the provisional measure. Any bonus to be paid under either of the plans is based
on the Company reaching certain operating targets and financial results. The
total amount paid by the Company under these bonus plans for 2003 amounted to
US$5.2 million.We provide certain social benefits to our employees, including
funds to operate a school. We contribute, jointly with the employees, to an
employee pension fund, most of the trustees of which are also our officers.
E. SHARE OWNERSHIP
As of December 31, 2003, the members of our board of directors and our
officers, on an individual basis and as a group, beneficially owned less than
one percent of any class of our stock. None of the members of our board of
directors or our officers holds any options to purchase our common shares or
preferred shares. See "Item 7A. Major Shareholders."
The following table lists the amount of shares held directly by each
individual member of our board of directors or executive officer and their
representative percentage relative to the total outstanding shares as of May 30,
2004:
48
NUMBER OF % OF THE TOTAL
NUMBER OF PREFERRED SHARES
COMMON SHARES SHARES TOTAL OUTSTANDING
------------- ------ ----- -----------
BOARD OF DIRECTORS
Carlos Alberto Vieira......................... 1,000 - 1,000 0.00
Ernane Galveas................................ 91 - 91 0.00
Acyr Frederico Pinto da Luz 205,321 103.000 308,321 0.03
Luiz Aranha Correa do Lago 8 - 8 0.00
Eliezer Batista da Silva...................... 13 - 13 0.00
Haakon Lorentzen.............................. 10 - 10 0.00
Jose Roberto Ermirio de Moraes................ - 1 1 0.00
Leon Chant Dakessian.......................... - 1 1 0.00
Nelson Koichi Shimada - 1 1 0.00
Sandra Meira Starling - 1 1 0.00
EXECUTIVE OFFICERS
Carlos Augusto Lira Aguiar.................... - 10,599 10,599 0.00
Joao Felipe Carsalade......................... - - - 0.00
Walter Lidio Nunes............................ - - - 0.00
Isac Roffe Zagury............................. - - - 0.00
Total......................................... 206,443 113,603 320,046 0.03
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
Of the three classes of our capital stock outstanding, only our common
stock, without par value, has voting rights. Approximately 96.5% of our common
stock is owned by the following four principal shareholders, or the Principal
Shareholders: Arapar S.A. (a company associated with Erling Sven Lorentzen, the
Chairman of our board of directors until April 2004), S.O.D.E.P.A.--Sociedade de
Empreendimentos, Publicidade e Participacao S.A., or SODEPA (an affiliate of
Banco Safra S.A.), Newark Financial Inc. (a British Virgin Islands company
wholly owned by VCP) and BNDES Participacoes S.A.--BNDESPAR (an affiliate of our
principal bank lender, Banco Nacional de Desenvolvimento Economico e
Social--BNDES, a development bank wholly owned by the Brazilian government). The
Principal Shareholders have the ability to control the election of the members
of our board of directors and the direction and future of our operations,
including decisions regarding acquisitions and other business opportunities, the
declaration of dividends in excess of the required amounts as set forth under
our by-laws and Brazilian corporate law, and the issuance of securities. See
"--Shareholders' Agreement."
On October 3, 2001, we were informed that, on that date, Mondi Brazil
Limited, or Mondi, a subsidiary of Anglo American Corporation of South Africa
Limited entered into a share purchase and sale agreement with VCP, one of our
competitors. See "Item 4B. Business Overview--Competition." Under the share
purchase and sale agreement, VCP agreed, through a wholly owned subsidiary
incorporated in the British Virgin Islands, to acquire from Mondi 127,506,457
shares of our common stock, representing 28% of our voting capital and 12.3% of
the total capital stock, excluding treasury stock, for US$370 million. The
transfer of the shares occurred on November 1, 2001, on which date the VCP
subsidiary agreed to be bound by the existing Shareholders' Agreement, which
expires in 2008. Mondi had purchased its participation from a former
shareholder, Souza Cruz S.A., on June 13, 1996.
The following table sets forth the amount and percentage ownership at March
31, 2004 of each shareholder known to us to own more than 5% of each class of
our capital stock and our officers and directors as a group:
49
SHARE OWNERSHIP AT MARCH 31, 2004
-------------------------------------------------------------------------
COMMON STOCK CLASS A STOCK(1) CLASS B STOCK
---------------------- --------------------- ---------------------
SHARES % SHARES % SHARES %
--------- -------- --------- ------- ---------- --------
(in millions of shares, except percentages)
Newark Finance Inc.(2) 127.5 28.0% -- 0.0% -- 0.0%
Arapar S.A.(3)(4) 127.5 28.0 -- 0.0 -- 0.0
Sociedade de Empreendimentos,
Publicidade e Participacao S.A.(5) 127.5 28.0 27.7 72.8 57.9 10.8
BNDES Participacoes S.A.(6) 56.9 12.5 10.0 26.3 34.2 6.4
Others 16.0 3.5 0.4 0.9 447.0 82.8
------ ----- ---- ------ ------ -------
Total 455.4 100.0% 38.1 100.0% 539.1 100.0%
====== ====== ==== ====== ===== ======
_______________
Source: Banco Itau S.A.
(1)Each share of acoes preferenciais classe A of the Company ("CLASS A STOCK")
may be converted into one share of acoes preferenciais classe B of the Company
("CLASS B STOCK") at any time at the holder's option. Shares of Class B Stock
are not convertible into shares of Class A Stock.
(2) Newark Finance Inc. purchased its Common Stock from Mondi Brazil
Limited on November 1, 2001.
(3)Lorentzen Empreendimentos S.A. owns indirectly approximately 44.7% of
Arapar S.A. Lorentzen Empreendimentos S.A. is indirectly controlled by Erling
Sven Lorentzen, Chairman of the Company's board of directors. Haakon Lorentzen,
also a member of the Company's board of directors, owns indirectly 2.6% of the
stock of Lorentzen Empreendimentos S.A.
(4)Den Norske Bank ASA owns indirectly approximately 23.3% of Arapar S.A. Den
Norske Bank ASA has agreed to finance the Company's acquisition of certain
equipment. See "Certain Transactions With Related Parties -- Other Matters."
(5) Albatroz S.A., previously a shareholder, was merged into Safra Holding
S.A. in January 1995, which in turn was merged into SODEPA in March 1996. On
April 22, 2004 127,506,457 shares of Common Stock held by SODEPA were
transferred to its affiliate Arainvest Participacoes S.A.
(6) A wholly owned subsidiary of BNDES.
SHAREHOLDERS' AGREEMENT
The Principal Shareholders are parties to a Shareholders' Agreement, dated
January 22, 1988, as amended on June 30, 1989, or the Original Shareholders'
Agreement. While we are a signatory to the Original Shareholders' Agreement, our
sole obligation under the agreement is to administer compliance by the Principal
Shareholders in accordance with the terms of the Original Shareholders'
Agreement. The Original Shareholders' Agreement relates only to our common
stock. The Original Shareholders' Agreement provides that the Principal
Shareholders will be entitled to elect directors of our board of directors in
proportion to their respective interests in our voting stock, except that each
Principal Shareholder is ensured the right to elect at least one director so
long as such Principal Shareholder retains 5% or more of our voting stock. Such
right is not transferable without the unanimous consent of the other parties to
the Original Shareholders' Agreement. In addition, the Original Shareholders'
Agreement provides that the maximum number of shares of common stock to be held
by any Principal Shareholder may not exceed 28% of the total outstanding shares
of common stock. Furthermore, the Original Shareholders' Agreement provides that
the Principal Shareholders may sell, encumber or otherwise transfer their rights
in our voting stock to any third party as long as the beneficial ownership of
51% or more of such stock is retained by Brazilian nationals. Brazilian
nationals are defined as (a) individual residents who are domiciled in Brazil,
(b) corporate instrumentalities of the Brazilian government or subdivisions
thereof or (c) corporate entities whose headquarters are in, and are
incorporated in, Brazil and which, directly or indirectly, are controlled by
persons referred to in (a) or (b) above. The Original Shareholders' Agreement
also requires that each person or entity who acquires shares of common stock
from any of the Principal Shareholders become a party to such agreement. The
Original Shareholders' Agreement will expire in 2008.
50
On February 5, 2003, a shareholders agreement was signed by and
between, on one side, Arapar S/A and Lorentzen Empreendimentos S/A, collectively
Grupo Lorentzen, and, on the other side, SODEPA (the "NEW SHAREHOLDERS'
AGREEMENT"). Each of the Parties holds approximately 28% of Aracruz' voting
shares.
Notwithstanding the Original Shareholders' Agreement dated January 22,
1988, which will be in force and effect until May 11, 2008, the New Shareholders
Agreement executed in February 2003, which will be in force for 16 years from
the date of its execution, governs the exercise of Grupo Lorentzen and SODEPA's
ownership rights, establishing rules related to (i) the sale of its shares (in
force during the term of the Original Agreement), (ii) the preferential rights
to purchase such shares, and (iii) the right to a tag along sale. The exercise
of voting rights by Grupo Lorentzen and SODEPA will continue to be in force upon
the expiration of the Original agreements.
B. RELATED PARTY TRANSACTIONS
BNDES LOAN AGREEMENTS
BNDES is our principal lender. As of December 31, 2003, we had outstanding
loans with BNDES with an aggregate principal amount outstanding of approximately
R$765.7 million (equivalent to US$263.3 million) (the "BNDES DEBT"), which
represented approximately 19% of our total indebtedness. The interest payable by
us on the real-denominated debt is equal to the TJLP, plus 1.8% to 4% per annum.
The TJLP is determined based on a mix of the long-term local and foreign debt
instruments issued by the government. The rate is reset quarterly. The debt that
is denominated in, or indexed to, foreign currencies is corrected by changes in
the exchange rate, plus interest of 2.33% to 10.41% per annum. Approximately 94%
of the BNDES Debt was incurred in connection with the Fiberline C Expansion
Project. At March 31, 2004, the outstanding principal balance of the Company's
BNDES debt was approximately R$714.9 million (equivalent to approximately
US$245.8 million), representing approximately 19% of the Company's total
indebtedness.
One of the financing arrangements that we have entered into with BNDES
extends a credit line to us of up to US$205.0 million for use principally in
connection with the Modernization Project (US$0.7 million outstanding as of
March 31, 2004). See "Item 4A. History and Development of Aracruz--Capital
Expenditures."
The BNDES debt is secured by liens on our industrial site at the
Municipality of Aracruz. Certain of the Principal Shareholders have provided
BNDES with assurances that we will meet the debt-to-equity and liquidity ratios
contained in one of the BNDES Debt loan agreements and agreed that, in the event
such ratios are not maintained, they will contribute to us as capital any amount
they would otherwise have been entitled to receive as dividends. We believe that
the BNDES debt is on terms comparable to those offered by BNDES to unaffiliated
third parties in similar financings. Because BNDES was organized by the
Brazilian government in large part to support development of businesses within
Brazil, loans made by BNDES, including the BNDES debt, are typically on terms
more favorable to the borrower than would be available from non-governmental
lending institutions. See Note 12 of the consolidated financial statements.
OTHER MATTERS
On June 14, 1996, we entered into a buyer's credit agreement with Den
Norske Bank ASA, an indirect shareholder of Arapar S.A., pursuant to which Den
Norske Bank ASA has agreed to provide approximately US$8.4 million to us to
finance the acquisition of certain equipment and related services in connection
with the Modernization Project. As of March 31, 2004 approximately US$0.6
million was outstanding under this agreement.
On January 1, 1998, Companhia de Navegacao Norsul, or Norsul, a company
indirectly controlled by Mr. Erling Sven Lorentzen, the former chairman of our
board of directors and a shareholder of Arapar S.A., one of the Principal
Shareholders, entered into a contract with us expiring on December 31, 2002
pursuant to which Norsul ships pulp for us to the United States and Northern
Europe. For Northern Europe, Norsul has a joint service agreement with Gearbulk
Pool Ltd. In 2002 and 2003, Norsul shipped approximately 396,000 and 460,000
tons of pulp to us, representing approximately 24% and 22% of our export sales,
respectively. In January 2004, Norsul sold its ocean freight division (Open
Hatch division) to Gearbulk, transferring all its agreement rights to Gearbulk.
51
On December 19, 2000, Norsul entered into an agreement with us which
established the terms and conditions to implement the investments and operations
of a project to ship wood logs from the port of Caravelas, in the south of the
State of Bahia, to the Portocel Barra do Riacho Specialized Terminal. According
to this agreement, we will reimburse Norsul for the costs incurred on the
acquisition of ships and other direct costs. In addition to the cost
reimbursement, we will pay to Norsul a monthly administration fee of US$34,000.
This agreement has a term of 20 years, starting on the issuance date of the
first shipment's notice of readiness.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 3A. Selected Financial Data" and "Item 19. Exhibits."
EXPORT SALES
During 2003, we produced approximately 2,250,000 tons of bleached eucalyptus
pulp. Sales to customers outside Brazil, especially in North America, Western
Europe and Asia, accounted for approximately 98% of our total sales volume .
During 2002, we produced approximately 1.656,000 tons of bleached eucalyptus
pulp. Pulp sales in 2002 were approximately 1,585,000 tons, of which 98% were
export sales. See "Item 4B. Business Overview--General."
LEGAL PROCEEDINGS
We are party to a number of legal actions arising from our normal business
activities. Although the amount of any liability that could arise with respect
to these actions cannot be accurately predicted, in our opinion, except as
described below, such actions, if decided adversely, would not, individually or
in the aggregate, have a material adverse effect on our financial condition.
As a part of our ongoing operations, we have been the defendant in a number
of lawsuits brought by our employees and their labor unions. Among these, some
suits claimed additional compensation for alleged hazardous work conditions. In
1995, we received an unfavorable decision with respect to the first of these
claims to be decided. We have established what we consider to be an adequate
reserve on our books to cover these claims. In December 2001, we and our
employees and their union settled two of the six claims for an amount of US$6.7
million, which amount has been paid by us in January 2002. Accordingly, we
reduced proportionately the reserve we have established with respect to these
claims. We are also a party to approximately 662 other legal actions relating
primarily to labor claims by former employees. In 2003, we have recorded
additional provisions in the amount of approximately US$1.5 million and have
also deposited approximately US$1.2 million in judicial deposits with respect to
such actions.
In October 1993, the Brazilian Federal Prosecutor brought a suit against
us, the State of Espirito Santo and IBAMA (the Brazilian environmental
protection agency) to halt all activities of the Forestry Partners Program, and
to seek damages on the grounds that the program did not follow certain
prescribed environmental procedures. We have been allowed, pursuant to an
interim judicial decision, to continue the program with respect to areas other
than native forest and areas cultivated with other plantings. In May 2000, the
federal local court promulgated a Term of Settlement signed by and among the
parties involved, extinguishing this suit and keeping in full effect the terms
of the Forestry Partners Program. Such Term of Settlement is still in effect and
being complied with by the Company.
In January 1997, the National Indian Foundation, or FUNAI, the Brazilian
government agency responsible for Indian affairs, instituted an administrative
proceeding to force us to relinquish 13,000 hectares of our property to enlarge
neighboring Indian reservations encompassing the Indian communities of Pau
Brasil, Caieiras Velhas and Comboios. In
52
January 1997, we filed a response and related documents with FUNAI stating
that we are a good-faith owner since we had legally acquired such land from the
former owners based on proper documentation. In March 1998, the Ministry of
Justice issued Edicts Nos. 193, 194 and 195, which provided solely for the
enlargement of the Indian reservation by 2,571 hectares of land belonging to us.
In April and June 1998, we signed two Terms of Settlement with the Indian
communities of Pau Brasil, Caieiras Velhas and Comboios that settled the
administrative proceeding and in which: (i) the Indians recognized the
legitimacy of Edicts Nos. 193, 194 and 195 and (ii) we committed to a financial
aid program for social, agricultural, educational, shelter and health projects,
in an amount of approximately R$13.5 million (US$5.8 million on December 31,
2001), over a 20-year period. The financial aid program is subject to the
performance by the Indian communities of the following main obligations: (a) the
formation of an association to receive the funds; (b) the delivery to us of a
proposed allocation of funds approved by two representatives of each Indian
village, by the association's board, by FUNAI and by the Brazilian Federal
Prosecutor, or BFP; (c) the use of the funds exclusively in projects which
guarantee the subsistence of all members of the communities, such use of the
funds to be monitored by a commission formed by FUNAI and Indian community
members not affiliated with the Association's board and to be reviewed by FUNAI
and the BFP; (d) the observance of agreed boundaries; and (e) the guarantee of
our right to use the existing roads in the enlarged areas object of the
reservation. If the Indian communities breach any of their obligations, we will
be released of our obligations under the Terms of Settlement. As of December 31,
2003, we advanced approximately R$6.8 million (US$3.3 million), in accordance
with the Terms of Settlement. For additional information, see Note 16 to our
consolidated financial statements.
In March 1997, we received assessment notices from the Brazilian Social
Security Institute (Instituto Nacional de Seguridade Socia--INSS) demanding
payment of social contributions over housing allowances paid to certain
employees. We brought several lawsuits before local federal courts contesting
such assessment notices and, at December 31, 2003, we have placed approximately
US$5.9 million in an escrow account to guarantee the payment of such social
contributions in the event we lose these lawsuits. These suits are still
pending.
We are contesting in local federal courts changes in the rates and rules
for the calculation of certain social contributions (Programa de Integracao
Social--PIS and Contribuicao para Financiamento da Seguridade Social-- COFINS)
determined by Law No. 9,718/98. Our provision with respect to such legal actions
equaled approximately US$43.4 million as of December 31, 2003. We believe this
provision is sufficient to cover any possible losses in connection with this
action.
