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, 2002
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:
Class B Stock, without par value New York Stock Exchange*
American Depositary Shares (as evidenced by American New York Stock Exchange
Depositary Receipts), each representing ten shares of
Class B Stock
__________________
* Not for trading purposes, but only in connection with the registration of
American Depositary Shares pursuant to the requirements of the Securities and
Exchange Commission.
________________
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:
Richard S. Aldrich, Jr.
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
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................................................13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..........................32
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................43
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.....................47
ITEM 8. FINANCIAL INFORMATION.................................................50
ITEM 9. THE OFFER AND LISTING ................................................55
ITEM 10. ADDITIONAL INFORMATION...............................................58
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........67
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...............68
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................68
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS......................................68
ITEM 15. CONTROLS AND PROCEDURES..............................................69
ITEM 16. RESERVED.............................................................69
PART III
ITEM 17. FINANCIAL STATEMENTS.................................................69
ITEM 18. FINANCIAL STATEMENTS.................................................69
ITEM 19. EXHIBITS.............................................................69
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, 2001 and 2002 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";
o all share data in this annual report have been adjusted to reflect a
change effective March 17, 1997 in the number of shares of Class B
Stock underlying each American Depositary Shares, or ADS, from five
shares of Class B Stock per ADS to ten shares of Class B Stock per
ADS, or the ADS Ratio Change; 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:
1
o general economic, political and business conditions, both in Brazil
and in our principal export markets,
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 2002 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 and 2002 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 has 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 1998, 1999, 2000, 2001 and 2002 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 1998, 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, 2000, 2001 and 2002 appear elsewhere herein, together with the
report of PricewaterhouseCoopers Auditores Independentes, Rio de Janeiro,
Brazil, independent accountants. The selected financial information at December
31, 1998, 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,
------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ----------
(thousands of U.S. dollars, except number of shares and per
share amounts)
Statement of Operations
Operating Revenues
Sales of eucalyptus pulp
Domestic................................. $38,449 $33,796 $43,601 $23,579 $17,126
Export................................... 503,836 596,242 800,634 583,365 700,622
------------ ------------ ------------ ------------ ----------
Total sales................................. $542,285 $630,038 $844,235 $606,944 $717,748
Sales taxes and other reductions............ (39,490) (43,459) (63,240) (32,589) (48,765)
------------ ------------ ------------ ------------ ----------
Net operating revenues...................... $502,795 $6,579 $780,995 $574,355 $668,983
Operating costs and expenses
Cost of sales............................... $414,874 $375,513 $412,313 $420,606 $468,875
Selling..................................... 28,329 25,311 21,492 23,253 28,242
Administrative.............................. 29,560 18,354 22,454 22,012 22,302
Provision for loss on ICMS credit.......... - - - 10,754 45,093
(Gain)/Loss and provision for loss sale of
property, plant and equipment and
spare-parts inventories................... 18,902 26,153 4,826 9,555 1,534
Other, net.................................. 9,286 6,907 7,152 5,252 7,434
------------ ------------ ------------ ------------ ----------
Total operating costs and expenses.......... $500,951 $452,238 $468,237 $491,432 $573,480
------------ ------------ ------------ ------------ ----------
Operating income $1,844 $134,341 $312,758 $82,923 $95,503
------------ ------------ ------------ ------------ ----------
Non-operating (income) expenses
Equity in results of affiliated company..... - - 1,313 (1,195) (6,076)
Financial income............................ $(104,840) $(100,692) $(64,849) $(54,749) $(61,611)
Financing expense........................... 120,955 120,336 101,461 70,215 82,014
Loss (gain) on currency remeasurement, net.. 7,780 7,454 (8,812) 18,029 (14,888)
Other, net.................................. (192) (209) (131) (214) (276)
------------ ------------ ------------ ------------ ----------
Total other income.......................... $23,703 $26,889 $28,982 $32,086 $(837)
------------ ------------ ------------ ------------ ----------
Income (loss) before income taxes $(21,859) $107,452 $283,776 $50,837 $96,340
Income tax expense (benefit)
Current..................................... $(9,573) $8,980 $40,461 $35,722 $(23,988)
Deferred.................................... (15,733) 7,699 41,604 (2,992) 8,415
------------ ------------ ------------ ------------ ----------
Total....................................... $(25,306) $16,679 $82,065 $32,730 $(15,573)
------------ ------------ ------------ ------------ ----------
Net income..................................... $3,447 $90,773 $201,711 $18,107 $111,913
============ ============ ============ ============ ==========
4
For the Year Ended December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ -----------
(thousands of U.S. dollars, except number of shares and per
share amounts)
Earnings per share(1)
Class A Stock............................... $0.09 $0.09 $0.20 $0.05 $0.11
Class B Stock............................... 0.00 0.09 0.20 0.02 0.11
Common Stock................................ 0.00 0.08 0.18 0.01 0.10
Dividends per share
Class A Stock............................... $0.09(2) $0.06(3) $0.06(4) $0.06(5) $0.08(6)
Class B Stock............................... 0.02(2) 0.02(3) 0.06(4) 0.06(5) $0.08(6)
Common Stock................................ 0.02(2) 0.01(3) 0.05(4) 0.06(5) $0.07(6)
Weighted-average number of shares
outstanding (thousands of shares)
Class A Stock............................... 41,007 40,979 40,903 40,651 40,395
Class B Stock............................... 564,374 553,279 552,889 536,512 536,768
Common Stock................................ 454,908 454,908 454,908 454,908 454,908
------------ ------------ ------------ ------------ ----------
Total....................................... 1,060,289 1,049,166 1,048,700 1,032,071 1,032,071
============ ============ ============ ============ ==========
_____________
(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 April 17, 1998 and paid on May 11, 1998.
(3) Including the dividend declared on March 25, 1999 and paid on April 22,
1999.
(4) Including the dividend declared on April 5, 2000 and paid on April 30,
2000.