On March 13, 2002 the Espirito Santo legislative assembly created an
investigating commission (Comissao Parlamentar de Inquerito) to investigate the
legality of our permits and the acquisition of our properties from the date we
began operating in Espirito Santo. As the investigative procedures were not
concluded within the prescribed term for such sort of investigation, the
commission was terminated without issuing a conclusive report. We are confident
that all our permits have been legally obtained and acquisition documents are
strictly in accordance with all laws and regulations.
In May 2003 the Human Rights Commission of the Brazilian House of
Representatives ("Camara dos Deputados") created a Working Group to discuss the
alleged violation of economic, social, cultural and environmental rights in the
eucalyptus plantations in the State of Espirito Santo. Among other issues,
several complaints involving the Company were discussed. Representatives of the
Company participated in a Public Hearing and presented to the Commission
extensive reports, information, evidences, technical studies, governmental and
judicial decisions that demonstrate that the complaints were unjustified. The
Working Group was terminated without issuing any report against the Company or
any of its affiliates.
The Company's operations are located within the geographic area of the
Agencia de Desenvolvimento do Nordeste (Northeast Development Agency, or
"ADENE") and the pulp and paper sector is considered by the Brazilian Federal
Government as a priority for the development of such geographic area.
Accordingly, during 2002, the Company applied for and was awarded the right to a
reduction in income taxes payable on its operating profits. The tax benefit was
authorized by ADENE and subsequently confirmed by the Revenue Service in
December 2002. On January 9, 2004, the Company was notified by ADENE of its
decision to cancel the fiscal benefits to which the Company had been entitled.
Such decision resulted from a reexamination by the legal department of the
Regional Integration Ministry, which concluded that the geographical area where
the Company is located would not be within the geographical area of the fiscal
incentive and, therefore, the Company would no longer be entitled to such fiscal
incentive. Based on the advice of external
53
legal counsel, the Company's management believes that such decision is not
correct. Also, based on the advice of external legal counsel, management
believes that ADENE's decision should not affect the benefits already recorded
during 2003 as they were duly recognized under the then-existing authorization.
Accordingly, management has not recorded any provisions for the benefits
recognized during the year ended December 31, 2003. In addition, the Company has
filed a lawsuit in federal courts challenging the legality of such reversal. In
a preliminary decision, the effects of the tax benefit revocation have been
suspended. After being notified of the court decision, ADENE cancelled its own
tax benefit revocation and started an administrative procedure to examine the
matter, during which the Company will have the opportunity to present its
arguments. Based on counsel's opinions, the Company believes that its right to
the tax benefit already used will be upheld, either by an administrative or
court decision. However, there is no assurance that the tax benefit will be
updated or made available in the future.
DIVIDEND POLICY AND DIVIDENDS
GENERAL
Under Brazilian corporate law, we are required to hold an annual
shareholders' meeting by April 30 of each year. At that meeting, our financial
statements for the previous year and the proposal for distribution of dividends
are submitted for shareholder approval. Accordingly, dividends for each fiscal
year ending December 31 may be declared by April 30 of the subsequent year.
Dividends are to be paid within 60 days from the date declared, unless otherwise
resolved at the annual shareholders' meeting at which they were declared. In any
event, declared dividends must be paid before the following December 31.
Dividends relating to prior years in excess of those required to be paid by law
may be declared and paid at any time by decision of the board of directors. The
board of directors may also elect to pay interim dividends either:
o based on our net income for any period within our fiscal year; or
o from our retained earnings or certain other revenue reserves
established in prior years.
Holders of Class A Stock are entitled to an annual preferential dividend
equal to a minimum of 6% of the capital attributable to the Class A Stock to be
paid from annual adjusted net income. In the event dividends in excess of those
paid to the holders of Class A Stock are distributed, holders of common stock
and Class B Stock share ratably in such excess up to an amount equal to the
Class A Stock preferential dividend. Any dividends thereafter remaining for
distribution are shared ratably by all holders of Class A Stock, Class B Stock
and common stock. The Class B Stock holders are entitled to receive dividends at
least ten percent higher than the amount per share paid to holders of common
stock. We adopt the same standards for payment of dividends for the Class A
Stock holders. See "--Dividend Preferences."
CALCULATION OF ADJUSTED NET INCOME
Brazilian corporate law requires that 5% of a company's annual net income
be appropriated to a legal reserve fund, until the amount of such fund reaches
an amount equal to 20% of the capital of such company, as recorded in its
statutory accounting records. For purposes of calculating such amount, Brazilian
corporate law provides that the "capital" of a company is equal to the aggregate
paid-in capital upon the subscription of such company's capital stock, plus the
amount of annual increases to such amount due to monetary corrections for
inflation. The amount of our legal reserve as of December 31, 2003 was
approximately R$169.9million (equivalent to US$58.8million), or 9.2% of our
capital.
Brazilian corporate law allows for three additional appropriations of net
income, each of which must be approved by the holders of common stock. First, a
portion of net income may be appropriated to a reserve for anticipated losses
which are deemed probable in future years. Conversely, any amount so reserved in
prior years must be returned to net income in the fiscal year in which the
reason for such reserve ceases to exist or in which the loss takes place.
Second, net income may be appropriated to an unrealized income reserve for
future income to be realized from:
o inflationary income;
54
o increases in the net worth of affiliated companies; and
o income from term sales to be received in subsequent fiscal years.
Third, net income may be appropriated for discretionary purposes, ratified
by the shareholders for business expansion and other capital projects, the
amount of which is based on an approved capital budget presented by management.
After completion of the projects, a company may elect to retain the
appropriations until the stockholders vote to transfer all or a portion of the
reserve to capital or to retained earnings, from which retained earnings a cash
dividend may then be paid.
Brazilian legislation requires that the calculation of the amount of a
company's net income available for dividend distributions to its shareholders be
determined on the basis of financial statements prepared in accordance with
Brazilian GAAP using the corporate law method. Such net income of a company may
not be the same as that determined by the currency of constant purchasing power
method. Through 1995 our net income was the same under both Brazilian methods,
but differed from that determined in accordance with U.S. GAAP. For all
financial statements prepared for any period ended after January 1, 1996, Law
No. 9,249/95 has abolished the requirement that companies apply monetary
correction to their financial statements. Although the actual amount of
dividends as remeasured into U.S. dollars is contained in the consolidated
financial statements, investors will be unable to use U.S. GAAP financial
information made available by us to calculate such dividends.
PAYMENT OF DIVIDENDS
Under Brazilian corporate law and in accordance with our by-laws, we are
required to allocate at least 25% of our adjusted net income for each fiscal
year to the payment of dividends, or the Mandatory Dividend. However, Brazilian
corporate law provides that a public company is not required to pay the
Mandatory Dividend in any year if the management of such company communicates to
its shareholders at its annual shareholders' meeting that the payment of such
dividend would be detrimental to the company based on its financial situation
and if, within five days of the annual shareholders' meeting, the company
forwards to the CVM an explanation for the nonpayment of the dividend. Adjusted
net income that is not so distributed and is not absorbed by losses in
subsequent years must be paid in dividends as soon as the financial condition of
the company permits.
Proposals to declare and pay dividends in excess of the statutory minimum
are generally made at the recommendation of the board of directors and require
approval by the vote of holders of common stock. Our board of directors has
adopted a policy pursuant to which any such proposal will be dependent upon our
results of operations, financial condition, cash requirements for our business,
future prospects and other factors deemed relevant by the board of directors.
There can be no assurance that there will be any adjusted net income or that
dividends in excess of the statutory minimum will be paid nor is there any legal
or other requirement to such effect. In the event that the board of directors
elects to pay interim dividends in any year, such interim dividends will count
toward the calculation of the Mandatory Dividend for such year. Generally,
dividends are payable to persons who are shareholders of record on the date on
which dividends are declared. We are not required by law to monetarily correct
dividends for inflation occurring during the period from the date such dividends
are declared to the date they are paid.
As a general requirement, shareholders who are not residents of Brazil must
be registered with the Central Bank in order to have dividends, sales proceeds
or other amounts with respect to their shares remitted outside of Brazil. The
shares of Class B Stock underlying the ADSs will be held in Brazil by the
Custodian, as agent for the Depositary, which will be the registered owner of
such shares on the records of the Transfer Agent. Payments of cash dividends and
distributions, if any, will be made in reais to the Custodian on behalf of the
Depositary, which will exchange the reais for U.S. dollars and will deliver the
U.S. dollars to the Depositary for distribution to the ADR holders. In the event
that the Custodian is unable to immediately convert the reais received as
dividends into U.S. dollars, the amount of U.S. dollars payable to holders of
ADRs may be adversely affected if the real devalues against the U.S. dollar
before such dividends are converted and remitted. Devaluation of the real will
reduce the value in U.S. dollars of distributions and dividends on the Class B
Stock and may reduce the value of the Class B Stock and the ADSs. There can be
no assurance that the real will not devalue relative to the U.S. dollar, as in
the past, that the real will not fluctuate significantly relative to the U.S.
dollar or that any such depreciation or fluctuations will not adversely affect
the value of the Class B Stock or ADSs or any
55
distributions and dividends thereon. Dividends in respect of shares of our
Class B Stock paid to holders who are not Brazilian residents, including holders
of ADSs, are not subject to Brazilian withholding tax. See "Item 10E.
Taxation--Brazilian Tax Considerations."
HISTORY OF DIVIDEND PAYMENTS
The following table sets forth the dividends paid by us to holders of our
capital stock since 1998. The exchange rates used to convert dividends in reais
into U.S. dollars were the rates in effect on the related payment dates.
YEAR COMMON STOCK CLASS A STOCK CLASS B STOCK
--------- ------------ ------------- -------------
(in U.S. dollars per share)
1999(1)................. 0.01 0.06 0.02
2000(2)................. 0.05 0.06 0.06
2001(3)................. 0.06 0.06 0.06
2002(4)................. 0.07 0.08 0.08
2003(5)................. 0.10 0.11 0.11
2004(6)................. 0.10 0.11 0.11
__________________
(1) Including dividend declared on March 25, 1999 and paid on April 22, 1999.
(2) Including dividend declared on April 5, 2000 and paid on April 30, 2000.
(3) Including dividend declared on March 30, 2001 and paid on April 12, 2001.
(4) Including dividend declared on April 30, 2002 and paid on May 9, 2002.
(5) Including dividend declared on April 29, 2003 and paid on May 15, 2003.
(6) Including dividend declared on April 29, 2004 and paid on May 21, 2004.
DIVIDEND PREFERENCES
Depending on the amount of our annual adjusted net income, holders of our
Class A Stock are entitled to an annual minimum preferential dividend equal to
6% of the capital attributable to its class of shares. For the purpose of
calculating the preferential dividend, the capital attributable to the Class A
Stock is equal to the amount paid for such stock upon subscription therefor,
plus the amount of annual increases in such amount due to any capital increase
and/or to monetary correction for inflation. In the event dividends are not paid
for three consecutive years, holders of all classes of preferred shares,
including Class A and Class B Stock, will be entitled to voting rights.
In the event that dividends in excess of those paid to the holders of Class
A Stock are distributed, holders of common stock and Class B Stock share ratably
in such excess up to an amount equal to the Class A minimum preferential
dividend. Any dividends thereafter remaining for distribution are shared ratably
by all holders of Class A Stock, Class B Stock and common stock. Payment of the
Mandatory Dividend is subject to the Class A Stock minimum preferential
dividend.
On June 5, 1997, the Brazilian Congress enacted Law No. 9,457 of May 5,
1997, amending the Brazilian corporate law, to grant holders of preferred stock
that do not carry a right to a fixed or minimum dividend a statutory right to
receive dividends in an amount per share of at least ten percent higher than the
amount per share paid to holders of common stock. The Class B Stock underlying
the ADSs is entitled to such higher dividend distributions.
B. SIGNIFICANT CHANGES
No significant change has occurred since the date of the annual financial
statements included in this Annual Report.
56
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The principal non-United States market for our Class B Stock is the Bolsa
de Valores de Sao Paulo, or the Sao Paulo Stock Exchange. In the United States,
the Class B Stock trades in the form of ADSs, which are evidenced by American
Depositary Receipts, or ADRs, issued by Morgan Guaranty Trust Company of New
York, our Depositary, each currently representing ten shares of Class B Stock.
The ADSs are listed on the New York Stock Exchange, or the NYSE, under the
symbol "ARA." In December 1999, we established a non-sponsored depositary
receipt program, representing our Class B Stock, to list and trade such stock on
the Latin-American Securities Market, or Latibex, managed jointly by the Madrid
Stock Exchange of Spain. The program depositary is Servicio de Compensacion y
Liquidacion, S.A., in Spain, and the custodian is Companhia Brasileira de
Liquidacao e Custodia. Trading of the depositary receipts on the Latibex started
on December 1, 1999.
MARKET PRICE INFORMATION
The table below sets forth for the periods indicated the high and low
closing sales prices for (i) the Class B Stock on the Sao Paulo Stock Exchange
and (ii) the ADSs on the NYSE. Prices on the Sao Paulo Stock Exchange are
determined independently on each exchange and need not have occurred on the same
date. Such high and low sales prices have been restated in reais of constant
purchasing power based on inflation until December 31, 2003 as measured by the
Indice Nacional de Precos ao Consumidor, the National Consumer Price Index, or
INPC. See "Item 10D. Exchange Controls" for information with respect to exchange
rates applicable during the periods set forth below.
57
NOMINAL REAIS PER
------------------------------------
SHARE OF CLASS B STOCK U.S. DOLLARS PER ADS (1)
------------------------------------ ---------------------------
SAO PAULO STOCK EXCHANGE NYSE
------------------------------------ ---------------------------
High Low High Low
------------- ------------- ----------- ----------
1999:
Annual........................... R$5.89 R$1.24 US$26.25 US$8.19
2000:
Annual........................... R$5.88 R$2.76 US$27.13 US$11.63
2001:
Annual........................... R$5.83 R$3.11 US$20.07 US$12.35
2002:
Annual........................... R$7.18 R$4.62 US$22.74 US$14.05
2003:
First Quarter.................... R$7.25 R$6.36 US$21.00 US$18.30
Second Quarter................... R$6.60 R$5.43 US$21.80 US$18.45
Third Quarter.................... R$8.45 R$6.00 US$29.10 US$21.05
Fourth Quarter................... R$10.42 R$7.51 US$35.89 US$25.88
Annual........................... R$10.42 R$5.43 US$35.89 US$18.30
Share price for the most recent six months:
December 2003.................... R$10.42 R$8.05 US$35.89 US$28.00
January 2004..................... R$10.50 R$8.73 US$37.30 US$31.14
February 2004.................... R$10.11 R$9.13 US$36.15 US$32.06
March 2004....................... R$10.63 R$9.71 US$38.25 US$34.90
April 2004....................... R$10.84 R$9.16 US$39.22 US$31.14
May 2004......................... R$10.27 R$9.01 US$31.86 US$28.37
_____________________________________
(1) All information on a per ADS basis for the indicated period has been
adjusted to reflect the ADS Ratio Change, pursuant to which each ADS
represents ten shares of Class B Stock.
The closing sales price for the Class B Stock on the Sao Paulo Stock
Exchange as of the close of business on December 31, 2003 was R$10.60 per share,
which is equivalent to US$36.69 per ADS, translated at a rate of R$2.8892 per
US$1.00, the commercial market selling rate for such day. The closing sales
price for the ADSs on the NYSE as of the close of business on December 31, 2003
was US$35.04 per ADS. On May 28, 2004, the last reported closing sale price for
the Class B Stock on the Sao Paulo Stock Exchange was R$10.00 per share,
equivalent to US$31.72 per ADS translated at the exchange rate of R$3.1524 per
US$1.00, the commercial market selling rate on such date.
As of December 31, 2003, an aggregate of 352,744,932 shares of Class B
Stock, or an aggregate of approximately 65.6% of the outstanding Class B Stock,
was held in the form of ADSs. As of June 15, 2004, there were approximately __
U.S. beneficial owners of the ADSs (based on their addresses only), representing
approximately 60.5% of the total Class B shares. (REINV)
58
To take advantage of the market price of our stock, we engaged in a stock
buy-back program in 2000 and 2002 which were subject to the limitations set
forth in the Brazilian corporate law and CVM regulations. The total number of
shares of Class B Stock bought back by us under those programs was 17,095,000
shares and 1,374,000 shares, respectively, for a total cost of approximately
US$22.7 million and US$2.1 million, respectively. We have not bought back any
shares during 2003.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
TRADING ON THE BRAZILIAN STOCK EXCHANGES
On January 27, 2000, a protocol was signed in order to merge the nine
Brazilian stock exchanges. According to the protocol, private equity and debt
will be traded only on the Sao Paulo Stock Exchange, which is the only remaining
Brazilian stock exchange at present. Brazilian federal, state and municipal
public debt are only traded on, and privatization auctions are carried out at,
the Rio de Janeiro Exchange. The protocol became effective on May 31, 2000.
Trading on the Sao Paulo Stock Exchange by nonresidents of Brazil is
subject to limitations under Brazilian foreign investment and tax legislation
and limited to member brokerage firms and a limited number of authorized non
members. The CVM and the Sao Paulo Stock Exchange have discretionary authority
to suspend trading in shares of any issuer. Securities listed on the Sao Paulo
Stock Exchange may be traded on the over-the-counter market under limited
circumstances.
Trading on the Sao Paulo Stock Exchange settles three business days after
the trade date. Delivery of and payment for securities is made through separate
clearinghouses for each exchange, which maintains accounts for member brokerage
firms. The seller is ordinarily required to deliver the securities to the
exchange on the second business day following the trade date. The clearinghouse
for the Sao Paulo Stock Exchange is the CBLC--Companhia Brasileira de Liquidacao
e Custodia.
In order to better control volatility, the Sao Paulo Stock Exchange has
adopted a "circuit breaker" system pursuant to which trading sessions may be
suspended for a period of 30 minutes to one hour whenever our indices fall below
the limit of 10% as compared to the index registered in the previous trading
session.
As of December 31, 2003, the Sao Paulo Stock Exchange had an aggregate
market capitalization of approximately US$234 billion and an average monthly
trading volume of approximately US$271.9 billion for the year 2003. In
comparison, the NYSE had a market capitalization of approximately US$16.8
trillion as of December 31, 2003. Although any of the outstanding shares of a
listed company may trade on the Sao Paulo Stock Exchange, in most cases less
than half of the listed shares are actually available for trading by the public,
the remainder being held by small groups of controlling persons, by governmental
entities or by one principal shareholder. As of December 31, 2003, we accounted
for approximately 1.65% of the market capitalization of all listed companies on
the Sao Paulo Stock Exchange.
There is a significantly large concentration in the Brazilian securities
markets. As of December 31, 2003, the five most actively traded shares
represented approximately 38.7% of the total volume of shares traded on the Sao
Paulo Stock Exchange.
REGULATION OF BRAZILIAN SECURITIES MARKETS
Brazilian securities markets are regulated by the CVM, which has regulatory
authority over stock exchanges and the securities markets in Brazil and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions.
59
Under Brazilian corporate law, a corporation is either public (companhia
aberta), such as us, or closely held (companhia fechada). All public companies,
including us, are registered with the CVM and are subject to reporting
requirements. Our stock trades on the Sao Paulo Stock Exchange, but may be
traded privately, subject to limitations.
We have the option to request that trading of our securities on the Sao
Paulo Stock Exchange be suspended in anticipation of a material announcement.
Trading may also be suspended by the Sao Paulo Stock Exchange or the CVM, among
other reasons, based on or due to a belief that a company has provided
inadequate information regarding a material event or has provided inadequate
responses to the inquiries of the CVM or the Sao Paulo Stock Exchange.
Brazilian securities law and Brazilian corporate law provide for, among
other things, disclosure requirements, restrictions on insider trading and price
manipulation and protection of minority shareholders. However, the Brazilian
securities markets are not as highly regulated and supervised as the U.S.
securities markets or securities markets in other jurisdictions.
The Custodian for the Class B Stock and the Depositary for the ADRs must
obtain an electronic certificate of registration from the Central Bank to remit
U.S. dollars abroad for payments of dividends, any other cash distributions, or
upon the disposition of the shares and sales proceeds thereto. In the event that
a holder of ADRs exchanges ADRs for Class B Stock, the holder will be entitled
to continue to rely on the Depositary's electronic certificate of registration
for five business days after the exchange. Thereafter, the holder may not be
able to obtain and remit U.S. dollars abroad upon the disposition of the Class B
Stock, or distributions relating to the Class B Stock, unless the holder obtains
a new certificate of registration with the Central Bank.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is certain information concerning our capital stock and a
brief summary of certain significant provisions of our by-laws and Brazilian
corporate law. This description does not purport to be complete and is qualified
by reference to our by-laws and to Brazilian corporate law.
CORPORATE PURPOSES
We are a Brazilian corporation (sociedade por acoes), enrolled with the
National Registry of Legal Entities of the Finance Ministry (CNPJ) under No.
42.157.511/0001-61 and registered with the State Enterprise's Registrar (NIRE)
under No. 32300025897. Our corporate purposes, as set forth in Article 2 of our
by-laws, are to: (i) engage in forestry and reforestation activities; (ii)
industrialize and trade forestry products; (iii) explore renewable sources of
energy; and (iv) engage in industrial and commercial activities, as well as
agricultural and rural activities in general. In order to meet our corporate
purposes, we may (i) participate in other business enterprises, subject to the
approval by our board of
60
directors; and (ii) engage in any activity and perform any services, directly
or indirectly related to our principal activities, including import and export.
CAPITAL STOCK AND DIVIDEND POLICY
According to our by-laws, we have one class of common stock and two classes
of preferred stock, the Class A Stock and the Class B Stock.
Depending on the amount of our annual adjusted net income, holders of Class
A Stock are entitled to a minimum annual preferential dividend equal to 6% of
the capital attributable to this class of shares. For the purpose of calculating
the preferential dividend, the capital attributable to the Class A Stock is
equal to the amount paid for such stock upon subscription thereof, plus the
amount of annual increases in such amount due to any capital increase and/or to
monetary correction for inflation. Brazilian corporate law provides that
non-voting or restricted voting shares (such as the Preferred Shares) acquire
unrestricted voting rights beginning when a company has failed for three
consecutive fiscal years (or for any shorter period set forth in a company's
constituent documents) to pay any fixed or minimum dividend to which such shares
are entitled and continuing until payment thereof is made. Our by-laws do not
set forth any such shorter period. Shareholders have a three-year period,
counted from the date in which we have made available the dividend, to claim
such dividends.
In the event that dividends in excess of those paid to the holders of Class
A Stock are distributed, holders of common stock and Class B Stock share ratably
in such excess up to an amount equal to the Class A minimum preferential
dividend. Any dividends thereafter remaining for distribution are shared ratably
by all holders of Class A Stock, Class B Stock and common stock. Payment of the
mandatory dividend is subject to the Class A Stock minimum preferential
dividend.
Under Brazilian corporate law, holders of preferred stock without the right
to a fixed or minimum dividend have the right to receive dividends in an amount
per share at least ten percent higher than the amount per share paid to holders
of voting stock. Holders of Class B Stock have been receiving such higher
dividend distributions. Our by-laws have been amended accordingly. See "Item 8A.
Consolidated Statements and Other Financial Information--Dividends."
WINDING UP
A general shareholders' meeting may authorize us to use our reserves or
profits in the redemption or sinking of our shares, determining the applicable
conditions and procedures. There are no sinking fund provisions in our by-laws.
According to our by-laws, in the event of winding up, the holders of Class
A Stock and Class B Stock will have priority over the holders of common stock on
the distribution of our remaining assets.
Under Brazilian corporate law, amortization consists of a distribution that
anticipates payments that a shareholder would be entitled to receive in the
event of a corporation's liquidation. The amortization may be made in full or
partially and may comprise one or all of the classes of the company's shares.
Amortizations will be made without decrease of the corporation's capital stock.
If the redemption or amortization does not comprise all of the shares of a
relevant class of stock, the shares to be redeemed or amortized will be chosen
through draws to be made by the company. In the event of liquidation of the
company, the amortized shares will only receive distributions after the
non-amortized shares have received amounts equivalent to those previously
received by the amortized shares.
SHAREHOLDERS' MEETINGS
Under Brazilian corporate law, at a general meeting of shareholders
convened and held in accordance with such law and the company's by-laws, the
shareholders are empowered to decide all matters relating to the company's
purposes and to pass such resolutions as they deem necessary for its protection.
Pursuant to Brazilian corporate law, shareholders voting at a general
shareholders' meeting have the power, among others, to:
61
o amend the company's by-laws;
o elect or dismiss members of the board of directors (and members of the
audit committee) at any time;
o receive the yearly accounts 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;
o authorize the issuance of debentures;
o suspend the rights of a shareholder;
o accept or reject the valuation of assets contributed by a shareholder
in consideration for issuance of capital stock;
o authorize the issuance of founders' shares;
o pass resolutions to reorganize the legal form of, merge, consolidate
or split the company, to dissolve and liquidate the company, to elect
and dismiss the liquidators and to examine their accounts; and
o authorize management to declare the company insolvent and to request a
concordata (a procedure involving protection from creditors similar in
nature to reorganization under the U.S. Bankruptcy Code).
A general shareholders' meeting of a publicly held company such as us is
convened by publishing a notice, no later than fifteen days prior to the
scheduled meeting date and no less than three times. We publish such notice in
the following newspapers: A Gazeta (from Vitoria), Gazeta Mercanti--Edicao Sao
Paulo and Diario Oficial do Espirito Santo. This notice must contain the agenda
for the meeting and, in the case of an amendment to our by-laws, an indication
of the subject matter.
A general shareholders' meeting may be held if shareholders representing at
least one-quarter of the voting capital are present. If no such quorum is
present, notice must again be given in the same manner as described above, and a
meeting may then be convened without any specific quorum requirement, subject to
the minimum quorum and voting requirements for certain matters, as set forth in
the company's by-laws. A shareholder without a right to vote may attend a
general shareholders' meeting and take part in the discussion of matters
submitted for consideration.
Except as otherwise provided by law, resolutions of a general shareholders'
meeting are passed by a simple majority vote, abstentions not being taken into
account. Under Brazilian corporate law, the approval of shareholders
representing at least half of the issued and outstanding voting shares is
required for the types of action described below (as well as, in the case of
clause (a), a majority of issued and outstanding shares of the affected class):
(a) changing a priority, preference, right, privilege or condition of redemption
or amortization of any class of Preferred Shares or creating any class of
non-voting Preferred Shares that has a priority, preference, right, condition or
redemption or amortization superior to an existing class of shares, such as the
Preferred Shares; (b) creating founders' shares; (c) changing the Mandatory
Dividend; (d) changing the corporate purposes; (e) merging, consolidating or
splitting the company; (f) dissolving or liquidating the company; and (g)
participating in a centralized group of companies as defined under Brazilian
corporate law.
Whenever the shares of any class of capital stock are entitled to vote,
each share is entitled to one vote.
A shareholder may be represented at a general 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
the company, the attorney-in-fact may also be a financial institution.
62
LIMITATIONS ON SHARE OWNERSHIP
Under Brazilian law there are no limitations on the ownership by
non-residents or foreign shareholders of securities of a Brazilian corporation,
provided that foreign investments will be registered with the Central Bank
and/or the CVM, as the case may be.
There are no legal limitations on the rights of non-residents or foreign
shareholders to exercise their voting rights as shareholders of Brazilian
corporations.
There are no provisions in the company's by-laws with respect to disclosure
of share ownership. Notwithstanding, Brazilian corporate law states that the
corporations will provide information regarding their share registry book and
share transfer book to any person, provided that such information is necessary
to protect any rights or clarify situations involving interests of: (i) the
requiring person; (ii) a shareholder; or (iii) the securities market.
CHANGES IN CONTROL, MERGERS, ACQUISITIONS, SPIN-OFFS
There are no provisions in the company's by-laws that would have the effect
of delaying, deferring or preventing a change in control of the company or that
would operate with respect to a merger, acquisition or corporate restructuring
involving the company or its subsidiaries. Notwithstanding the foregoing,
Brazilian corporate law provides that the affirmative vote of at least 50% of
the voting shareholders is necessary to approve a merger, spin-off or
dissolution of a corporation.
C. MATERIAL CONTRACTS
At December 31, 2003, we did not have any material contracts.
D. EXCHANGE CONTROLS
There are no restrictions on ownership of our common stock or Class B Stock
by individuals or legal entities domiciled outside Brazil. However, the right to
convert dividend payments and proceeds from the sale of common stock or Class B
Stock into foreign currency and to remit such amounts outside Brazil is subject
to exchange control restrictions and foreign investment legislation which
generally requires, among other things, obtaining an electronic registration at
the Central Bank.
According to Resolution No. 2,689 of January 26, 2000 of the National
Monetary Council, foreign investors may invest in almost all financial assets
and engage in almost all transactions available in the Brazilian financial and
capital markets, provided that some requirements are fulfilled. Resolution No.
2,689 defines a foreign investor as any individual, legal entity, mutual fund or
other collective investment entity, domiciled or headquartered abroad.
Pursuant to Resolution No. 2,689, foreign investors must:
o appoint at least one representative in Brazil with powers to perform
actions relating to the foreign investment;
o complete the appropriate foreign investor registration form;
o register as a foreign investor with the CVM; and
o register the foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant to
Resolution No. 2,689 must be registered or maintained in deposit accounts or
under the custody of an entity duly licensed by the Central Bank or the CVM. In
addition, securities trading is restricted to transactions carried out in the
stock exchanges or organized over-the-counter markets licensed by the CVM.
63
Investors under Resolution No. 2,689 who are not resident in a tax haven
(i.e., a country that does not impose income tax or where the maximum income tax
rate is lower than 20%) are entitled to favorable tax treatment. See
"--Brazilian Tax Considerations."
Resolution No. 1,927 of the National Monetary Council, which is the
restated and amended Annex V to Resolution No. 1,289 of the National Monetary
Council, or the Annex V Regulations, provides for the issuance of depositary
receipts in foreign markets in respect of shares of Brazilian issuers. An
application was filed to have the ADSs approved under Annex V Regulations by the
Central Bank and the CVM, and final approval was received before the offering of
the Preferred Shares underlying the ADSs.
E. TAXATION
The following summary contains a description of the principal Brazilian and
U.S. federal income tax consequences of the purchase, ownership and disposition
of Class B Stock or ADSs, but it does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a decision to
purchase Class B Stock or ADSs. Prospective purchasers of Class B Stock or ADSs
should consult their own tax advisors as to the tax consequences of the
purchase, ownership and disposition of Class B Stock or ADSs, including, in
particular, the effect of any state, local or other national tax laws.
The summary is based upon the tax laws of Brazil and the United States and
regulations thereunder as in effect on the date hereof, which are subject to
change (possibly with retroactive effect). This summary is also based upon the
representations of the Depositary and on the assumption that each obligation in
the Deposit Agreement and any documents relating to the ADRs will be performed
in accordance with its terms.
Although there is at present 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
whether or when a treaty will enter into force or how it will affect the U.S.
Holders of Class B Stock or ADSs. Prospective purchasers of Class B Stock or
ADSs should consult their own tax advisors as to the tax consequences of the
acquisition, ownership and disposition of the Class B Stock or ADSs in their
particular circumstances.
BRAZILIAN TAX CONSIDERATIONS
The following discussion summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of Class B Stock or
ADSs by a holder that is not domiciled in Brazil for Brazilian taxation purposes
and, in the case of a holder of Class B Stock, who has an investment in foreign
currency registered at the Central Bank (a "Foreign Holder"). This summary does
not specifically address all of the Brazilian tax considerations applicable to
any particular Foreign Holder. Each Foreign Holder should consult his own tax
adviser concerning the Brazilian tax consequences of an investment in Class B
Stock or ADSs. Any change in such law may change the consequences described
below.
REGISTERED CAPITAL
The amount of an investment in Class B Stock must be registered by the
Foreign Holder of such Class B Stock (or by the Custodian in the case of Class B
Stock held by the Depositary) with the Brazilian Central Bank as "Registered
Capital" in order to allow remittances outside Brazil of foreign currency
acquired with the proceeds of distributions on, and amounts obtained from
dispositions of, such Class B Stock. The Registered Capital for each share of
Class B Stock issued to the Depositary will be equal to its issue price in U.S.
dollars. The Registered Capital for a share of Class B Stock that is withdrawn
upon surrender of an ADS will be the U.S. dollar equivalent of (i) the average
price of a share of Class B Stock on the Sao Paulo Stock Exchange on the day of
withdrawal or (ii) if no such shares were traded on that day, their average
price on the Sao Paulo Stock Exchange in the 15 trading sessions immediately
preceding such withdrawal. The U.S. dollar value of the Class B Stock is
determined on the basis of the average price of the Commercial Market rate for
U.S. dollars in effect on the date the Class B Stock is withdrawn or, at the
Foreign Holder's option, the sale rate quoted for U.S. dollars by the Central
Bank Information System on such date (or, if the average price of the Class B
Stock is determined under clause (ii) of the preceding sentence, the average of
such quoted sale rates on the same 15 dates used to determine the average price
of the Class B Stock).
64
TAXATION ON DISTRIBUTIONS
Withholding Income Tax (Imposto de Renda na Fonte). Dividends paid with
respect to income earned since January 1996 are not subject to Brazilian
withholding income tax under Brazilian tax law. However, dividends paid with
respect to income earned until December 31, 1995 are subject to withholding
income tax at rates ranging from 15% to 25%, according to the tax legislation
applicable to each corresponding year. The rate of such tax may be reduced under
certain circumstances by a tax treaty (at least with respect to shares not held
by the Depositary). However, there is no tax treaty between the United States
and Brazil, and the only existing tax treaty that reduces the rate of
withholding income tax to less than 15% is that between Brazil and Japan, which
reduces the rate of withholding income tax to 12.5%.
In the case of dividends paid to foreign investors resident in countries
where the maximum income tax rate is lower than 20%, such dividends may be
subject to Brazilian withholding income tax at a rate of 25%.
TAXATION ON GAINS
Gains on the Disposition of ADSs. Gains obtained outside Brazil by a
Foreign Holder on the disposition to another Foreign Holder of ADSs representing
Class B Stock are not subject to Brazilian tax.