(5) Including the dividend declared on March 30, 2001 and paid on April 12,
2001.
(6) Including the dividend declared on April 30, 2002 and paid on May 13, 2002.
The annual shareholders' meeting held on April 29, 2003 defined dividends
with respect to 2002 in the amount of US$107.7 million, which were paid on
May 15, 2003.
At December 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(thousands of U.S. dollars)
Balance Sheet Data
Cash and cash equivalents................... $ 151,886 $ 312,590 $ 18,091 $ 20,125 $ 25,474
Other current assets........................ 182,028 190,889 261,815 215,199 250,487
Debt securities available for sale.......... 696,404 189,480 323,032 405,493 248,455
Property, plant and equipment, net.......... 1,892,451 1,702,747 1,664,322 1,913,191 2,000,071
Investment in affiliated company............ - - 79,698 80,893 87,107
Other assets................................ 277,720 205,297 107,500 143,296 87,220
------------ ------------ ------------ ------------ ------------
Total assets................................ $3,200,489 $2,601,003 $2,454,458 $2,778,197 $2,698,814
============ ============ ============ ============ ============
Short-term debt............................. 821,157 473,652 272,042 325,855 182,680
Other current liabilities................... 39,312 40,174 55,035 99,425 55,824
Long-term debt.............................. 730,939 392,354 278,873 537,183 611,091
Other long-term liabilities................. 41,917 41,511 75,387 78,004 88,656
Stockholders' equity........................ 1,567,164 1,653,312 1,773,121 1,737,730 1,760,563
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity.. $3,200,489 $2,601,003 $2,454,458 $2,778,197 $2,698,814
============ ============ ============ ============ ============
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
June 26, 2003, the commercial selling rate was R$2.8491 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
----------------------- --- ---- ------- --------
1998............................................. 1.1165 1.2087 1.1611 1.2087
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
----------------------------
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, 2002................................................ 3.4278 3.7980
January 31, 2003................................................. 3.2758 3.6623
February 28, 2003................................................ 3.4930 3.6580
March 31, 2003................................................... 3.3531 3.5687
April 30, 2003................................................... 2.8898 3.3359
May 31, 2003..................................................... 2.8653 3.0277
June 2003 (until June 26, 2003).................................. 2.8491 2.9780
----------------------
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.
In the past, the Brazilian government has intervened in the Brazilian
economy and occasionally made drastic changes in policy. The Brazilian
government's actions to control inflation and institute other policies have
included wage and price controls, currency devaluations, capital controls, and
limits on imports. Our business, financial condition and results of operations
may be adversely affected by changes in government policies as well as general
economic factors, including:
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.
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.
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.
7
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.
From January 1, 2003 through May 31, 2003, the real appreciated 16%.
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."
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, 2002 and has, through
a subsidiary, advanced approximately 33.33% of our total consolidated
indebtedness as of such date. See "Item 7B. Related Party Transactions."
Developments in other emerging markets, including Argentina and Venezuela,
may adversely affect the market price of our preferred shares and ADSs.
The market for securities issued by Brazilian companies is influenced by
economic and market conditions in Brazil and, to varying degrees, market
conditions in other Latin American and emerging market countries. Although
economic conditions are different in each country, the reaction of investors to
developments in one country may cause the
8
capital markets in other countries to fluctuate. 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.
For example, in 2001 after a prolonged recession followed by political
instability, the Argentine government announced that it would no longer continue
to service its public debt. In order to address the deteriorating economic and
social conditions, the Argentine government abandoned its decade-old fixed
dollar-peso exchange rate, allowing the peso to float to market rate levels. In
2002, the Argentine peso experienced a 237% devaluation against the U.S. dollar.
The situation in Argentina has negatively affected investors' perceptions of
Brazilian securities.
The recent political crisis in Venezuela may also influence investors'
perception of risk in Brazil. If market conditions in Argentina and Venezuela
continue to deteriorate, they may adversely affect our ability to borrow funds
at a favorable interest rate or to raise equity capital when and if there is a
need. Adverse developments in Argentina, Venezuela or in other emerging market
countries could lead to a reduction in both demand and the market price for our
preferred shares and ADSs.
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 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.
9
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$124 billion as of December 31, 2002, and an average monthly
trading volume of approximately US$4.1 billion in 2002. In comparison, the NYSE
had a market capitalization of US$9.7 trillion as of December 31, 2002, and an
average monthly trading volume of approximately US$859 billion for 2002.
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
46.8% of the aggregate market capitalization of BOVESPA as of December 31, 2002.
The top ten stocks in terms of trading volume accounted for approximately 56.5%
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."
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.
10
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
throughout the second quarter of 2001, especially in Europe. During the third
quarter of 2001, overall demand for pulp improved and pulp prices increased in
the European and Asian markets. In 2002, the average list price decreased 8%
compared to the average in 2001. This was 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. It is possible that market
prices for pulp will decline in the future, or that there will not be sufficient
demand for our products to enable us to operate our production facilities in an
economical manner. 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. Several 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.
We are subject to stringent environmental laws and regulations in
Brazil governing air emissions, effluent discharges, solid wastes, odor and
reforestation, and we require permits from governmental agencies for certain of
our operations. Changes in these laws and regulations could adversely affect us.
If we violate or fail to comply with these laws, regulations and permits, we
could be fined or otherwise sanctioned by regulators or our permits could be
revoked, and our ability to operate could be suspended or otherwise adversely
affected. In addition, noncompliance with these laws, regulations and permits
could result in criminal sanctions for us and for our employees. We could also
be responsible for related environmental remediation costs, which could be
substantial.
11
It is possible that governmental agencies or other authorities will pass
new laws or impose additional laws and regulations even more stringent than the
ones currently in force or will seek a more stringent interpretation of existing
laws and regulations that would require us to spend additional funds on
environmental compliance or limit our ability to operate as we currently do. In
addition, these actions could increase the costs associated with renewing
existing permits or applying for new ones. There can be no assurance that these
additional funds or costs will not be material or that existing permits will be
renewed.