Deposits and Withdrawals of Class B Stock in Exchange for ADSs. A Foreign
Holder may deposit or withdraw Class B Stock in exchange for ADSs without
incurring Brazilian tax. On receipt of the underlying Class B Stock, the Foreign
Holder will be entitled to register the U.S. dollar value of such shares with
the Brazilian Central Bank as described above in "Registered Capital" and will
be subject to the rules on Taxation on Distributions and Taxation of Gains
applicable to the Class B Stock, discussed herein. Such rules generally are less
favorable to Foreign Holders than the rules applicable to ADSs. In addition,
such Foreign Holder may experience delays in effecting such registration, which
may delay remittances abroad. Such delay may adversely affect the amount in U.S.
dollars received by the Foreign Holder. See "Item 3D. Risk Factors--Risks
Relating to our Preferred Shares and ADSs--Exchanging ADSs for the underlying
Class B Stock may have unfavorable consequences."
Gains on the Disposition of Class B Stock. Foreign Holders have been
subject to Withholding Income Tax (i) at a rate of 15% on gains obtained on
sales or exchanges to, or with, a resident in Brazil and (ii) at a rate of 20%
on gains obtained on sales or exchanges that occur in Brazil (e.g., on a
Brazilian stock exchange). According to Law No 10,833, dated December 2003, as
of February 2004, Foreign Holders are subject to withholding income tax in
Brazil on capital gains obtained on sales of Class B shares, regardless of where
and to whom such sales take place. The gain obtained as a result of a
transaction on a Brazilian stock exchange is the difference between the amount
in Brazilian currency obtained on the sale or exchange and the acquisition cost,
without any correction for inflation, of the Class B Stock sold. The gain
obtained as a result of a transaction outside of a Brazilian stock exchange will
be calculated based on the Registered Capital for the Class B Stock sold.
Reductions in the rate of Withholding Income Tax provided for in tax treaties do
not apply to the Withholding Income Tax on such gains. The tax on gains is
collected out of the proceeds of a sale or exchange by the stock exchange in the
case of sales effected through a Brazilian stock exchange and, in other cases,
by the purchaser.
TAXATION ON INCOME OBTAINED ABROAD
Prior to January 1, 1996, Brazilian tax laws taxed earnings related to the
activities performed within Brazil by Brazilian companies, branches of foreign
companies and nonresidents in general. Since January 1, 1996, profits, capital
gains and other income obtained abroad by a Brazilian company, or by its foreign
branches or subsidiaries or by foreign companies controlled by or affiliated
with such company, must be added in the determination of such Brazilian
company's profits and, therefore, taxed in Brazil when distributed or otherwise
made available to the Brazilian shareholders. Provisionary Measure No. 2,158
enacted in July 27, 2001 determined that profits obtained abroad by a foreign
branch or subsidiary of a Brazilian company must be taxed in Brazil at the same
time of the yearly distribution of such profits. Therefore, accumulated profits
accounted until December 31, 2001 will be taxed at the end of the following
fiscal period. After January 2002, such profits will be taxed at the end of each
fiscal period.
65
STAMP AND EXCISE TAXES
There are no stamp, transfer, estate, gift or other similar taxes in Brazil
applicable to the Class B Stock or to the ADSs.
UNITED STATES TAX CONSIDERATIONS
As used below, a "US holder" is a beneficial owner of a Preferred Share or
Preferred ADR that is, for US federal income tax purposes, (i) a citizen or
resident alien individual of the United States, (ii) a corporation (or an entity
treated as a corporation) organized under the law of the United States, any
State thereof or the District of Columbia, (iii) an estate the income of which
is subject to US federal income tax without regard to its source or (iv) a trust
if (1) a court within the United States is able to exercise primary supervision
over the administration of the trust, and one or more United States persons have
the authority to control all substantial decisions of the trust, or (2) the
trust was in existence on August 20, 1996 and properly elected to continue to be
treated as a United States person. For purposes of this discussion, a "non-US
holder" is a beneficial owner of a Preferred Share or Preferred ADR that is (i)
a nonresident alien individual, (ii) a corporation (or an entity treated as a
corporation) created or organized in or under the law of a country other than
the United States or a political subdivision thereof or (c) an estate or trust
that is not a US Holder.
In general, for US federal income tax purposes, the owner of a Preferred
ADR will be treated as the owner of the Preferred Share represented by the
Preferred ADR, and a deposit or withdrawal of a Preferred Share in exchange for
a Preferred ADR will not be a taxable transaction for US federal income tax
purposes.
TAXATION OF DIVIDENDS
US holders. In general, subject to the passive foreign investment company rules
discussed below, a distribution on a Preferred Share or Preferred ADR (including
for this purpose a distribution of interest on capital stock) will constitute a
dividend for US federal income tax purposes to the extent made from the
company's current or accumulated earnings and profits as determined under US
federal income tax principles. If a distribution exceeds the company's current
and accumulated earnings and profits, it will be treated as a non-taxable
reduction of basis to the extent of the US holder's tax basis in the Preferred
Share or Preferred ADR on which it is paid, and to the extent it exceeds that
basis it will be treated as capital gain. For purposes of this discussion, the
term "dividend" means a distribution that constitutes a dividend for US federal
income tax purposes.
The gross amount of any dividend on a Preferred Share or Preferred ADR (which
will include the amount of any Brazilian taxes withheld) will be subject to US
federal income tax as foreign source dividend income. The amount of a dividend
paid in Brazilian currency will be its value in US dollars based on the
prevailing spot market exchange rate in effect on the day the US holder receives
the dividend or, in the case of a dividend received in respect of a Preferred
ADR, on the date the Depositary receives it, whether or not the dividend is
converted into US dollars. Any gain or loss realized on a conversion or other
disposition of the Brazilian currency generally will be treated as US source
ordinary income or loss. Any Brazilian withholding tax will be treated as a
foreign income tax eligible for credit against a US holder's US federal income
tax liability, subject to generally applicable limitations under US federal
income tax law. For purposes of computing those limitations separately for
specific categories of income, a dividend generally will constitute foreign
source "passive income" or, in the case of certain holders, "financial services
income." A foreign tax credit may not be allowed for withholding tax imposed in
respect of certain short-term or hedged positions in a Preferred Share or
Preferred ADR. Alternatively, any Brazilian withholding tax may be taken as a
deduction against taxable income. A dividend will not be eligible for the
corporate dividends received deduction.
Subject to certain exceptions for short-term and hedged positions, a dividend an
individual receives on a Preferred ADR before January 1, 2009 will be subject to
a maximum tax rate of 15% if the dividend is a "qualified dividend." A dividend
on a Preferred ADR will be a qualified dividend if (i) the Preferred ADRs are
readily tradable on an established securities market in the United States, and
(ii) the company was not, in the year prior to the year the dividend was paid,
and is not, in the year the dividend is paid, a passive foreign investment
company ("PFIC"), foreign personal holding company ("FPHC") or foreign
investment company ("FIC"). The Preferred ADRs are listed on the New York Stock
Exchange and will qualify as readily tradable on an established securities
market in the United States so long as they are so listed. Based on existing
guidance, it is not entirely clear whether a dividend on a Preferred Share will
be treated as a qualified
66
dividend, because the Preferred Shares themselves are not listed on a US
exchange. Based on the company's audited financial statements and relevant
market and shareholder data, the company believes it was not a PFIC, FPHC or FIC
for US federal income tax purposes for its 2003 taxable year. In addition, based
on the company's audited financial statements and its current expectations
regarding the value and nature of its assets, the sources and nature of its
income, and relevant market and shareholder data, the company does not
anticipate becoming a PFIC, FPHC or FIC for its 2004 taxable year. The US
Treasury has announced its intention to promulgate rules pursuant to which
holders of stock of non-US corporations, and intermediaries though whom such
stock is held, will be permitted to rely on certifications from issuers to
establish that dividends are treated as qualified dividends. Because those
procedures have not yet been issued, it is not clear whether the company will be
able to comply with them. Special limitations on foreign tax credits apply to
dividends subject to the reduced rate of tax. Holders of Preferred ADRs and
Preferred Shares should consult their own tax advisers regarding the
availability of the reduced dividend tax rate in the light of their own
particular circumstances.
Non-US holders. A dividend paid to a non-US holder on a Preferred Share or
Preferred ADR will not be subject to US federal income tax unless the dividend
is effectively connected with the conduct of trade or business by the non-US
holder within the United States (and is attributable to a permanent
establishment or fixed base the non-US holder maintains in the United States if
an applicable income tax treaty so requires as a condition for the non-US holder
to be subject to US taxation on a net income basis on income from the Preferred
Share or Preferred ADR). A non-US holder generally will be subject to tax on an
effectively connected dividend in the same manner as a US Holder. A corporate
non-US holder may also be subject under certain circumstances to an additional
"branch profits tax," the rate of which may be reduced pursuant to an applicable
income tax treaty.
TAXATION OF CAPITAL GAINS
US holders. Subject to the passive foreign investment company rules discussed
below, on a sale or other taxable disposition of a Preferred Share or Preferred
ADR, a US holder will recognize capital gain or loss in an amount equal to the
difference between the US holder's adjusted basis in the Preferred Share or
Preferred ADR and the amount realized on the sale or other disposition, each
determined in US dollars. Any gain a US holder recognizes generally will be US
source income for US foreign tax credit purposes, and,subject to certain
exceptions, any loss generally will be a US source loss. If a Brazilian tax is
withheld on a sale or other disposition of a Preferred Share, the amount
realized will include the gross amount of the proceeds of that sale or
disposition before deduction of the Brazilian tax. The generally applicable
limitations under US federal income tax law on crediting foreign income taxes
may preclude a US holder from obtaining a foreign tax credit for any Brazilian
tax withheld on a sale of a Preferred Share.
In general, any adjusted net capital gain of an individual in a taxable year
ending before January 1, 2009 is subject to a maximum tax rate of 15%. In later
years, the maximum tax rate on the net capital gain of an individual will be
20%. The deductibility of capital losses is subject to limitations.
Non-US holders. A non-US holder will not be subject to US federal income tax on
gain recognized on a sale or other disposition of a Preferred Share or Preferred
ADR unless (i) the gain is effectively connected with the conduct of trade or
business by the non-US holder within the United States (and is attributable to a
permanent establishment or fixed base the non-US holder maintains in the United
States if an applicable income tax treaty so requires as a condition for the
non-US holder to be subject to US taxation on a net income basis on income from
the Preferred Share or Preferred ADR), or (ii) in the case of a non-US holder
who is an individual, the holder is present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions apply. Any effectively connected gain of a corporate non-US holder
may also be subject under certain circumstances to an additional "branch profits
tax," the rate of which may be reduced pursuant to an applicable income tax
treaty.
67
PASSIVE FOREIGN INVESTMENT COMPANY RULES
A special set of US federal income tax rules applies to a foreign corporation
that is a PFIC for US federal income tax purposes. As noted above, based on the
company's audited financial statements and relevant market and shareholder data,
the company believes it was not a PFIC for US federal income tax purposes for
its 2003 taxable year. In addition, based on the company's audited financial
statements and its current expectations regarding the value and nature of its
assets, the sources and nature of its income, and relevant market and
shareholder data, the company does not anticipate becoming a PFIC for its 2004
taxable year.
In general, a foreign corporation is a PFIC if at least 75% of its gross income
for the taxable year is passive income or if at least 50% of its assets for the
taxable year produce passive income or are held for the production of passive
income. In general, passive income for this purpose means, with certain
designated exceptions, dividends, interest, rents, royalties (other than certain
rents and royalties derived in the active conduct of trade or business),
annuities, net gains from dispositions of certain assets, net foreign currency
gains, income equivalent to interest, income from notional principal contracts
and payments in lieu of dividends. The determination of whether a foreign
corporation is a PFIC is a factual determination made annually and is therefore
subject to change. Subject to certain exceptions, once stock in a foreign
corporation is stock in a PFIC in the hands of a particular shareholder that is
a United States person, it remains stock in a PFIC in the hands of that
shareholder.
If the company is treated as a PFIC, contrary to the tax consequences described
in "US Federal Income Tax Considerations--Taxation of Dividends" and "--US
Federal Income Tax Considerations--Taxation of Capital Gains" above, a US holder
that does not make an election described in the succeeding two paragraphs would
be subject to special rules with respect to (i) any gain realized on a sale or
other disposition of a Preferred Share or Preferred ADR and (ii) any "excess
distribution" by the company to the US holder (generally, any distribution
during a taxable year in which distributions to the US holder on the Preferred
Share or Preferred ADR exceed 125% of the average annual taxable distributions
the US holder received on the Preferred Share or Preferred ADR during the
proceeding three taxable years or, if shorter, the US holder's holding period
for the Preferred Share or Preferred ADR). Under those rules, (i) the gain or
excess distribution would be allocated ratably over the US holder's holding
period for the Preferred Share or Preferred ADR, (ii) the amount allocated to
the taxable year in which the gain or excess distribution is realized would be
taxable as ordinary income and (iii) the amount allocated to each prior year,
with certain exceptions, would be subject to tax at the highest tax rate in
effect for that year, and the interest charge generally applicable to
underpayments of tax would be imposed in respect of the tax attributable to each
such year. A US holder who owns a Preferred Share or Preferred ADR during any
year the company is a PFIC must file Internal Revenue Service Form 8621.
The special PFIC rules described above will not apply to a US holder if the US
holder makes a timely election to treat the company as a "qualified electing
fund" ("QEF") in the first taxable year in which the US holder owns a Preferred
Share or Preferred ADR and if thecompany complies with certain reporting
requirements. Instead, a shareholder of a QEF generally is currently taxable on
a pro rata share of the company's ordinary earnings and net capital gain as
ordinary income and long-term capital gain, respectively. Neither that ordinary
income nor any actual dividend from the company would qualify for the 15%
maximum tax rate on dividends described above if the company is a PFIC in the
taxable year the ordinary income is realized or the dividend is paid or in the
preceding taxable year. The company has not yet determined whether, if it were a
PFIC, it would make the computations necessary to supply US holders with the
information needed to report income and gain pursuant to a QEF election. It is,
therefore, possible that US holders would not be able to make or retain that
election in any year the company is a PFIC. Although a QEF election generally
cannot be revoked, if a US holder made a timely QEF election for the first
taxable year it owned a Preferred Share or Preferred ADR and the company is a
PFIC (or is treated as having done so pursuant to any of certain elections), the
QEF election will not apply during any later taxable year in which the company
does not satisfy the tests to be a PFIC. If a QEF election is not made in that
first taxable year, an election in a later year generally will require the
payment of tax and interest, and in certain circumstances the election may cease
to be available at a later date.
In lieu of a QEF election, a US holder of stock in a PFIC that is considered
marketable stock could elect to mark the stock to market annually, recognizing
as ordinary income or loss each year an amount equal to the difference as of the
close of the taxable year between the fair market value of the stock and the US
holder's adjusted basis in the stock.
68
Losses would be allowed only to the extent of net mark-to-market gain previously
included in income by the US holder under the election for prior taxable years.
A US holder's adjusted basis in the Ordinary Shares or ADS will be adjusted to
reflect the amounts included or deducted with respect to the mark-to-market
election. If the mark-to-market election were made, the rules set forth in the
second preceding paragraph would not apply for periods covered by the election.
A mark-to-market election will not apply during any later taxable year in which
the company does not satisfy the tests to be a PFIC. In general, the ADRs will
be marketable if ADRs are traded, other than in de minimis quantities, on at
least 15 days during each calendar quarter. However, there is no certainty that
the Ordinary Shares will be considered "marketable stock" for these purposes
unless and until the Internal Revenue Service designates the BOVESPA as having
rules adequate to carry out the purposes of the PFIC rules. There can be no
assurance that the Internal Revenue Service will make such a designation.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividends paid on, and proceeds from the sale or other disposition of, a
Preferred Share or Preferred ADR to a US holder generally may be subject to
information reporting requirements and may be subject to backup withholding at
the rate of 28% unless the US holder provides an accurate taxpayer
identification number or otherwise establishes an exemption. The amount of any
backup withholding collected from a payment to a US holder will be allowed as a
credit against the US holder's US federal income tax liability and may entitle
the US holder to a refund, provided certain required information is furnished to
the Internal Revenue Service.
A non-US holder generally will be exempt from these information reporting
requirements and backup withholding tax but may be required to comply with
certain certification and identification procedures in order to establish its
eligibility for exemption.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENTS BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, pursuant to which we file reports and other information
with the Commission. These materials, including this annual report and the
accompanying exhibits, may be inspected and copied at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
materials may be obtained from the Public Reference Room of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public
may obtain information on the operation of the Commission's Public Reference
Room by calling the Commission in the United States at 1-800-SEC-0330. In
addition, material we filed can be inspected at the offices of the New York
Stock Exchange at 20 Broad Street, New York, New York 10005, on which our ADSs
are listed.
We also file electronically financial statements and other periodic reports
with the CVM. The CVM website is www.cvm.gov.br.
Copies of our annual reports on Form 20-F and documents referred to in this
annual report and our by-laws will be available for inspection upon request at
our principal office at Rua Lauro Muller, 116, 40th floor, 22299-900 Rio de
Janeiro, State of Rio de Janeiro, Brazil, or at our website: www.aracruz.com.br.
Information contained in our website is not part of this annual report.
The Compay has, in compliance with New York Stock Exchange Corporate
Governance Rule 303A.11, provided on its website a summary of how corporate
governance practices differ from those followed by U.S. domestic companies under
the New York Stock Exchange listing standards, at www.aracruz.com.br.
69
I. SUBSIDIARY INFORMATION
Not required.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As an exporter, we consider the U.S. dollar as our operating currency. We
are exposed to various market risks, particularly the variation of the U.S.
dollar against the real and interest rate variation (fixed, floating and U.S.
dollar-indexed).
We hold, on a weekly basis or more frequently if necessary, Treasury Cash
Committee meetings where macroeconomic issues are discussed for our implications
on financial matters. During such meetings future steps are also decided in
accordance with the directives set by the board of directors and with corporate
policies.
We have guaranteed debt with BNDES loans and secured debt related to our
securitization program. See "Item 5. Liquidity and Capital Resources" and "Item
7B. Related Party Transactions--BNDES Loan Agreements."
EXCHANGE RATE SENSITIVITY
We were substantially protected against our exposition to exchange rate
fluctuations on a balance sheet basis against local currency risk at the end of
2003 according to U.S. GAAP rules.
The table below sets forth the assets and liabilities for the year 2003 in
terms of currency denomination:
DENOMINATION
-------------------------------------------
TOTAL YEAR ENDED U.S.
DECEMBER 31, 2003 REAL-DENOMINATED DOLLAR-DENOMINATED
-------------------- ----------------- --------------------
(in US$ millions)
Assets:....................................... 3,454.4 368.8 3,085.6
Current Assets.......................... 742.7 348.0 394.7
Long-Term Assets........................ 58.8 20.8 38.0
Permanent Assets........................ 2,652.9 0.0 2,652.9
Liabilities:.................................. 3,454.4 470,3 2,984.1
Current Liabilities..................... 513.7 148.8 364.9
Long-Term Liabilities................... 1,139.7 321.5 818.2
Stockholders' Equity.................... 1,801.0 0.0 1,801.0
As a result of our exposure to exchange rate fluctuation, the gain and loss
on currency translations at the end of 2003 (after the local currency
devaluation) was a net gain of US$41.9 million.
Having our revenues 98% U.S. dollar-denominated and our costs and expenses
almost entirely local currency denominated, we highly benefit from local
currency devaluation on an ongoing basis, significantly improving our margins
and cash generation. See "Item 5A. Operating Results."
INTEREST RATE SENSITIVITY AND SENSITIVITY TO INFLATION RATES
As of December 31, 2003, approximately 15.5% of our total indebtedness was
real-denominated, which consisted of loans bearing interest at variable rates.
The principal amounts of such loans are also indexed to inflation. In times of
high inflation, the TJLP is generally higher, i.e., the nominal rates include an
inflation factor. In 2003, the TJLP ranged from 11% to 12% for the year. In
2002, the TJLP ranged from 9.5% to 10%. The interest payable by us on the
real-denominated debt is equal to the TJLP, plus 1.8% to 3.75% per annum. See
"Item 5B. Liquidity and Capital Resources" and "Item 7B. Related Party
Transactions--BNDES Loan Agreements."
70
As of December 31, 2003, we had outstanding loans with BNDES with an
aggregate amount of approximately R$760.7 million (equivalent to US$263.3
million at the year end's exchange rate), mainly denominated in reais.
As measured by the General Market Price Index, the inflation rate for 2002
was 25.3%. However, as a result of the evaluation of the real, inflation in 2003
decreased to 8.7%. See "Item 5. Operating and Financial Review and
Prospects--Brazilian Economic Environment."
Set forth in the table below are our currency and interest rate exposures,
on financial debt outstanding for the years 2004 through 2011.
DENOMINATION INTEREST RATE 2004 2005 2006 2007 2008-2011 TOTAL
-------------------------------------------------- ------- ---- ------ ------ ---------- ---------
Local currency TJLP (1).................... 42.2 38.3 38.4 38.4 54.6 211.9
Foreign currency basket (2). 8.5 8.3 8.3 8.3 13.2 46.6
Foreign currency Fixed....................... 161.8 73 115.8 115.8 305.0 771.4
LIBOR....................... 173.5 3.7 53.8 104.5 0.0 335.5
Total per year................................... 386.0 123.3 216.3 267.0 372.8 1365.4
_______________
(1) Long-Term Interest Rate.
(2) Basket of foreign currencies, including U.S. dollars, Japanese yen and European currencies.
COMMODITY PRICE SENSITIVITY
We are exposed to commodity price risks through the fluctuation of pulp
prices. We do not utilize derivative financial instruments to manage any
remaining exposure to fluctuations in commodity prices. However, we seek to
minimize these risks through efficient operating and inventory management
procedures.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Our chief executive officer and our acting chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in the U.S. Securities Exchange Act of 1934 under Rule 13a-14(c)) have
concluded that our disclosure controls and procedures were effective to ensure
that material information relating to us was made known to them by others within
our company, particularly during the period in which this annual report and
accounts were being prepared. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon and as of the date of our evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is recorded, processed, summarized and reported as and when
required.
71
B. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Not applicable.
C. ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
Not applicable.
D. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls and procedures subsequent
to the date our chief executive officer and our chief financial officer
completed their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls and procedures requiring corrective
actions.
ITEM 16.
A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of the Company has determined that Mr. Ernane
Galveas is an audit committee financial expert within the meaning of the
Sarbanes-Oxley and related regulations. We do not yet have an audit committee
that is fully in compliance with the requirements of Sarbanes-Oxley, but we
expect to be fully compliant by the required deadline of July 31, 2005.
B. CODE OF ETHICS
We have adopted a Code of Ethics (called "Codigo de Conduta") that applies
to the Company's principal executive officer, principal financial officer,
principal accounting officer or controller. The English version of the Code is
attached as exhibit 11.01 of this Annual Report and can be downloaded at our
website (www.aracruz.com.br). Additionally, any person, upon request, can ask
for a hard copy or electronic file of such Code.
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND NON-AUDIT FEES
The following table sets forth the fees billed to us by our Registered
Public Accounting Firm, Pricewaterhouse Coopers Auditores Independentes during
the fiscal years ended December 31, 2002 and 2003:
2002 (IN US$) 2003 (IN US$)
Audit services fees 245,037 149,597
Other accounting services fees 114,026 64,766
Non-audit services fees 284,263 --
TOTAL 643,326 214,363
Audit fees in the above table are the aggregate fees billed by
Pricewaterhouse Coopers Auditores Independentes in connection with the audit of
our annual financial statements and review of the Company's quarterly financial
information.
72
Audit-related fees in the above table are the aggregate fees billed by
Pricewaterhouse Coopers Auditores Independentes for providing assistance in
documenting internal control policies and procedures over financial reporting.
Tax fees in the above table are fees billed by Pricewaterhouse Coopers
Auditores Independentes for tax compliance and tax advice.
Due to the mandatory rotation of audit firms as determined by Brazilian
Securities Commission - CVM to public companies in Brazil, the Company has
appointed Deloitte Touche Tohmatsu as its Registered Public Accounting Firm as
from the fiscal year 2004.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Board of Directors has established pre-approval and
procedures for the engagement of its Registered Public Accounting Firm for audit
and non-audit services.
The Board of Directors reviews the scope of the services to be provided,
before their commencement, in order to ensure that there are no independence
issues and the services are not prohibited services as defined by Sarbanes-Oxley
Act of 2002.
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
PART III.
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this annual report,
together with the report of the independent accountants.
Page
Report of PricewaterhouseCoopers Auditores Independentes................................................F-2
Consolidated balance sheets at December 31, 2003 and 2002...............................................F-3
Consolidated statements of income for each of the three years in the
period ended December 31, 2003..........................................................................F-5
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2003..........................................................................F-8
Consolidated statements of changes in stockholders' equity for each of the
three years in the period ended December 31, 2003.......................................................F-9
Notes to consolidated financial statements.............................................................F-12
73
ITEM 19. EXHIBITS
1.1 English translation of the Company's by-laws (estatuto social).
2.1 The total amount of long-term debt of the Company authorized under any
instrument does not exceed 10% of the total assets of the Company and
its subsidiaries, on a consolidated basis. The Company undertakes to
furnish to the SEC all other instruments relating to long-term debt of
the Company and its subsidiaries upon request by the SEC.
4.1 Term of Adhesion to the Company's Shareholders' Agreement by Mondi
Brazil Limited, Inc., dated June 13, 1996 (free translation into
English), incorporated herein by reference to the Company's annual
report dated April 16, 2002.
4.2 Term of Adhesion to the Company's Shareholders' Agreement by Newark
Financial, Inc., dated November 1, 2001 (free translation into English),
incorporated herein by reference to the Company's annual report dated
April 16, 2002.
4.3 Amended Shareholders' Agreement, dated February 5, 2003, entered into
among Arapar S.A. and Lorentzen Empreendimentos S.A. and Sodepa -
Sociedade de Empreendimentos, Publicidade e Participacoes S.A. (free
translation into English)
4.4 Master Indenture among Arcel Finance Limited, as Issuer, Aracruz Trading
S.A., as provider of the Company Guarantee, Lasalle Bank National
Association, as Collection Agent, The Bank of New York, as Trustee,
Registrar, Transfer Agent and Principal Paying Agent and The Bank of New
York, London Branch, as London Paying Agent, dated as of February 6,
2002, incorporated herein by reference to the Company's annual report
dated April 16, 2002.
6.1 See Note 1(o) to the Company's financial statements for information
explaining how earnings per share information was calculated.
8.1 See Item 4B of this annual report for information regarding the
Company's subsidiaries.
12.1 Certifications by Chief Executive Officer and Chief Financial Officer
required by Item 15.
13.1 Certifications by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
74
INDEX TO FINANCIAL STATEMENTS
Page
Report of PricewaterhouseCoopers Auditores Independentes.........................................................F-2
Consolidated balance sheets at December 31, 2003 and 2002........................................................F-3
Consolidated statements of income for each of the three years in the
period ended December 31, 2003...................................................................................F-5
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2003...................................................................................F-7
Consolidated statements of changes in stockholders' equity for each of the
three years in the period ended December 31, 2003................................................................F-9
Notes to consolidated financial statements......................................................................F-12
75
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
ARACRUZ CELULOSE S.A.
By: /s/Carlos Augusto Lira Aguiar
---------------------------------
Name: Carlos Augusto Lira Aguiar
Title: Chief Executive Officer
By: /s/ Isac Roffe Zagury
---------------------------------
Name: Isac Roffe Zagury
Title: Chief Financial Officer
Date: June 25, 2004
76
ARACRUZ CELULOSE S.A.
CONSOLIDATED FINANCIAL STATEMENTS AT
DECEMBER 31, 2002 AND 2003 AND
REPORT OF INDEPENDENT AUDITORS
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Aracruz Celulose S.A.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity, expressed in United States dollars, present fairly, in all material
respects, the financial position of Aracruz Celulose S.A. and its subsidiaries
at December 31, 2002 and 2003 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. These consolidated financial statements are the responsibility of the
management of Aracruz Celulose S.A.; our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As mentioned in Note 4, on January 9, 2004, the Company was notified by Agencia
de Desenvolvimento do Nordeste - ADENE (Northeast Development Agency), of its
decision to cancel the fiscal benefits, consisting of reduction in income tax
rates, to which the Company has so been entitled. Based on the advice of
external legal counsels, Company's management believes that this decision is not
correct and, therefore, does not affect the benefits already recorded, as they
were duly recognized under existing authorization. In addition, management will
seek all available legal instruments to protect its rights and to revoke ADENE's
decision, in order to allow the Company to get all the fiscal benefits, i.e.,
for the entire period of the benefit.
PricewaterhouseCoopers Vitoria, Brazil
Auditores Independentes January 12, 2004
F-2
ARACRUZ CELULOSE S.A.
CONSOLIDATED BALANCE SHEETS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES)
-----------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
ASSETS 2002 2003 LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2003
--------------------- -------------------------
Current assets Current liabilities
Cash and cash equivalents 25,474 66,284 Suppliers 45,902 79,673
Time deposits 248,455 285,991 Payroll and related charges 7,426 16,245
Accounts receivable, net Income and other taxes 2,054 24,120
Related party 2,781 3,174 Current portion of long-term debt
Other 130,308 219,874 Related party 47,281 55,190
Inventories, net 81,553 131,486 Other 120,033 212,472
Deferred income tax, net 8,653 13,181 Short-term borrowings - export 10,811 118,306
financing and other
Recoverable income and other 25,985 20,464 Accrued finance charges 4,555 6,120
taxes
Prepaid expenses and other Other accruals 442 1,553
current assets 1,207 2,280 ------- --------
--------- ---------
524,416 742,734 238,504 513,679
--------- --------- ------- ---------
Property, plant and equipment, net 2,000,071 2,270,369 Long-term liabilities
--------- ---------
Long-term debt
Investment in affiliated company 70,943 174,257 Related party 214,772 208,076
Goodwill 16,026 208,061 Other 396,319 771,359
--------- --------- Tax assessments and litigation 65,620 94,500
contingencies
Deferred income tax, net 26,467
Suppliers 20,113 15,222
Other assets Other 2,668 23,877
------- -------
Advances to suppliers 28,229 38,197
Deposits for tax assessments 10,605 14,319 699,492 1,139,501
Deferred income tax, net 361 ------- ---------
Recoverable income and other 45,170 1,548 Commitments and contingencies (Note 15)
taxes
Other 2.993 4,948
------ ------
87,358 59,012 Minority interest 255 292
------ ------ ------- ---------
F-3
ARACRUZ CELULOSE S.A.