Actions by state legislature may adversely affect our operations.
In September 2001, the legislature of the State of Espirito Santo, where we
own approximately 140.7 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 an injunction relief granted by Brazilian Supreme Court, in
response to suits brought by the National Confederation of Industry and by the
National Brazilian Confederation of Agriculture and Cattle Raising. However,
there can be no assurance 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.
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 investigations of this
type, the commission was terminated without issuing a conclusive report. While
we are confident that we have obtained all necessary permits and that all our
property was legally acquired strictly in accordance with all laws and
regulations, we cannot assure you that future investigations by the state
government or the legislative will not be initiated in the future.
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.
We may, as part of our business strategy, acquire other businesses in
Brazil or elsewhere or enter into alliances. 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. Even if we complete
future acquisitions:
o 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 new businesses or manage 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. 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
12
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."
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, which could have a material adverse effect on our 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, know 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, after being built in record time. See
"--Business Overview--Fiberline C Expansion Project." In order to provide for
the increased production volume resulting from the Fiberline C Expansion
Project, on June 1, 2000, we acquired Terra Plana Agropecuaria Ltda., whose
assets are comprised of 19,000 hectares of land appropriate for planting
eucalyptus trees, entered into a three-year agreement with Veracel for the
supply of wood, and acquired, together with Bahia Sul Celulose S/A, forest
assets in the northern area of the State of Espirito Santo.
On October 10, 2000, we acquired a 45% stake in Veracel, a joint venture
between Stora Enso OYJ and Odebrecht S.A., or Odebrecht, to build a pulp mill.
On January 31, 2003, Odebrecht sold its stake in Veracel to us and Stora Enso
OYJ. Since then, Stora Enso OYJ and we each own 50% of Veracel's capital stock.
The construction of Veracel's pulp mill has begun in the first semester of 2003,
and its conclusion is expected to take place within two years. See "--Business
Overview--Acquisition of Veracel" and Note 4 to the consolidated financial
statements.
13
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, we acquired the capital stock of Riocell S.A., or Riocell,
held by Klabin S.A. and Klabin do Parana Produtos Florestais Ltda. Riocell is
one of our competitors. See "--Business Overview--Competition."
Capital Expenditures
Our capital expenditures for the years 2002, 2001 and 2000 were US$260.7
million, US$421.5 million and US$138.4 million, respectively.
The table below sets forth a breakdown of our most significant capital
expenditures for the periods indicated:
For the years ended December 31,
---------------------------------------
2002 2001 2000
------------- ------------ ------------
(in US$ millions)
Fiberline C Expansion Project........................................ US$ 185.3 US$ 355.8 US$ 68.9
Siviculture and other forestry investments........................... 39.5 48.7 31.8
Forests (includes land purchase)..................................... 15.4 -- --
Improvements/industrial investments.................................. 9.4 13.7 22.1
Acquisition of equity participation in Veracel....................... -- -- 81.0
Other................................................................ 10.8 3.3 15.6
------------- ------------ ------------
Total........................................................... US$ 260.7 US$ 421.5 US$ 219.4
============= ============ ============
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 2003, we expect to invest approximately US$114.0 million, of which
US$62.0 million in the Fiberline C Expansion Project and US$52.0 million in
industrial, forestry and other investments.
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.
We produced approximately 1,656,000 tons of bleached eucalyptus kraft
market pulp in 2002, a 30% increase compared to 2001, representing approximately
8% of the total worldwide production capacity and 22% of the worldwide
production capacity of bleached eucalyptus kraft market pulp during 2002. In
each of 2002 and 2001, eucalyptus accounted for approximately 38% of the total
worldwide production capacity of bleached hardwood kraft market pulp. In 2002,
sales to customers located outside Brazil, especially in North America, western
Europe and Asia, accounted for approximately 98% of our sales volume. During
2001, sales to customers located outside Brazil accounted for approximately 97%
of our sales volume. See "--Markets and Customers" and "--Competition."
In 2002 we sold approximately US$669 million of eucalyptus pulp compared to
US$574 million in 2001 and US$781 million in 2000.
14
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 305,363 hectares of forest and other land in the State
of Espirito Santo and the State of Bahia, of which 185,894 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 2001 and 2002, we were able to meet almost 65% 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." We
internally produce approximately 97% 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 strategy are:
o pursuing a growing position among the best global producers of forest
products, concentrating on 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:
15
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 is expected to
absorb the new activity without additional fixed costs. These
improvements in pulp manufacturing technologies and in project
development in the Fiberline C Expansion Project will enable us to
reduce pulp costs and improve quality levels.
o Improvements in forestry technology using advanced genetic techniques,
which will result in an increase in the forest yield.
o Optimization of transportation logistics. Since transportation of wood
to the Mill comprises a large portion of the cost of our pulp
production, we seek to improve our transportation logistics and costs.
During 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
communications with customers and suppliers.
o Diversification of our business into other forest products. We have
invested in Aracruz Produtos de Madeira S.A., a producer of solid wood
products, in order to further complement our product line.
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 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.
With nominal capacity of 700,000 tons per year, the cost of the new line
will be approximately US$467 million, or US$667 per ton. The volume of
production added during year 2002 by the Fiberline C totaled 340,000 tons.
During November 2002, the facility reached a monthly production of 61,000 tons,
representing an annual production of approximately 720,000 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
will require an increase in our forest base of approximately 72,000 hectares of
eucalyptus plantations. For this reason, in June 2000, we acquired Terra Plana
Agropecuaria, with assets comprised of 19,000 hectares of land appropriate for
planting eucalyptus trees. Through December 31, 2001, we acquired approximately
44,000 additional hectares of land through separate transactions. Additionally,
in September 2002, Bahia Sul and we signed, jointly with Companhia Vale do Rio
Doce and its wholly
16
owned subsidiary, Florestas Rio Doce S/A, a contract for the acquisition by
Bahia Sul and us of an equal stake in forest assets comprising approximately
40,000 hectares of lands and eucalyptus-planted forests.