CONSOLIDATED BALANCE SHEETS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES) (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Share capital - no-par-value shares authorized and
issued
Preferred stock
Class A - 2002 - 40,326,290 shares; 2003 -
38,137,170 shares 32,990 31,199
Class B - 2002 - 536,837,131 shares; 2003
-
539,026,251 shares 581,506 583,297
Common stock - 2002 and 2003 - 455,390,699 297,265 297,265
shares
Treasury stock
Class B preferred stock - 2002-1,374,000
shares; 2003 - 1,378,000 shares; and
Common stock - 2002 and 2003 -
483,114 shares (2,285 ) (2,288 )
-------------- --------------
Total share capital 909,476 909,473
Appropriated retained earnings 117,173 334,246
Unappropriated retained earnings 733,914 557,242
-------------- --------------
1,760,563 1,800,961
------------- ------------- -------------- --------------
2,698,814 3,454,433 2,698,814 3,454,433
============= ============= ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF INCOME
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS) (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2002 2003
----------------- ------------------ ----------------
OPERATING REVENUES
Sales of eucalyptus pulp
Domestic 23,579 17,126 42,401
Export 583,365 700,622 1,056,498
----------------- ------------------ ----------------
606,944 717,748 1,098,899
Sales taxes and other deductions (32,589) (48,765) (95,829)
----------------- ------------------ ----------------
Net operating revenues 574,355 668,983 1,003,070
----------------- ------------------ ----------------
OPERATING COSTS AND EXPENSES
Cost of sales 420,606 468,875 592,555
Selling 23,253 28,242 38,617
Administrative 22,012 22,302 22,762
Provision for loss on ICMS credit 10,754 45,093 23,178
Other, net 14,807 8,968 18,784
----------------- ------------------ ----------------
491,432 573,480 695,896
----------------- ------------------ ----------------
OPERATING INCOME 82,923 95,503 307,174
----------------- ------------------ ----------------
NON-OPERATING (INCOME) EXPENSES
Equity in results of affiliated company (1,195) (6,076) 6,844
Financial income (54,749) (61,611) (43,037)
Financial expenses 70,215 82,014 108,209
Loss (gain) on currency remeasurement, net 18,029 (14,888) (41,955)
Other, net (171) (212) (129)
----------------- ------------------ ----------------
32,129 (773) 29,932
----------------- ------------------ ----------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 50,794 96,276 277,242
----------------- ------------------ ----------------
INCOME TAX EXPENSE (BENEFIT)
Current 35,722 (23,988) 106,549
Deferred (2,992) 8,415 22,567
----------------- ------------------ ----------------
32,730 (15,573) 129,116
----------------- ------------------ ----------------
MINORITY INTEREST IN LOSSES (EARNINGS) OF SUBSIDIARY 43 64 (37)
----------------- ------------------ ----------------
NET INCOME FOR THE YEAR 18,107 111,913 148,089
================= ================== ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF INCOME
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS) (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2002 2003
--------------- ---------------- ---------------
BASIC AND DILUTED EARNINGS PER SHARE
Class A preferred stock 0.05 0.11 0.15
Class B preferred stock 0.02 0.11 0.15
Common stock 0.01 0.10 0.14
WEIGHTED-AVERAGE NUMBER OF SHARES
OUTSTANDING (THOUSANDS)
Class A preferred stock 40,651 40,395 39,819
Class B preferred stock 536,512 536,768 535,969
Common stock 454,908 454,908 454,908
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2002 2003
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year 18,107 111,913 148,089
Adjustments to reconcile net income to cash
provided by operating activities:
Non-cash items
Depreciation and depletion 162,567 171,527 191,508
Equity in results of affiliated company (1,195) (6,076) 6,844
Deferred income tax (2,992) 8,415 22,567
Loss (gain) on currency remeasurement 18,029 (14,888) (41,955)
Loss on sale of equipment 8,883 1,077 1,903
Other (1,346)
Decrease (increase) in assets
Accounts receivable, net (5,122) (50,557) (24,199)
Inventories, net 13,552 (11,868) (23,556)
Interest receivable on time deposits 4,792 54,817 (15,540)
Recoverable income taxes (27,025) 10,246 68,848
Other 5,019 6,708 (2,725)
Increase (decrease) in liabilities
Suppliers 27,977 10,437 (38,554)
Payroll and related charges (353) (1,537) 6,460
Income and other taxes and litigation
contingencies 31,382 (3,751) 25,641
Accrued finance charges 5,825 (9,927) (3,689)
Other 714 1,061 14,783
---------------- ---------------- ----------------
Net cash provided by operating activities 260,160 276,251 336,425
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Time deposits (92,279) 27,927 75,194
Proceeds from sale of equipment 392 1,199 699
Investments in affiliate (5,137) (110,158)
Acquisition of Riocell (net of cash received) (563,208)
Additions to property, plant and equipment (416,353) (260,658) (118,663)
---------------- ---------------- ----------------
Net cash used in investing activities (513,377) (231,532) (716,136)
---------------- ---------------- ----------------
F-7
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS (CONTINUED)
------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt, net (15,224) (78,789) 104,486
Long-term debt
Issuances
Related parties 160,889 112,199
Other 280,374 250,000 612,512
Repayments
Related parties (53,214) (43,309) (52,719)
Other (54,945) (203,756) (133,080)
Treasury stock acquired (2,175) (3)
Dividends paid (63,169) (73,765) (109,310)
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 254,711 (39,595) 421,886
--------------- --------------- ---------------
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH AND
cash equivalents 540 225 (1,365)
--------------- --------------- ---------------
Increase in cash and cash equivalents 2,034 5,349 40,810
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,091 20,125 25,474
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR 20,125 25,474 66,284
=============== =============== ===============
SUPPLEMENTARY CASH FLOW INFORMATION
Financial charges paid 49,258 60,412 64,828
=============== =============== ===============
Income taxes paid, including escrow deposits
for tax assessments 66 140 2,186
=============== =============== ===============
Withholding income tax on financial income 34,020 1,404 6,969
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS)
----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2002 2003
---------------------------- ----------------------- ----------------------
SHARES U.S.$ SHARES U.S.$ SHARES U.S.$
--------------- ------------ ----------- ----------- ---------- ----------
SHARE CAPITAL
Preferred stock - Class A
Balance, January 1 40,929,550 33,455 40,479,797 33,087 40,326,290 32,990
Treasury stock cancelled (35,301)
Conversion to Class B
stock (449,753) (368) (118,206) (97) (2,189,120) (1,791)
------------- ------- ------------- ------- -------------- -------
Balance, December 31 40,479,797 33,087 40,326,290 32,990 38,137,170 31,199
------------- ------- ------------- ------- -------------- -------
Preferred stock - Class B
Balance, January 1 581,599,464 581,041 582,049,217 581,409 536,837,131 581,506
Treasury stock cancelled (45,330,292)
Conversion from Class A
stock 449,753 368 118,206 97 2,189,120 1,791
------------- ------- ------------- ------- -------------- -------
Balance, December 31 582,049,217 581,409 536,837,131 581,506 539,026,251 583,297
Common stock
Balance, January 1 and
December 31 455,390,699 297,265 455,390,699 297,265 455,390,699 297,265
------------- ------- ------------- ------- -------------- -------
Treasury stock
Balance, January 1 (45,848,707) (57,807) (45,848,707) (57,807) (1,857,114) (2,285)
Treasury stock cancelled 45,365,593 57,697
Treasury stock acquired (1,374,000) (2,175) (4,000) (3)
------------- ------- ------------- ------- -------------- -------
Balance, December 31 (45,848,707 (57,807 (1,857,114) (2,285) (1,861,114) (2,288)
------------- ------- ------------- ------- -------------- -------
Total share captal 1,032,071,006 853,954 1,030,697,006 909,476 1,030,693,006) 909,473
------------- ------- ------------- ------- -------------- -------
F-9
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS) (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
2001 2002 2003
------------------------- ----------------------- ----------------------------
Shares U.S.$ Shares U.S.$ Shares U.S.$
------------- --------- ------------- --------- ------------- ---------
Balance brought forward 1,032,071,006 853,954 1,030,697,006 909,476 1,030,693,006 909,473
------------- --------- ------------- --------- ------------- ---------
Net unrealized gain on
Available-for-sale securities
Balance, January 1 1,095 10,920
Unrealized gain (loss) on
available-for-sale
securities, net of
reclassification adjustments 14,664 (16,299)
Tax effect on above (4,839) 5,379
--------- --------- ---------
Balance December 31, 10,920
--------- --------- ---------
Fiscal-incentive reserve
Balance, January 1
Transfer from unappropriated retained 34,934
earnings
--------- --------- ---------
Balance, December 31 34,934
--------- --------- ---------
Investments reserve
Balance, January 1 282,475 242,121 81,520
Treasury stock cancelled (57,697)
Transfer from (to) unappropriated (40,354 (102,904) 158,989
retained earnings
--------- --------- ---------
Balance, December 31 242,121 81,520 240,509
--------- --------- ---------
Legal reserve
Balance, January 1 57,775 52,985 35,653
Transfer from (to) unappropriated
retained earnings (4,790) (17,332) 23,150
--------- --------- ---------
Balance, December 31 52,985 35,653 58,803
--------- --------- ---------
Total appropriated retained earnings 295,106 117,173 334,246
--------- --------- ---------
Balance carried forward 1,032,071,006 1,159,980 1,030,697,006 1,026,649 1,030,693,006 1,243,719
------------- --------- ------------- --------- ------------- ---------
F-10
ARACRUZ CELULOSE S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS) (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
2001 2002 2003
------------------------- ----------------------- ----------------------------
Shares U.S.$ Shares U.S.$ Shares U.S.$
------------- --------- ------------- --------- ------------- ---------
BALANCE BROUGHT FORWARD 1,032,071,006 1,159,980 1,030,697,006 1,026,649 1,030,693,006 1,243,719
------------- --------- ------------- --------- ------------- ---------
UNAPPROPRIATED RETAINED EARNINGS
Balance, January 1 577,822 577,750 733,914
Net income for the year 18,107 111,913 148,089
Cash dividends (per share: 2001 - U.S.$ 0.06 to Class A
preferred stock and U.S.$ 0.06 to both Class B
preferred and common stock; 2002 - U.S.$ 0.08
to Class A preferred stock and U.S.$ 0.07 to
both Class B preferred and common stock;
2003 - U.S.$ 0.11 to both Class A preferred and
Class B preferred stock and U.S.$ 0.09 to common stock) (63,323) (75,985) (107,688)
Transfer from (to) reserves 45,144 120,236 (217,073)
--------- --------- ---------
Balance, December 31 577,750 733,914 557,242
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,032,071,006 1,737,730 1,030,697,006 1,760,563 1,030,693,006 1,800,961
============= ========= ============= ========= ============= =========
COMPREHENSIVE INCOME IS COMPRISED AS FOLLOWS:
Net income for the year 18,107 111,913 148,089
Net unrealized gain on available-for-sale securities
Increase(decrease)in the unrealized gain arising
during the year, net of taxes 9,825 (10,920)
--------- --------- ---------
Total comprehensive income 27,932 100,993 148,089
F-11
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Aracruz Celulose S.A. and its
subsidiaries (the Company) have been prepared in conformity with accounting
principles generally accepted in the United States of America ("US GAAP"),
which require management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses during the
reporting periods and require the disclosure of contingent assets and
liabilities as of the date of the financial statements. The Company's
consolidated financial statements therefore include estimates concerning
such matters as the selection of useful lives of property, plant and
equipment, provisions necessary for asset impairments, contingent
liabilities, employee postretirement benefits and other similar
evaluations; actual results may vary from estimates.
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
US GAAP, which differ in certain respects from the Brazilian accounting
principles applied by the Company in its statutory financial statements
prepared in accordance with Brazilian corporate legislation.
The Company has reported its financial statements in U.S. dollars since
1994 when the U.S. Securities and Exchange Commission permitted foreign
registrants to report in U.S. dollars rather than in the currency of the
country in which they are incorporated. The U.S. dollar amounts have been
remeasured from Brazilian reais (R$) in accordance with the criteria set
forth in Statement of Financial Accounting Standards N(0) 52 - "Foreign
Currency Translation" ("SFAS 52"). The Board of Directors and management
have historically considered the U.S. dollar as the Company's functional
currency as this has been, and remains in their opinion, the currency in
which it principally operates as well as being the Company's primary unit
of economic measure. Accordingly, the Company's management has concluded
that the Company's functional currency is and will continue to be the U.S.
dollar.
Gains and losses resulting from the remeasurement of the financial
statements, as well as those resulting from foreign currency transactions
have been recognized in the statements of income. The impact of the
devaluation of the Real on the Company's monetary assets and liabilities in
2003 was a net gain of U.S.$ 42.0 million (U.S.$ 14.9 million gain in 2002
and U.S.$ 18.0 million loss in 2001). The exchange rates at December 31,
2003, 2002 and 2001 were, respectively: U.S.$ 1: R$ 2,8892, R$ 3,5333 and
R$ 2,3204.
Stockholders' equity included in the consolidated financial statements
presented herein differs from that included in the Company's statutory
accounting records as a result of the variations in the U.S. dollar
exchange rate, the indexation mandated over the years up to December 31,
1995 for statutory financial statements and adjustments made to reflect the
requirements of US GAAP.
F-12
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(b) BASIS OF CONSOLIDATION
The financial statements of majority-owned subsidiaries have been
consolidated, and all significant intercompany accounts and transactions
have been eliminated. Accordingly, the following companies were
consolidated: Aracruz Trading S.A., Aracruz Celulose (USA) Inc., Portocel -
Terminal Especializado de Barra do Riacho S.A., Mucuri Agroflorestal S.A.,
Aracruz Produtos de Madeira S.A. and Riocell S.A.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash, bank accounts and short-term
financial investments with a ready market and maturities when purchased of
90 days or less, and are stated at the lower of cost plus accrued interest
or market value.
(d) CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit and performance risk are cash and cash
equivalents, time deposits and trade accounts receivable. The Company
limits its credit and performance risk associated with cash and cash
equivalents and time deposits by placing its investments with highly rated
financial institutions and in very short-term securities. An allowance for
doubtful accounts is established to the extent the Company's trade
receivables are estimated not to be fully collectible.
The Company's pulp sales are made substantially to the paper industry;
consequently, its performance is dependent upon that industry's worldwide
demand for pulp and the related supply, as well as fluctuations in the
market price for pulp which can be significant.
(e) INVENTORIES
Inventories are stated at the lower of the average cost of purchase or
production, and replacement or realizable values. Cost is determined
principally on the average-cost method.
F-13
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(f) INVESTMENTS IN AFFILIATED COMPANIES
The Company uses the equity method of accounting for its long-term
investment (Veracel Celulose S.A.) for which it owns 50% of the investee's
voting stock and has the ability to exercise significant influence over
operating and financial policies of the investee. The equity method
requires periodic adjustments to the investment account to recognize the
Company's proportionate share in the investee's results, reduced by receipt
of investee dividends and, up to January 1, 2002, amortization of goodwill.
In accordance with SFAS 142 - "Goodwill and Other Intangible Assets",
goodwill will be tested for impairment at least annually using an
estimation of a reporting unit.
(g) PROPERTY, PLANT AND EQUIPMENT
Timber resources are stated at cost, less accumulated depletion. Forest
development and maintenance costs are capitalized. Depletion is determined
on the unit-of-production basis, excluding from the amount to be depleted
the portion of tree-development costs that benefits future harvests; such
costs are deferred and included in the cost of those harvests.
Other property, plant and equipment are recorded at cost, including
interest incurred on financing during the construction period of major new
facilities. Interest on local currency borrowings is determined as that
part of the total finance cost incurred on borrowings net of the foreign
currency translation adjustments arising on such borrowings, and, on
foreign currency borrowings (including those denominated in U.S. dollars)
at the contractual interest rates.
Depreciation is computed on the straight-line basis at rates, which take
into consideration the useful lives of the assets, principally an average
of 25 years for buildings, 10 years for improvements and installations, and
4 to 25 years for machinery and equipment and other assets.
F-14
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(h) ENVIRONMENTAL COSTS
Expenditures relating to ongoing programs for compliance with environmental
regulations are generally expensed but may be capitalized under certain
circumstances. Capitalization is considered appropriate when the
expenditures relate to the acquisition and installation of pollution
control equipment. These ongoing programs are designed to minimize the
environmental impact of the Company's pulp-producing activities.
(i) RECOVERABILITY OF LONG-LIVED ASSETS
In accordance with SFAS 144 - "Accounting for the Impairment or Disposal of
Long-Lived Assets", management reviews long-lived assets, primarily
property, plant and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Management did not
identify the need for a provision for impairment in 2001, 2002 and 2003.
(j) EMPLOYEE RETIREMENT AND POSTEMPLOYMENT BENEFITS
The cost of the retirement benefits plans is accrued currently. Employee
postretirement and postemployment benefits as defined by SFAS 106 -
"Employers' Accounting for Postretirement Benefits other than Pensions" and
SFAS 112 - "Employers' Accounting for Postemployment Benefits",
respectively, are not significant. The Company is required by law to
provide severance benefits to employees terminated without just cause. No
amounts were accrued at December 31, 2001, 2002 and 2003, since future
severance costs are not reasonably estimable.
(k) COMPENSATED ABSENCES
The liability for employees' future vacation compensation is accrued as
vacation vests during the year.
F-15
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(l) REVENUES AND EXPENSES
Revenues arise from annual and long-term contracts and from spot sales and
are recognized on an accrual basis when persuasive evidence of arrangements
exists, title has transferred to the customer, the selling price is fixed
or determinable and collectibility is reasonably assured. Expenses and
costs are accrued as incurred.
(m) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
The Company has adopted Statement of Financial Accounting Standards No. 133
- Accounting for Derivative Financial Instruments and Hedging Activities
("SFAS 133"), as amended, as from January 1, 2001. SFAS 133 defines
derivatives broadly such that the Company's purchase and sale contracts
could be considered derivatives except that the Company may qualify for
certain exemptions. The Company has determined that these contracts qualify
for these exemptions. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in
current earnings or in other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction and, if it is,
depending on the type of hedge relationship. For fair value hedge
transactions in which the Company is hedging changes in an asset's,
liability's, or a firm commitment's fair value, changes in the fair value
of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value attributable to the
hedged risk.
For cash-flow hedge transactions in which the Company is hedging the
variability of cash flows related to a variable-rate asset, variable-rate
liability, or a forecasted transaction, the effective portion of the gain
or loss on the derivative instrument is reported in other comprehensive
income. The gains and losses on the derivative instrument that are reported
in other comprehensive income are reclassified to the income statement in
the periods in which earnings are impacted by the hedged item. The
ineffective portion of all hedges is recognized in current period earnings.
The gains and losses on all derivatives not designated as hedges are
recognized in earnings.
The adoption of SFAS 133 did not have an effect upon the financial position
and results of operations of the Company as it had previously recognized
and continues to recognize all derivative financial instruments as
non-hedge transactions, with the derivative instrument recorded at fair
value in the balance sheet and changes in the fair value of the instrument
recorded in the income statement.
F-16
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(n) INCOME TAXES
The Company has adopted SFAS 109 - "Accounting for Income Taxes" for all
years presented. Accordingly, the Company recognizes (i) the benefits of
tax loss carryforwards available to be offset against future taxable income
and (ii) deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases and financial
reporting bases of assets and liabilities, as well as on the effects of
adjustments made to reflect the requirements of US GAAP. A valuation
allowance is provided to reduce deferred tax assets when management
considers that realization is not reasonably assured.
(o) BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share are computed by dividing net income by
the weighted average number of all classes of shares outstanding during the
year, net of treasury stock, after taking into consideration the dividend
provisions applicable to Class A preferred and Class B preferred stocks,
assuming that all earnings for the year are fully distributed. There were
no dilutive securities outstanding in 2001, 2002 and 2003.
(p) COMPREHENSIVE INCOME
The Company has disclosed comprehensive income as part of the Statement of
Changes in Stockholders' Equity, in compliance with SFAS 130 -
"Reporting Comprehensive Income".
2 BUSINESS COMBINATION - ACQUISITION OF RIOCELL S.A.
On July 2, 2003, the Company completed the acquisition of all outstanding
shares of Riocell S.A. and its subsidiaries ("Riocell") from Klabin S.A.
and Klabin do Parana Produtos Florestais Ltda for the amount of US$
610,500.
Riocell, is a producer of bleached eucalyptus pulp, most of which is
exported, with a production capacity of 400,000 tons of pulp per year and
forestry operations which encompass 40,000 hectares of eucalyptus
plantations.
The acquisition is in line with the Company's strategy objective of
increasing capacity. The goodwill paid is related to potential operating
synergy gains. The final price paid is within the market value evaluation
made by independent appraisers.
After the completion of the due diligence process, the initial purchase
price of US$ 610,500 was reduced to US$ 567,296.
F-17
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
The Company retained an independent appraiser to perform a detailed fair
value valuation of Riocell's assets and liabilities. This valuation was
completed in December 23, 2003 and after the final allocation of the
purchase price to the net assets acquired, the company recognized a
goodwill in the amount of US$ 192,035 at December 31, 2003; there was no
intangible assets identified on the acquisition.
The following table summarizes the estimated fair value of Riocell's assets
and liabilities at July 2, 2003, after giving effect to the final price
adjustments:
JULY 2, 2003
Cash and cash-equivalents 4,088
Inventory 29,525
Property, Plant and equipment 340,129
Other assets acquired 77,068
TOTAL ASSETS 450,810
Liabilities 75,549
NET WORTH 375,261
Shares owned 100%
Company's interest 375,261
Consideration paid 567,296
Goodwill 192,035
The final goodwill assessment under Brazilian GAAP was R$ 839,3 million (tax
deductible in accordance with Brazilian tax legislation), of which R$ 282,1 (US$
97,5 at December 31, 2003 exchange rate) based on asset market value, to be
amortized in a period equivalent to the depreciation of property, plant and
equipment (approximately 18 years); and R$ 557,2 (approximately US$ 192,7
million at December 31, 2003 exchange rate) based on expected return of
investments to be amortized in 10 years.