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 build a pulp mill. We entered into an agreement
with Odebrecht relating to our acquisition of 40% of the total outstanding
capital stock of Veracel for approximately US$72 million. We also entered into
another agreement with Stora Enso Treasury Amsterdam B.V., or Stora Enso,
relating to our acquisition of 5% of the total outstanding capital stock of
Veracel for approximately US$9 million. 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 approximately US$9.5
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
expand 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$1.25 billion, of which US$300
million has already been invested in forestry-related activities and
infrastructure investments, such as roads and a specialized harbor.
The financing for the project is expected to be 45% equity and 55% loans
from Brazilian and international development agencies.
The construction of the mill will be initiated in the first semester of
2003, and it is expected to be concluded within two years. The project will be
carried out under the EPC (Engineering, Procurement and Construction) concept
and will require 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 will be 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
17
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, will 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 will be comprised of four members, of whom (i) two
will be elected from individuals appointed by Stora Enso, and (ii) 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) will 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 will govern the
management and operation of Veracel.
Aracruz Produtos de Madeira
As part of our 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. The 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 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 December 31,
2002, APM had nominated 12 sales representatives in major furniture markets in
Brazil and was supplying an industrial customer base of more than 300
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, we 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 has given 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
18
internationalization of APM was its affiliation with the International Wood
Products Association at the beginning of last year.
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 an increase of
47,223m2 of Lyptus(R) flooring. In 2002, 15% of total production was exported.
Consistent with the strategies set forth above, we may, from time to time,
enter into joint venture, technological exchange, marketing or other
arrangements with third parties to complement our business and competitive
positions.
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 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. From 1992 to 2002, the market for hardwood has had an annual rate of
growth in demand of 4.7%, while the market for softwood has had a 2.8% annual
rate of growth in demand. Within the hardwood segment, bleached eucalyptus kraft
market pulp has demonstrated the highest annual rate of growth in demand with a
5.3% annual growth in demand over the same ten-year-period.
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 48% in 2002) primarily due to its high quality, and because of
properties, such as its softness, opacity and printability.
19
International Markets
From 1992 to 2002, the worldwide production capacity of bleached hardwood
kraft market pulp is estimated to have grown an average of approximately 4.3%
per year, from 13.2 million tons to 20.1 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 2.2 million tons from 2000
to 2002. 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 18.1 million tons in 2002.
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.
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.
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:
20
[CHART OMITTED]
While our volume of pulp sales during 2002 was higher than in 2001 or 2000,
the price of pulp declined throughout 2002. The average list price decreased 8%
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 good performance of the main consumer markets, high-quality
tissue and printing and writing papers, the price of pulp began falling again at
the end of 2002. Considering these factors, the average list price of eucalyptus
pulp in 2002 (US$484 per ton, delivered to the United States) was even lower
than the average in 2001.
Domestic Market
In 2002, we supplied approximately 27,000 tons of the aggregate domestic
demand for bleached eucalyptus kraft market pulp, compared to 36,000 tons in
2001.
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%).
21
The six largest Brazilian producers of bleached hardwood kraft market pulp
are:
o Aracruz Celulose S.A.,
o Celulose Nipo-Brasileira S.A., or Cenibra,
o Bahia Sul Celulose S.A.,
o VCP,
o Jari Celulose S.A., and
o Riocell S.A.
Together the six largest Brazilian producers accounted for 64% of total
domestic sales in 2002, with us accounting for 5% of total domestic sales. For
the last two years, we have held approximately the same percentage of our
domestic market share. Our domestic sales volume of bleached hardwood kraft
market pulp was 2% of its total sales volume in 2002 as compared to 3% in 2001,
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, 2002, we owned approximately 307,300 hectares of forest and
other land, of which 69,500 hectares are situated in the State of Espirito Santo
near the Mill site, 71,000 hectares are situated farther north primarily in the
municipalities of Sao Mateus and Conceicao de Barra in the State of Espirito
Santo, and 164,600 hectares are in the southernmost region of the State of
Bahia, which at their furthest point are less than 340 kilometers from the Mill.
At December 31, 2002, we also owned approximately 2,004 hectares of forest and
other land in the State of Minas Gerais. In 2002, we purchased 7,500 hectares,
which are being prepared for new plantations. The average distance from our
forest areas currently in use to the Mill site is 188 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 307,300
hectares owned by us, approximately 187,500 hectares are currently used for the
planting of trees to supply pulp production and solid wood production,
approximately 102,500 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 2001, one of our principal objectives was to purchase land and
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. By the end of 2002, we expect to have established approximately
65,000 additional hectares of eucalyptus plantation. 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,
22
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.
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 2002, we supplied most of our 6.2 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 2.2 million cubic meters of wood, which is equivalent to 35% of our
wood consumption, of which approximately 905,000 cubic meters were purchased
through the Forestry Partners Program, compared to 655,000 cubic meters in 2001.
Based on the current demand for pulp and our current supply of trees
suitable for harvesting, we may not need to purchase wood from third-party
suppliers in the future, except in certain limited circumstances. Wood purchased
from independent suppliers is not always of the same quality and uniformity of
fiber as wood from forests owned and managed by us. With the aim of reducing our
dependence on wood supplied by traditional independent sources, during 1990 and
1991 we initiated a program to provide approximately 46.7 million seedlings
(along with financial and technical assistance to ensure that the cultivated
trees meet our standards) to farmers in the State of Espirito Santo who own land
near the Mill in exchange for contractual commitments from the farmers that the
mature trees will be sold to us. In 2002, we expanded the area of the Forestry
Partners Program by 11,000 hectares. The program now encompasses over 35,000
hectares owned by 2,493 independent farmers in the States of Espirito Santo,
Minas Gerais and Bahia. There was a substantial increase in the supply of wood
to the Mill through this program in 2002, reaching 905,000 cubic meters of wood,
approximately 38% more than in the previous year. We are obligated to purchase
the mature trees from the farmers at certain agreed-upon prices not to exceed
the market prices at the time of such purchases. We made our first purchases of
trees under this program totaling approximately 83,000 cubic meters of wood
during 1997. In response to certain restrictions contained in the permit to the
Fiberline C Expansion Project, we expect to expand the farming program in the
State of Espirito Santo, see "--Environmental and Other Regulatory Matters." To
the extent such obligation creates any excess inventory of wood, we believe that
we will be able to use any excess wood for diversification projects (such as
solid wood products produced by APM). Alternatively, we may be able to sell such
excess wood to third parties. See "--Business Strategy." We believe that under
this arrangement we will be able to purchase from these farmers wood of quality
and uniformity of fiber that is comparable to wood from our forests at a cost
lower than that obtainable from traditional independent sources. In 2001, this
program was subject to a legal proceeding seeking to suspend our activities
within the Fiberline C licensing process. In 2002, however, we were granted an
injunctive relief by a state court which denied the suspension. See "Item 8A.
Consolidated Statements and Other Financial Information--Legal Proceedings."
Regardless of the outcome of such legal proceeding, we believe that the wood
supply from our forests alone will be sufficient to meet our pulp production
needs based on current demands without further wood supply from this program.
Through the development of cloned trees selected on the basis of certain
characteristics, we were able to reduce our wood consumption per ton of pulp
produced from 4.5 solid cubic meters in 1985 to 3.8 solid cubic meters in 2001
and 3.68 solid cubic meters in 2002. The optimal time to harvest our trees is
approximately seven years from the time of planting.
23
Energy
Reducing our need for outside sources of energy and chemicals is an
important component of our low-cost production strategy. In 2001 and 2002,
approximately 94% and 97% 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 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.
24
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
2000 and 2001, the use of water from the Rio Doce river enabled us to obtain all
of our water supply requirements.
The Mill
Our pulp mill, located in the State of Espirito Santo, is the largest
bleached hardwood kraft market pulp production facility in the world. 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.
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 40,000 tons of pulp and
a fully computerized control system that continuously monitors the entire
production process. Each of the Mill's pulp systems has 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 50.4 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. We have implemented a new expansion project
which has increased the Mill's nominal production capacity by 700,000 tons per
year. See "--Fiberline C Expansion Project." 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 conveyor 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
25
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;
o TCF 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 2002,
we produced approximately 203,848 tons of Standard Pulp, as compared to 284,678
tons in 2001 and 309,582 tons in 2000.
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 able to produce 100% ECF pulp. See "--The Mill."
During 2002, approximately 83% of our production, or 1,372,172 tons, was
comprised of ECF Pulp as compared to 926,356 tons during 2001 and 912,884 tons
during 2000.
TCF Pulp, or Total Chlorine Free Pulp, is pulp bleached with no chlorine
compounds. The demand for this kind of pulp has decreased since the bleaching
process is more expensive than EFC Pulp and AFC Pulp. We produced TCF Pulp from
1991 to 1998. We no longer produce TCF Pulp.
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 2002, approximately 5%
of our production, or 80,028 tons, was comprise d of ACF Pulp as compared to
60,578 tons during 2001 and 78,796 tons during 2000.
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 188
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 2,000,000 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.
26
Since the first expansion of the Mill, which was completed in 1991, the
port has operated at its full capacity (2,000,000 tons per year). During 1995
and part of 1996, we and Cenibra expanded the existing quay and increased the
storage capacity of the warehouse. This expansion project was completed in
October 1996. In 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 Veracel's 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.
We obtained all the necessary environmental and construction licenses for
the wood loading and unloading terminals in Caravelas and Portocel, and we are
in strict compliance with the implementation schedule for the sea-going wood
transportation project. The Portocel barge terminal is ready, as are the barges
and tugboat. The construction of the terminal in Caravelas and the dredging of
the access channels are nearly completed. The first phase of the operation
between Caravelas and Portocel, with an annual capacity for transporting 1.7
million cubic meters of wood, began at the end of 2002.
In 2002, we also carried out a review of our wood supply operations, based
on a master plan for developing new ways to improve wood harvest and
transportation operations.
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:
1998 1999 2000 2001 2002
-------------------- ------------------ ------------------ ---------------- ------------------
% of % of % of % of % of
Tons Total Tons Total Tons Total Tons Total Tons Total
-------- --------- -------- --------- -------- --------- -------- ------- -------- --------
Europe.............. 455.4 39% 561.0 44% 594.6 47% 475.3 37% 637.0 40%
North America....... 390.1 34 406.4 32 433.5 34 479.8 37 623.2 39
Asia................ 230.0 20 217.9 17 180.8 14 306.2 23 280.1 18
Latin America....... 9.5 1 20.6 2 9.0 1 3.6 - 17.6 1
-------------------- -------- --------- -------- --------- -------- --------- -------- ------- -------- --------
Total Exports....... 1,085.0 94% 1,205.9 95% 1,217.9 96% 1,264.9 97% 1,557.9 98%
==================== ======== ========= ======== ========= ======== ========= ======== ======= ======== ========
Brazil.............. 68.8 6% 59.4 5% 54.7 4% 36.4 3% 27.0 2%
-------------------- -------- --------- -------- --------- -------- --------- -------- ------- -------- --------
Total............ 1,153.8 100% 1,265.3 100% 1,272.6 100% 1,301.3 100% 1,584.8 100%
==================== ======== ========= ======== ========= ======== ========= ======== ======= ======== ========
The average net prices of eucalyptus pulp for 1998, 1999, 2000, 2001 and
2002 were US$435.78, US$463.20, US$611.34, US$438.10 and US$417.80,
respectively.