F-18
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
Unaudited pro-forma results of operations for the year ended December 31,
2003 as if the acquisition of Riocell had taken place at the beginning of
2003 is presented below. Riocell was incorporated on November 30, 2002 and,
accordingly no financial information is available for the year ended
December 31, 2002. The pro-forma results of operations include estimates
and assumptions which management believes are reasonable. However, pro
forma results do not include any anticipated cost savings and are not
necessarily indicative of the results which could have occurred if the
business combination had been in effect on the dates indicated or which may
result in the future.
2003 (UNAUDITED)
-------------------------
Operating revenues 1,104,350
Net income 148,577
Earnings per share, basic and diluted :
Preferred shares 0.15
Common shares 0.14
3 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB"), recently issued the
following pronouncements:
SFAS N(0) 147 - "Accounting for Acquisitions of Certain Financial
Institutions".
SFAS N(0) 148 - "Accounting for Stock-Based Compensation".
SFAS N(0) 149 - "Amendment of SFAS 133".
SFAS N(0) 150 - "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity".
Management believes that adoption of these pronouncements did not or will
not, as applicable, have a material impact on the financial position and
results of operations of the Company.
F-19
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
In January 2003, the FASB issued Interpretation No. 46 (FIN 46) -
Consolidation of Variable Interest Entities. FIN 46 provides guidance on
when certain entities should be consolidated or the interests in those
entities should be disclosed by enterprises that do not control them
through majority voting interest. This interpretation applies immediately
to variable interest entities created after January 31, 2003. The Company
does not have any entities or transactions, which are subject to the
requirements of FIN 46 and does not expect FIN 46 to have a material impact
on its financial statements.
4 TAXES
4.1 INCOME TAXES
Income taxes in Brazil comprise federal income tax and social contribution
(which is an additional federal income tax). The statutory rates applicable
for federal income tax and social contribution for the years ended December
31, 2001, 2002 and 2003 are presented as follows:
Federal income tax rate 25.0%
Social contribution (*) 9.0%
-----------------
Composite tax rate 34.0%
=================
F-20
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
The amounts reported as income tax expense in the consolidated statements of
income are reconciled to the statutory rates as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2002 2003
--------------- ------------- -------------
Income before income taxes and minority
interest 50,794 96,276 277,242
=============== ============= =============
Federal income tax and social
contribution at statutory rates 17,270 32,734 94,262
Adjustments to derive effective tax rate:
Effects of differences in remeasurement
from reais to U.S. dollars, using
historical exchange rates and indexing
for tax purposes:
Translation effect for the period (4,131) (89,660) 43,778
Depreciation on difference in asset basis 21,083 40,746 25,893
Valuation allowance (reversal)
Operations outside Brazil (2,474)
Reversal of income tax and social
contribution related to "plano verao" (9,106)
Fiscal incentive - income tax (*) (34,934)
Other permanent items 982 607 9,223
--------------- ------------- -------------
Income tax expense (benefit) in the consolidated
statements of income 32,730 (15,573 ) 129.116
=============== ============= =============
(*) The Company's operations are located within the geographic area of the
Agencia de Desenvolvimento do Nordeste (Northeast Development Agency,
or ADENE) and the pulp and paper sector is considered by the Federal
Government as a priority for the development of such geographic area.
Accordingly, during 2002, the Company applied and was awarded the right
to a reduction in the income taxes payable over its operating profits.
The tax benefit was authorized by ADENE and subsequently confirmed by
the Revenue Service in December 2002, as follows:
(i) Profits corresponding to the volumes of Plant C, limited to 780
thousand tons/year, for 10 years: 75% reduction of the statutory tax
rate, as from 2003 through 2012;
F-21
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(ii) Profits corresponding to the volumes of Plants A and B, limited to
1,300 thousand tons/year, for 10 years: 37.5% reduction of the
statutory rate through 2003, 25% reduction from 2004 through 2008 and
12.5% reduction from 2009 through 2013.
For the year ended December 31, 2003, the reduction in taxes amounted to
US$ 34,934. This amount was transferred from retained earnings and was
recognized as a Fiscal Incentive Reserve in the Stockholders' Equity and
can only be used to increase capital, according to the ADENE rules.
On January 9, 2004, the Company was notified by ADENE of its decision to
cancel the fiscal benefits to which the Company has so been entitled.
Such decision has resulted from a reexamination by the legal department
of the Regional Integration Ministry, which has concluded that the
geographical area where the Company is located would not be within the
geographical area of the fiscal incentive and, therefore, the Company
would no longer be entitled to such fiscal incentive.
Based on the advice of external legal counsels, Company's management
believes that such decision is not correct, as the most appropriate
interpretation of the legislation would necessarily lead to the
conclusion that the Company does operate within the geographical area of
ADENE and, therefore, is entitled to the fiscal incentive. Also, based
on the advice of external legal counsels, management believes that the
ADENE's decision does not affect the benefits already recorded during
2003 as they were duly recognized under so existing authorization.
Accordingly, management has not recorded any provisions for the benefits
recognized during the year ended December 31, 2003.
Finally, management will seek all available legal instruments to protect
its rights and to revoke the ADENE's decision, in order to allow the
Company to get all the fiscal benefits, i.e., for the entire period of
the benefit.
F-22
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
The major components of the deferred tax accounts in the balance sheet are
as follows:
DECEMBER 31,
---------------------------------
2002 2003
-------------- ----------------
Assets (liabilities)
Tax loss carryforwards
Operations in Brazil 1,354
Expenses not currently deductible 34,633 48,596
Other capitalized investments (35,626) (75,063)
Others 8,653 13,181
-------------- ----------------
9,014 (13,286)
Current assets 8,653 13,181
-------------- ----------------
Long-term assets (liabilities) 361 (26,467)
============== ================
Although realization of net deferred tax assets is not assured, management
believes that, except where a valuation allowance has been provided, such
realization is more likely than not to occur. The amount of the deferred
tax asset considered realizable could, however, be reduced if estimates of
future taxable income during the tax loss carryforwards period are reduced.
Tax loss carryforwards do not expire and are available to offset against
future taxable income limited to 30% of taxable income in any individual
year.
4.2 OTHER TAXES
Since the promulgation of the Federal Law no. 87, on September 13, 1996,
the Company has been accumulating ICMS (state sales tax) credits resulting
from ICMS paid on purchases, credited to its books and not compensated
against ICMS on sales because export sales are exempted from ICMS. The
Company has the legal right, not contested by the state authorities, to
claim those credits against the Espirito Santo State. However, due to the
priority given by Espirito Santo government to financially restructure
public account, the Company does not foresee a short-term solution to the
utilization of the credits.
Accordingly, the Company decided in October 2002 to increase its original
valuation allowance from 25% to 100% of the existing credits, as well as to
make similar provisions related to any future credit to be accumulated. At
December 31, 2003, the Company had ICMS credits in the amount of U.S.$
92,010 and a valuation allowance in the same amount.
F-23
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
5 CASH AND CASH EQUIVALENTS
DECEMBER 31,
-----------------------------
2002 2003
-------------- ------------
Brazilian reais 4,176 3,307
United States dollars 20,658 61,775
Other European currencies 640 1,202
-------------- ------------
25,474 66,284
============== ============
Cash equivalents denominated in Brazilian Reais and in United States
dollars represent principally investments in certificates of deposit placed
with major financial institutions.
6 TIME DEPOSITS
At December 31, 2003, comprised of certificates of deposit with prime
institutions in Brazil, with final maturities from February 2004 to July
2006 and daily liquidity.
7 ACCOUNTS RECEIVABLE, NET
DECEMBER 31,
-----------------------------
2002 2003
-------------- ------------
Customers - pulp sales
Domestic 4,305 7,383
Export 124,689 196,911
Advances to suppliers 1,036 4,258
Other 4,130 18,007
-------------- ------------
134,160 226,559
Allowance for doubtful accounts (1,071 ) (3,511 )
-------------- ------------
Total, net 133,089 223,048
============== ============
F-24
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
At December 31, 2003, two customers accounted for 44% of total customer
receivables (At December 31, 2002 two customers accounted for 35%) and no
other accounted for more than 10%.
Export receivables are denominated in the following currencies:
DECEMBER 31,
---------------------------
2002 2003
------------ ------------
United States dollars 122,127 193,599
European currency units - EURO 2,562 3,312
------------ ------------
124,689 196,911
============ ============
Export receivables in currencies other than U.S. dollars are swapped into
U.S. dollars through forward foreign exchange contracts as discussed in
Note 17.
8 INVENTORIES, NET
DECEMBER 31,
-------------------------
2002 2003
----------- ----------
Finished products 36,689 67,903
Work in process 1,078 1,380
Timber 2,853 3,872
Raw materials 11,445 24,059
Spare parts and maintenance supplies,
less allowance
for loss of U.S.$ 8,111
(2002 - U.S.$ 3,512) 29,488 34,272
----------- ----------
81,553 131,486
============ ==========
F-25
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
9 PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 2002
----------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET
------------------ ------------------ --------------
Land 206,211 206,211
Timber resources 523,122 352,690 170,432
Buildings, improvements and installations 472,799 282,835 189,964
Equipment 1,812,318 868,242 944,076
Information technology equipment 47,753 30,872 16,881
Other 143,510 109,957 33,553
------------------ ------------------ --------------
3.205.713 1,644,596 1,561,117
Construction in progress 352.074 352,074
------------------ ------------------ --------------
Total 3.557.787 1,644,596 1,913,191
================== ================== ==============
DECEMBER 31, 2003
----------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET
------------------ ------------------ --------------
Land 295,364 295,364
Timber resources 341,054 75,087 265,967
Buildings, improvements and installations 563,872 326,633 237,239
Equipment 2,606,971 1,193,750 1,413,221
Information technology equipment 55,926 41,303 14,623
Other 153,481 125,653 27,828
------------------ ------------------ --------------
4,016,667 1,762,425 2,254,242
Construction in progress 16,127 16,127
------------------ ------------------ --------------
Total 4,032,794 1,762,425 2,270,369
================== ================== ==============
F-26
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
FIBERLINE C - EXPANSION PROJECT
The Expansion project consists of a new pulp line with a capacity of
700,000 tons that, together with additional optimization of the two
existing lines from 1.24 to 1.30 million tons, increased the Company's
production capacity at its site in northern Espirito Santo State to 2
million tons per year. The new production capacity requires an increase in
the forest base of the Company of approximately 72,000 hectares of
eucalyptus plantations. The construction of the new pulp line began in the
second semester of 2000 and start up occurred in May 2002. The Company
reached full production capacity in the first quarter of 2003. The total
budgeted investment in the Expansion project is approximately US$ 825
million, of which US$ 575 million was invested in the production line and
the balance in land, forest and other investments. As of December 31, 2003
the Company had invested approximately US$ 711 million.
During 2002 up to the start-up of the new pulp line - "Fiberline C" on May
2002, the Company capitalized approximately US$ 7.5 million of interest
cost on funds used to construct the new pulp line.
ACQUISITION OF FLORESTAS RIO DOCE S.A.
In September 2002, Aracruz Celulose S.A., together with Bahia Sul Celulose
S.A., signed an agreement with Companhia Vale do Rio Doce S.A. (CVRD) and
its subsidiary Florestas Rio Doce S.A. (FRDSA), for the acquisition of the
assets of FRDSA, located in the Municipality of Sao Mateus, in the State of
Espirito Santo. Such assets are comprised of approximately 40,000 hectares
of land and eucalyptus forests with amount of (R$ 193.3 million - US$ 49.6
million) net of the assignment to the buyers of the rights of a preexisting
wood supply agreement (R$ 49.5 million - US$ 13.3 million), with a combined
net price of R$ 143.8 million (approximately US$ 36.3 million).
The net purchase price will be paid in 12 quarterly installments and the
Company recorded its share in the agreement (50%) as a liability (supply
agreement) and as an asset (land and forests). Aracruz and Bahia Sul each
will separately control its share of the assets. The Company has paid 5
installments through December 31, 2003.
F-27
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
10 INVESTMENT IN AFFILIATED COMPANY
VERACEL CELULOSE S.A.
On October 10, 2000, the Company acquired a 45% interest in Veracel
Celulose S.A. ("Veracel") for US$ 81,011. Veracel is growing eucalyptus
plantations in the state of Bahia in Brazil and did not begin operations
until January 2002. Stora Enso OYJ ("Stora Enso") and Odebrecht S.A.
("Odebrecht") owned the remaining 45% and 10%, respectively. Upon closing
of the purchase agreement, the Company and Veracel entered into a
three-year wood supply contract to provide wood for the Company<180>s mill
expansion. Under the terms of the contract, which began in January 2002,
Veracel supplies up to 3.85 million cubic meters of wood at US$ 40.50 per
cubic meter.
During the first quarter of 2003, the Company acquired, together with Stora
Enso, the 10% Odebrecht's ownership on a 50/50 ratio, paying the amount of
US$ 9,658, including US$ 443 of unallocated goodwill, for the acquisition
of its portion of the additional investment in Veracel.
The Company accounts for its investment in Veracel using the equity method
of accounting. At December 31, 2003 the Company's investment in Veracel
included goodwill of US$ 16,026. In 2003, the Company recognized an equity
gain of US$ 6,844 (2002 - loss of US$ 6,076).
In May 2003, the Company and Stora Enso jointly decided to proceed with the
planned construction of Veracel's own green field plant which will have
a capacity 900,000 tons of pulp per year and will require investments of
approximately US$ 1,250 million of which US$ 300 million were already
invested in forestry and infrastructure including roads and a specialized
maritime terminal.
11 SHORT-TERM BORROWINGS
The Company's short-term borrowings are principally from commercial banks
for export financing and are substantially denominated in U.S. dollars.
Average annual interest rates at December 31, 2002 and 2003 were,
respectively, 1.5% and 4.33%.
At December 31, 2003, U.S.$ 82,206 of short-term borrowings fall due within
90 days, U.S.$ 34,975 from 91 to 180 days and U.S.$ 1,125 from 181 to 360
days.
F-28
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
12 LONG-TERM DEBT
DECEMBER 31,
---------------------------------
2002 2003
-------------- ----------------
Denominated in Brazilian currency - term loans with varying interest rates;
principally the "Long-term Interest Rate" (TJLP) plus 7.8% to 10.0%
(2002 - 7.8% to 11.0%), due 2004 to 2009 191,177 210,955
-------------- ----------------
Denominated in foreign currencies
Term loans - 2.33% to 10.41% (2002 - 2.9% to
11.97%), due 2004 to 2009 134,940 89,813
Securitization of receivables - 5.99% to 7.05% due
2004 to 2009( 2002 - 5.98%) 250,000 650,000
Import financing - 1.43% to 7.08% (2002 - 2.27%
to 7.8%), due 2004 to 2007 22,288 16,317
Pre-export financing - 2.51% to 4.33% (2002 -
2.93% to 3.24%) due 2004 to 2007 180,000 280,012
-------------- ----------------
587,228 1,036,142
-------------- ----------------
Total 778,405 1,247,097
Less current maturities 167,314 267,662
-------------- ----------------
611,091 979,435
============== ================
During June 2001, Aracruz Trading S.A. obtained long term financing of US$
100 million, with maturities from May 2004 to June 2004 with contractual
clauses of early maturity and annual interest rates ranging from 2.51% to
2.67%, secured against future export sales receivables. Aracruz Trading
S.A. pre-paid the amounts of US$ 37.5 million in December 2002 and US$ 25.0
million in May 2003.
In June 2003, the Company obtained bank financing against export
receivables in the amount of US$ 60 million, with annual interest rate of
4.33% and maturity in December 2004.
In December 2003, the Company had an outstanding balance of BNDES loans in
the amount of R$ 761 million (equivalent to US$ 263 million), denominated
in Brazilian Reais and basket of foreign currencies, with annual interest
rates ranging from 2.33% to 10,41%, to be repaid from 2004 through 2009.
F-29
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
In February 2002, the Company, through Aracruz Trading S.A., signed a
financing agreement with a special-purpose entity (SPE) under which such
entity received and advanced to the Company US$ 250 million, as an issuance
of Senior Secured Notes. In August 2003, a second tranche of Senior Secured
Notes was issued, in the amount of US$ 400,000 under the same
securitization program established in February 2002. In return, the Company
securitized the financing by selling to the SPE 95% of its current and
future export accounts receivables. In June 2003 this obligation was
reduced to 80%. Each month the collections in excess of contractual funding
requirements are transferred to Aracruz Trading S.A..
The table below summarizes the conditions of the two tranches under the
securitization program:
OUTSTANDING
BALANCE
--------------------------------
ANNUAL DECEMBER DECEMBER
TRANCHE CHARGES DUE DATE 31, 2003 31, 2002
------------------- ------------- ------------------- ---------------- ---------------
February 2002 5.98% February /2009 250,000 250,000
August 2003 7.05% September /2011 400,000
---------------- ---------------
650,000 250,000
================ ===============
In November and December 2003, the Company obtained bank financing against
export receivables in the amount of US$ 153 million, with annual interest
rate ranging from 2.72% to 3,39% and maturity ranging from October 2006 to
June 2007.