In 2002, approximately 2% of our sales volume was sold in the domestic
market (3% in 2001). 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 2002, our ten largest customers accounted for
approximately 71% of our sales and our largest customer accounted for
approximately 22% of our sales (76% and 26%,
27
respectively, in 2001 and 73% and 34%, respectively, in 2000). In 2001 and 2002,
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 our largest customer could
have a material adverse effect on our results of operations. Otherwise, we
believe that the loss of any other customer would not have a material adverse
effect on our results of operations since we will be able to replace such
customer with other customers in a short time.
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 1998, 1999, 2000, 2001 and 2002.
Year Ended December 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Tissue.................................... 46% 48% 51% 51% 57%
Printing, and Writing Paper............... 27 27 28 28 29
Specialty Papers(1)....................... 24 22 19 20 13
Cartonboard............................... 3 3 2 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.
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:
28
Producer Country
--------------------------------------------------------------------------------------- -----------------
Cenibra......................................................................... Brazil
Bahia Sul Celulose S.A.......................................................... Brazil
Riocell 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 currently account for 58% of the total world
production capacity of bleached eucalyptus kraft market pulp. Management
estimates that in 2002, we accounted for 22% of the world production capacity of
bleached eucalyptus kraft market pulp, 4% of the world production capacity of
chemical market pulp and 8% 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 2002 are estimated to have accounted for 70% in the aggregate,
and 24%, 23%, 14% and 9%, respectively, of the world's total bleached hardwood
kraft market pulp production capacity. Producers in the United States sold
approximately 2,440,000 tons during 2000, 2,802,000 tons during 2001 and
2,527,000 during 2002, while Brazilian producers sold approximately 3,441,000
tons, 3,663,000 tons and 3,919,000 tons, 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 4.3% per year from 1992 to 2002, totaling 20.1 million tons, and
is expected to grow at an annual rate of 3.9% during the period of 2002 to 2006
(or approximately 4.2 million tons in total during this period). Approximately
89% 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 4.6 million tons in 2002 to approximately 8.3 million tons in
2007. Mixed tropical hardwood market pulp capacity in Indonesia is expected to
increase from 3.1 million tons in 2002 to 3.2 million tons in 2007, accounting
for 4% of the total increase in the world bleached kraft pulp market. Worldwide
demand for bleached hardwood kraft market pulp is expected to grow by 3.6% per
year from 2002 through 2007, adding 3.5 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.
29
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 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
95,550 hectares of land in the State of Bahia and entered into contracts with
farmers in the State of Espirito Santo pursuant to which the farmers have agreed
to grow trees for sale to us. See "--Raw Materials--Wood." In 1996, we received
two operating permits for our forest operations in the State of Bahia which were
valid until July 24, 2001. On August 9, 2001, we received one operating permit,
which consolidated the prior two permits and is valid for a five-year period. We
also obtained seven implementation permits for an area of 24,309 hectares of
plantation.
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 29.4% of our total
landholdings.
In September 2001, the legislature of the State of Espirito Santo, where we
own approximately 140,740 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 the Brazilian Supreme Court. However, there can be no assurance 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.
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 from the date
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 have been legally obtained 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. See "--Business Strategy."
30
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 114 licenses for forest plantations, of which 21 were
installation licenses issued by the Espirito Santo Agriculture, Cattle-Raising
and Forest Protection Institute (IDAF), 91 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 2002:
o Installation Licenses: rail access; airport; gasoline station; fuel
storage and supply;
o Operating Licenses: Fiberline C; gasoline station; fuel storage and
supply; airport; IBAMA (renewal); wood embarcation and disembarcation
(Portocel Barge Terminal);
o Environmental Authorization: clay extraction; and
o Installation License: administrative ruling CRA 1385.
Insurance
We believe that our insurance coverage of our production facilities and
forests is in line with Brazilian market and international pulp industry
standards.
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, 2002:
As of December 31, 2002*
------------------------
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)....................................................... 45% 45%
Aracruz Nordeste S.A.(1)**..................................................... 100% 100%
Terra Plana Agropecuaria Ltda.(1)**............................................ 100% 100%
Aracruz Empreendimentos Sociedade Civil Ltda.(1)............................... 100% 100%
100% 100%
----------------------
* On May 10, 2001, VCP and we established a special purpose company, which is
now dormant, to bid for CVRD's stake in Cenibra.
31
** 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 production facilities consist of a eucalyptus pulp mill 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.
As of December 31, 2002, we had an aggregate principal amount outstanding
of approximately US$218.0 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 307,367 hectares of land, of which approximately
187,487 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.
See "--Environmental and Other Regulatory Matters" for the environmental
rules and regulations affecting our operations.
ITEM 5. 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 2002, we produced approximately 1,656,000 tons of bleached eucalyptus
pulp, a 30.2% increase from 2001 when we had produced approximately 1,272,000
tons of bleached eucalyptus pulp, and a 2.23% increase as compared to 2000 when
we had produced approximately 1,301,000 tons of bleached eucalyptus pulp. Pulp
sales for 2002 were approximately 1,585,000 tons, a 21.8% increase as compared
to 1,301,000 in 2001, which had represented a 2% increase when compared to 2000
pulp sales. Total pulp sales in 2002 were approximately 1,589,000 tons, of which
98% corresponded to export sales. Pulp sales for the year 2001 were
approximately 1,301,000 tons, of which approximately 1,265,000 tons, or 97%,
were export sales. See "Item 4B. Business Overview--General."
While our volume of pulp sales during 2002 was higher than in 2001, the
price of pulp declined throughout 2002. The average list price increased 2.2% in
2002 compared with 2001. We, like other pulp producers, curtailed production in
order to adjust inventory in response to weak economic conditions in 2002;
however, by that time, pulp prices had already fallen below the production costs
of the highest-cost producers.
32
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 98% of our sales are made. See "--Brazilian Economic
Environment--Effects of Inflation and Currency Exchange Fluctuations."
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.
33
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
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 17 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
34
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 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 Brazilian government has proposed a broad tax reform in Brazil,
mainly designed to reduce the public deficit through the increase in tax
collection. It is expected that the final tax reform bill will be submitted to
the Brazilian Congress for approval during 2003. It is anticipated that the
reform will include the creation of a value-added tax on goods and services that
would replace six existing taxes (including the contribution for social
purposes, the federal tax on industrial products and the state tax on the
circulation of goods and services). In addition, the Contribuicao Provisoria
sobre Movimentacao Financeira-CPMF, a provisional levy on checking account
transactions, would be replaced by a permanent federal tax on financial
transfers. We may have a higher tax burden if the tax reform bill is approved
and implemented. See "Item 3D. Risk Factors."
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:
35
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
Inflation (General Market Price Index)............ 1.8% 20.1% 9.8% 10.4% 25.3%
Devaluation (R$ vs. US$).......................... 8.3% 48.0% 9.3% 18.7% 52.3%
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 2002, selling and distribution
expenses were US$28.2 million, 21% higher than in 2001 due to higher sales
volume. Administrative expenses were US$22.3 million, US$1.0 million lower than
in 2001, and other operating expenses were US$54.1 million, compared with
US$25.6 million in 2001. In 2002, our operating expenses, as expressed in U.S.
dollars, increased mainly due to a provision for loss on credit of ICMS.
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, 2002, approximately 71% of
our cash and cash equivalents and marketable securities were invested in U.S.
dollar-denominated financial assets. See "--Liquidity and Capital
Resources--Financial Strategy."
A. Operating Results
Results of Operations
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 volume, 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.
36
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.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Net operating revenues in 2001 were US$574.4 million, compared to US$781.0
million in 2000. The US$206.6 million decrease was primarily due to a lower
average net pulp price of US$438 per ton in 2001 compared to US$611 per ton in
2000, offset in part by higher sales volume, 1,301,000 tons in 2001 compared to
1,273,000 tons in 2000.
In 2001, total cost of pulp and sawn wood sales were US$420.6 million,
compared to US$412.3 million in 2000. Cost of pulp sales in 2001 was US$410.5
million, or US$315.48 per ton, compared to US$404.9 million, or US$318.16 per
ton, in 2000. This increase was mainly due to higher sales volume. The 2001
production cost includes depreciation of US$91 per ton compared to US$86 per ton
in 2000. This increase in depreciation reflects the full-year impact in 2001 of
the acceleration of depreciation of assets that took effect in the second
quarter of 2000 (see note 10 to our consolidated financial statements). Cash
production cost in 2001 was US$149 per ton versus US$157 per ton in 2000,
reflecting the impact of the real devaluation.
Selling expenses were US$23.3 million in 2001, compared to US$21.5 million
in 2000. This increase was mainly due to higher sales volume, especially in
Asia.
Administrative expenses in 2001 totaled US$22.0 million, compared to
US$22.5 million in 2000. This decrease was mainly due to local currency
devaluation, partially offset by US$1.3 million of adjustments in labor-related
provisions and US$1.2 million increase in consulting fees.
Other operating expenses, net, totaled US$25.6 million in 2001, compared to
US$12.0 million in 2000. This increase in operating expenses was the result of a
US$10.8 million provision for loss of unutilized ICMS (value-added tax) credits,
a US$2.5 million contribution to ARUS (the pension fund for our employees), and
a US$6.5 million write-off of fixed assets related to the modernization of a
recovery boiler located at the Mill. These expenses were partially offset by the
reversal of a US$10.0 million labor-related provision, net of US$6.7 million to
be paid as part of a labor dispute settlement.
37
Financial income in 2001 totaled US$54.7 million, primarily from
investments in U.S. dollar-indexed securities. In 2000, financial income totaled
US$64.8 million. The difference resulted from a lower average yield on cash
investments.
Financial expense was US$70.2 million in 2001 compared to US$101.5 million
in 2000. The decrease was mainly due to the favorable impact of the real
devaluation on real-denominated loans, as well as the capitalization of US$12.9
million in interest expenses related to Fiberline C Expansion Project-related
loans.
Loss (gain) on currency remeasurement, net, resulted in a loss of US$18.0
million in 2001, compared to a gain of US$8.8 million in 2000. The closing
exchange rate on December 31, 2001 was R$2.3204 to the U.S dollar as compared to
R$1.9554 on December 31, 2000.
Income tax expense in 2001 was US$32.7 million as compared to US$82.1
million in 2000. This decrease was mainly due to lower taxable profits under our
Brazilian corporate law financial statements (US$283.8 million in 2000 as
compared to US$50.8 million in 2001), which was partially offset by a US$13.6
million provision recorded in 2001 relating to the taxation of unremitted
earnings of offshore subsidiaries due to a change in taxation laws.
Net income in 2001 totaled US$18.1 million, compared to US$201.7 million in
2000.
B. Liquidity and Capital Resources
At December 31, 2002, we had total debt outstanding of US$793.8 million, a
decrease of 8% over total debt outstanding at December 31, 2001 of US$863.0
million. This decrease in 2002 was primarily due to the reduction of trade
financing in the form of export sale advances, or ACC, and discounted export
account receivables, or ACE.
The breakdown of our total debt outstanding at December 31, 2002 and
December 31, 2001 is set forth in the table below:
At December 31,
2001 2002
------------ ------------
(millions of U.S. dollars)
SHORT-TERM DEBT
Current portion of long-term debt
Local currency........................................................... 33.3 27.3
Foreign currency......................................................... 157.7 140.0
Short-term debt instruments
Local currency........................................................... 0.4 3.3
Foreign currency (ACC/ACE)............................................... 119.6 7.5
Accrued finance charges
Local currency........................................................... 1.0 0.3
Foreign currency......................................................... 13.8 4.3
------------ ------------
Subtotal 325.8 182.7
------------ ------------
LONG-TERM DEBT
Local currency........................................................... 163.7 163.9
Foreign currency......................................................... 373.5 447.2
------------ ------------
Subtotal............................................................. 537.2 611.1
------------ ------------
TOTAL DEBT.................................................................... 863.0 793.8
At December 31, 2002, our outstanding debt in local currency totaled
US$194.8 million and was comprised primarily of loan agreements with Banco
Nacional de Desenvolvimento Economico e Social--BNDES.