The long-term portion of the Company's debt at December 31, 2003 becomes
due in the following years:
2005 123,302
2006 216,282
2007 266,957
2008 160,671
2009 and thereaft 212,223
--------------
Total 979,435
==============
F-30
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
13 STOCKHOLDERS' EQUITY
At December 31, 2002, the Company's principal common stockholders and their
common stock ownership interests, either direct or indirect are as follows:
Arapar S.A. (a Company associated with the Chairman of the Board of the
Company), S.O.D.E.P.A. - Sociedade de Empreendimentos, Publicidade e
Participacao S.A. (SODEPA) (an affiliate of Banco Safra S.A.), and
Votorantim Celulose e Papel (VCP) with 28% each; Banco Nacional de
Desenvolvimento Economico e Social - BNDES with 12.5%. At December 31,
2003, SODEPA and the Banco Nacional de Desenvolvimento Economico e Social -
BNDES also owned preferred stocks which in total amounted to 14.9% and
7.7%, respectively, of the total preferred stocks.
TREASURY STOCK
At the Ordinary General Meeting held on July 29, 2002, management decided
to cancel 45,365,593 preferred shares (35,301 class "A" shares and
45,330,292 class "B" shares), all held in treasury. The cancellation of
shares did not result in a reduction of subscribed capital.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") as of December 31, 2003, 2002
and 2001, as presented in the Company's statement of income, have been
calculated on the following basis taking into consideration the Dividend
Ratio between Class A and Class B preferred stock and common stock as
discussed below.
Class A preferred stock may be converted into Class B preferred stock at
any time at the option of the stockholder. Preferred stock does not have
voting rights but has priority in the return of capital in the event the
Company is liquidated. Stock dividends payable to Class A preferred
stockholders are effected through issuance of Class B preferred stock.
Class A preferred stock has priority in the distribution of a minimum
annual cash dividend equivalent to 6% of the related capital.
F-31
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
Additionally, in order to comply with Law 9457/97, the Company's By-laws
were changed to grant Class B preferred stock the right to receive an
annual dividend in an amount that is 10% greater than dividends paid to
common stockholders (the "Dividend Ratio"); earnings, if any, in excess of
the Class A preferred stock minimum dividend will be distributed as
dividends to Class B preferred stock and common stock, up to the equivalent
on a per-share basis to those paid to Class A preferred stock, while
maintaining the Dividend Ratio between Class B preferred stock and common
stock. Any earnings remaining for distribution thereafter are shared
ratably among Class A preferred, Class B preferred and common stocks while
maintaining the Dividend Ratio between Class A and Class B preferred stock
and common stock. In the event that Class A preferred stock is not paid
dividends for three consecutive years, holders of that stock are entitled
to voting rights until the dividends in arrears for those three years are
paid.
The following presents the earnings per share calculations:
2001 2002 2003
------------ ------------ --------------
Net income for the year 18,107 111,913 148,089
Less priority Class A preferred stock dividends (1,889) (1,233) (1,488)
Less Class B preferred stock and common stock dividends up to a limit
equivalent to the Class A preferred stock dividends on a per-share
basis while maintaining the Dividend Ratio (16,218 ) (29,007 ) (35,483 )
------------ ------------ --------------
Remaining net income to be equally allocated to Class A and Class B preferred
stock and common stock while maintaining the
Dividend Ratio 81,673 111,118
============ ============ ==============
Weighted average number of shares
outstanding (thousands)
Class A preferred 40,651 40,395 39,819
Class B preferred 536,512 536,768 535,969
Common 454,908 454,908 454,908
Basic and diluted earnings per share
Class A preferred 0.05 0.11 0.15
Class B preferred 0.02 0.11 0.15
Common 0.01 0.10 0.14
F-32
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
Brazilian law permits the payment of cash dividends only from retained
earnings and certain reserves registered in the Company's statutory
accounting records. At December 31, 2003, after considering appropriated
retained earnings which can be transferred to unappropriated retained
earnings, the earnings and reserves available for distribution as
dividends, upon approval by the Company's stockholders, amounted to the
equivalent of U.S.$ 238 million.
Retained earnings that represent unrealized income (principally
inflationary income recognized up to December 31, 1995 in the Company's
statutory financial statements) are transferred to unrealized income
reserve and are transferred back to unappropriated retained earnings as
financial resources become available for dividend distribution.
The investments reserve represents discretionary appropriations, ratified
by the stockholders, for plant expansion and other capital projects, the
amount of which is based on an approved capital budget presented by
management. After completion of the projects, the Company may elect to
retain the appropriations until the stockholders vote to transfer all or a
portion of the reserve to capital or to retained earnings, from which a
cash dividend may then be paid.
The legal reserve results from appropriations from retained earnings of 5%
of annual net income recorded in the statutory accounting records. Such
appropriations are required until the balance reaches 20% of the balance of
capital stock, based on the statutory accounting records. At December 31,
2003, such capital stock was R$ 1,855 million and the balance in the legal
reserve was R$ 170 million. The legal reserve may be used to increase
capital and to absorb losses, but is not available for distribution as cash
dividends.
At the Company's Annual General Meeting held on April 30, 2003, the
stockholders approved the payment of dividends of R$ 315,000 thousand,
equivalent to US$ 107,733 at that date, representing dividends of R$ 250.00
- US$ 108.89 per thousand shares of Class A and B preferred stock and R$
227.27 - US$ 98.99 per thousand shares of common stock. The dividends were
paid in May 2003.
14 PENSION PLAN
The Company sponsors a contributory defined contribution pension plan, ARUS
- Fundacao Aracruz de Seguridade Social, which covers substantially all of
its employees. The principal objective of the pension plan is to supplement
the social security pension benefits of the employees of the Company.
("Sponsors").
The Sponsors and eligible employees make monthly contributions under the
plan to ARUS, which administers (or places with a trustee) its investments
and other assets, which comprised, principally, of bank certificates of
deposit, investments funds and marketable equity securities.
F-33
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
Contributions made by the Company to the plan amounted to U.S.$ 1,031,
U.S.$ 989 and US$ 1,287 in 2001, 2002 and 2003, respectively, and
represented the annual pension expense of the Company for the plan.
15 EMPLOYEE BENEFITS
In addition to the pension plan, the Company makes monthly contributions,
based on total payroll, to government pension, social security and
severance indemnity plans and such payments are expensed as incurred. Also,
certain severance payments are due on dismissal of employees, principally
notice of one month's salary and a severance payment calculated at 40% of
the accumulated contributions made to the government severance indemnity
plan on behalf of the employee. Based on current operating plans management
does not expect that amounts of future severance indemnities will be
material.
16 COMMITMENTS AND CONTINGENCIES
(a) CONTINGENCIES
(i) LABOR PROCEEDINGS
The Company has partially agreed with a suit brought by certain industrial
employees represented by their union, claiming additional compensation for
alleged hazardous conditions at the mill. As a result, the Company paid
U.S.$ 6.7 million to the employees in January 2002. The excess provision of
U.S.$ 3.3 million was reversed to income.
In addition, at December 31, 2003, the Company had a total provision
recorded for other cases of U.S.$ 13.3 million based on the Court's
computation framework and existing labor jurisprudence and a corresponding
deposit in an escrow account of U.S.$ 3.9 million.
(ii) ADMINISTRATIVE PROCEEDINGS
The Company has been involved in an administrative claim regarding the
enlargement of Indian reservations in an area owned by the Company. In
April 1998, the Indian communities signed two Terms of Settlement
recognizing the legitimacy of the Ministry of Justice Edicts 193, 194 and
195, dated March 6, 1998, that restricted expansion of the reservation to
2,571 hectares of land belonging to the Company. Additionally, the Company
committed itself to a financial aid program to be implemented through
social, agricultural, educational, shelter and health projects, up to an
amount of approximately R$ 13.5 million (equivalent to U.S.$ 4.7 million at
December 31, 2003), to be disbursed within a twenty-year period,
conditioned to the accomplishment of certain obligations by the Indian
communities.
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ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
If the Indian communities breach any of their obligations, Aracruz will be
released from the obligations defined by the Terms of Settlement. Decrees
approving the enlargement of the Indian reservations have extinguished the
aforementioned administrative claim. As of December 31, 2003, the Company
had donated to the Indian Associations approximately R$ 6.8 million (U.S.$
3.3 million) (U.S.$ 2.7 up to December 31, 2002) under the Terms of
Settlement.
(iii) FISCAL PROCEEDINGS
In March 1997, the Company received notification from the INSS (the
Brazilian Social Security System) relating to the value of housing
allowances paid to certain employees over a period of several years. At
December 31, 2003, the Company is contesting this notification and has
placed approximately U.S.$ 5.9 million in an escrow account to cover this
claim. Based on the opinion of its legal advisors, the Company's management
does not believe that the ultimate resolution of this matter will have a
material adverse impact on the Company, and accordingly, no provision has
been made therefor.
(iv) INCOME TAX AND SOCIAL CONTRIBUTION RELATED TO THE "PLANO VERAO"
In December 1994, the Company petitioned the Regional Federal Tribunal of
the 2nd Region (the "Tribunal") to include, in the determination of its
income tax and social contribution liabilities the effects of the variation
in the IPC (Consumer Price Index) in January 1989 of 70.28% ("Plano
Verao"). The Tribunal subsequently accepted the use of a variation of
42.72%. Beginning in the third quarter of 2000, with the substantially full
utilization of the Company's net operating losses in Brazil, the Company
began to determine and pay income tax using 42.72% deduction and made a
provision for contingencies to cover the effects of the use of this
deduction. In March 2003, the Company obtained a final court ruling and,
consequently, made a reversal of this provision, which includes interest
and monetary variation, against income tax expense and financial expense in
the amounts of US$ 9,106 and US$ 6,832, respectively.
(v) PIS AND COFINS CONTRIBUTIONS
The Company is taking action in court against certain changes in the rates
and rules for the calculation of the PIS (Social Integration Program) and
COFINS (Social Fund) contributions determined by Law 9.718/98, the basis of
calculation of which includes financial income and exchange and monetary
variations. At December 31, 2003, the provision for contingencies included
U.S.$ 43.4 million related to PIS and COFINS on exchange gains on U.S.
dollar denominated debt resulting from the appreciation of the Real against
the U.S. dollar that occurred following the significant devaluation in
early 1999.
F-35
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(vi) Value-Added Tax
During 2001 the Company received tax assessment from fiscal authorities
of the States of Espirito Santo and Bahia, the total amount of U.S.$
36.7 million relating to ICMS (value-added tax). In addition, the tax
authorities disallowed certain tax credits of U.S.$ 9.6 million
previously recognized by the Company. The Company will file appeals with
the relevant courts and, based on the opinion of external legal counsel,
it believes the probability of loss resulting from this dispute to be
remote and, accordingly, no provision has been recorded at December 31,
2003.
(vii) SOCIAL CONTRIBUTION
On September 10, 2003, the Company obtained a Court Order that gave it
the right not to pay Social Contribution on profits generated by export
sales from January 2002 as well as the right to recognize the amounts of
tax credits previously compensated in this regard. The accumulated
amount as of December 31, 2003 is US$ 34.0 million, which is being
accrued as a liability until a final decision is reached.
(viii) OTHERS
The Company has, based on the advice of its legal counsel, recorded
additional provisions in the amount of U.S.$ 7.1 million relating to
several other legal disputes and has also made deposits in the amount of
U.S.$ 8.4 million in escrow accounts.
(b) "TAKE-OR-PAY" CONTRACT
In connection with the sale of its electrochemical plant to Nexen
Chemicals Holdings International Limited - NEXEN (formerly Canadian Oxy
Chemicals Holding Ltd.) in 1999, the Company and NEXEN entered into a
long-term contract for chemical products supply. The contract includes
clauses of performance incentives such as sharing of productivity gains,
preference prices and "take-or-pay", by which the Company is committed
to acquire from the electrochemical plant purchased by NEXEN a volume of
chemical products conservatively projected for 6 years from 2000 on.
Volumes purchased by the Company in addition to the minimum agreed for a
given year may be compensated with lower volumes acquired in subsequent
years. For the take-or-pay quantities, the Company will pay unit prices
which equal cost plus margin as determined in the contract. The Company
is meeting the minimum quantitative commitments under the contract.
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ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(c) COMPLIANCE WITH REGULATIONS
The Company's forestry and manufacturing operations are subject to both
Federal and State government environmental regulations. The Company's
management believes that it is in compliance, in all material respects,
with all applicable environmental regulations.
17 DERIVATIVE INSTRUMENTS, HEDGING AND RISK MANAGEMENT ACTIVITIES
The Company is engaged in the exportation of market pulp to various
markets throughout the world. Management considers the Company's
functional currency to be the U.S. dollar and approximately 22% of the
Company's indebtedness was Real-denominated, consisting of loans bearing
interest at variable rates.
These activities expose the Company to credit, currency and interest
rate risks. The responsibilities of the Treasury include the proposal of
risk management strategy and its implementation, and the evaluation of
the effectiveness of the Company's overall risk management strategy. The
Treasury reports to the Chief Financial Officer.
The Company may use derivative and non-derivative instruments to
implement risk management strategy. However, by using derivative
instruments, the Company exposes itself to credit and market risk.
Credit risk is the failure of a counterparty to perform under the terms
of the derivative contract. Market risk is the adverse effect on the
value of a financial instrument that results from a change in interest
rates, currency exchange rates, or commodity prices. The Company
addresses credit risk by restricting the counterparties to such
derivative financial instruments to major financial institutions. Market
risk is managed by the Treasury.
(a) Foreign currency risk management
The Company's foreign currency risk management strategy may use
derivative instruments to protect against foreign exchange rate
volatility, which may impair the value of certain of the Company's
assets. The Company has been using foreign currency forward and futures
contracts to implement this strategy.
(b) Interest rate risk management
The Company's strategy for interest rate management has been to
maintain a balanced portfolio of fixed and floating interest rates in
order to optimize cost and volatility. The Company's interest rate risk
management strategy may use derivative instruments to reduce earnings
fluctuations attributable to interest rate volatility. The Company may
use interest rate swaps to implement this strategy. At December 31, 2003
the Company had no outstanding interest rate swap contracts.
F-37
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
(c) Commodity price risk management
The Company is exposed to commodity price risks through the fluctuation
of pulp prices. The Company currently does not utilize derivative
financial instruments to manage its exposure to fluctuations in
commodity prices, but may utilize them in the future.
18 NONDERIVATIVE FINANCIAL INSTRUMENTS
Fair value - the Company considers that the carrying amount of its
financial instruments generally approximates fair market value. Fair
value have been determined as follows:
Cash - the carrying amount of cash is a reasonable estimate of its fair
value.
Cash equivalents and short-term investments and bank deposits - cash
equivalents are represented, principally, by short-term investments.
Their fair value and that of other bank deposits not meeting the
definition of cash equivalents were estimated using the rates currently
offered for deposits of similar remaining maturities and approximates
its carrying value.
Debt securities - the Company's debt securities are stated at their fair
value, which was estimated by obtaining quotes from major financial
institutions and brokers.
Short-term debt and long-term debt - interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value, which approximates
the carrying value at December 31, 2003 and 2002. The Company's
financial structure does not require any substitution of such financing
or the contracting of similar fundings.
The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
F-38
ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
19 GEOGRAPHICAL INFORMATION
The Company's exports from Brazil, classified by geographic destination,
are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2002 2003
---------------- ----------------- -----------------
North America 119,593 278,988 408,699
Europe 229,913 290,877 402,822
Asia 232,371 119,966 229,376
Other 1,488 10,791 15,601
---------------- ----------------- -----------------
Total 583,365 700,622 1,056,498
================ ================= =================
Sales to two unaffiliated customers represented 42% of net sales in
2003. Two unaffiliated customers represented 35% and 21% in 2002 and
2001, respectively. No other individual customers represented more than
10% of net sales.
20 RELATED PARTIES
Transactions with related parties resulted in the following balance
sheet and income statement balances:
DECEMBER 31,
--------------------------------------------------------------
2002 2003
------------------------------ ------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------- --------------- ------------- ---------------
BALANCE SHEET
Current assets
Cash and cash equivalents 132 51
Accounts receivable 2,781 3,174
Current liabilities - suppliers
Long-term debt (including
current portion and accrued
finance charges) 264,093 264,434
------------- --------------- ------------- ---------------
2,913 264,093 3,225 264,434
============= =============== ============= ===============
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ARACRUZ CELULOSE S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
(UNLESS OTHERWISE STATED)
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2002 2003
------------------------- -------------------------- --------------------------
INCOME EXPENSE INCOME EXPENSE INCOME EXPENSE
------------ ------------ ------------ ------------ ------------- ------------
INCOME STATEMENT
Operating revenues 23,336 31,016 22,963
Financial expenses 10,292 129,424 79,676
------------ ------------ ------------ ------------ ------------- ------------
23,336 10,292 31,016 129,424 22,963 79,676
============ ============ ============ ============ ============= ============
21 SUPPLEMENTARY INFORMATION -
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO CREDITED TO BALANCE
BEGINNING COSTS AND COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES EXPENSES OF YEAR
----------------------------------------- ---------------- -------------- --------------- ------------
2003
Allowances deducted from related balance sheet accounts:
Accounts receivable 1,161 1,996 3,157
Inventories 2,154 1,801 1,846 2,109
Investments (other assets) 801 801
2002
Allowances deducted from related balance sheet accounts:
Accounts receivable 317 863 19 1,161
Inventories 2,615 461 2,154
Investments (other assets) 801 801
2001
Allowances deducted from related balance sheet accounts:
Accounts receivable 446 129 317
Inventories 4,841 2,226 2,615
Investments (other assets) 801 801
Deferred income tax 2,474 2,474
* * *
F-40