At December 31, 2002, our long-term debt maturities were as follows:
Maturing in
-----------------------------------------------------
2008
and
2004 2005 2006 2007 beyond Total
-------- -------- -------- -------- ------ ---------
(in millions of U.S. dollars)
Long-term debt......... 223.2 92.6 91.7 89.9 113.7 611.1
38
At December 31, 2002, we had cash, cash equivalents and debt securities
available for sale of US$273.9 million, a decrease of US$151.7 million from
US$425.6 million at December 31, 2001. Of this amount, US$173.5 million was
invested in Brazil in dollar-indexed instruments, US$20.8 million was invested
abroad, mostly in U.S. dollar time deposits with leading financial institutions,
and the equivalent of US$253.1 million was invested in local currency
instruments.
Net debt (gross debt less cash, cash equivalents and debt securities
available for sale) was US$519.9 million at December 31, 2002, an increase of
US$82.5 million compared to US$437.4 million at December 31, 2001. The increase
was mainly due to capital expenditures of approximately US$260.7 million, and
dividends of US$73.8 million paid to shareholders, partially offset by cash
generated from operations.
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 our gross
debt was a result of the increase of the capital expenditures in 2001 relating
to the Fiberline C Expansion Project. The net debt increase of US$227.6 million
was mainly due to capital expenditures of approximately 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, 2001, the
outstanding principal amount of such short-term trade financing was US$126.8
million at an average annual interest rate of 4.7% and an average month-end
balance of US$187.9 million during 2001. 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.
From time to time, we raise short-term funds for cash management purposes
through issuances of commercial paper under our Euro-Commercial Paper program.
On September 2, 1998, the Central Bank approved the renewal and the increase of
the program from US$100 million to US$200 million. As of December 31, 2002, we
had no commercial paper outstanding under this program.
Our long-term debt consists primarily of U.S. dollar-denominated debt
issued outside Brazil in the amount of US$514.8 million at December 31, 2002 and
loans from BNDES, one of our principal shareholders, denominated in reais and in
foreign currencies. At December 31, 2002, we had loans from BNDES with an
aggregate principal amount outstanding of approximately R$925.9 million
(US$262.1 million) (as compared to R$649.2 million (US$279.8 million) at
December 31, 2001), which represented approximately 33% of our total
indebtedness at such date. At December 31, 2002, of the total aggregate
principal amount of the BNDES debt, US$189.6 million was denominated in reais
and adjusted by the Taxa de Juros de Longo Prazo (the Long-term Interest Rate,
or TJLP), US$22.5 million was U.S. dollar-denominated and US$49.9 million was
adjusted by a currency basket. On June 13, 2001, we entered into an eight-year
loan agreement with BNDES for an aggregate principal amount of R$666.3 million
(approximately US$188.6 million at the exchange rate of R$3.5333 per US$1.00 at
December 31, 2002), in three tranches, with maturities from 2003 to 2009 and
annual interest rates ranging from 7.8% to 11.97%. We had outstanding
indebtedness under this agreement of US$218.0 million at December 31, 2002. A
portion of the debt incurred by us 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 will be used
principally to finance the Fiberline C Expansion Project. Our obligations under
this loan agreement are secured by liens on our industrial site at the
Municipality of Aracruz.
39
In January 1994, we issued in the Euromarkets US$120 million aggregate
principal amount of 10.375% unsecured notes due 2002, which were refinanced in
January 1997. In order to allow us greater financial flexibility, certain of the
terms and conditions of such bonds and notes, including the negative pledge,
were also amended at the time of the refinancing. These notes were paid in
January 2002, at maturity.
In February 1995, we and our wholly owned subsidiary Aracruz Trading S.A.,
or Aracruz Trading, completed the first tranche, totaling US$50 million, of a
transaction pursuant to which Aracruz 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, and accrued interests of this program, were fully redeemed. As of
December 31, 2001, there was US$13.2 million outstanding under the
securitization. Aracruz Trading prepaid the outstanding amount due under the
securitization on March 31, 2002.
Arcel Finance Limited issued 5.984% Senior Secured Notes due 2009 on
January 30, 2002, in the amount of US$250 million, as part of a new program for
the issuance of collateralized debt securities. Subsequent to the offer and sale
of those notes, additional series of notes may be issued, provided that certain
conditions are met. We unconditionally and irrevocably guaranteed all
obligations of Aracruz Trading under the notes. The notes rank pari passu in
priority of payment (subject to mandatorily preferred debts under applicable
laws) with all of our other present and future unsecured and unsubordinated
obligations and have a financial guaranty insurance policy by a financial
guaranty insurance company guaranteeing the timely payments of interest on and
scheduled principal of the notes.
We agreed, among other things:
o that at least 95% of our export sales of bleached eucalyptus kraft
market pulp in the most recent four calendar quarters of certain dates
must be made to Aracruz Trading S.A.;
o to limitations on our winding-up or dissolution or possible future
mergers and our consolidation for as long as the notes are
outstanding; and
o to perform certain acts in the event of bankruptcy of Aracruz Trading
S.A., including the replacement of Aracruz Trading for another company
and our assumption of Aracruz Trading's obligations.
As of December 31, 2002, we had no off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future material effect on
our financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
The following table summarizes our significant contractual obligations and
commitments that impact our liquidity at December 31, 2002:
Contractual Obligations Up to 1 year 2-3 years After 3 years Total
---------------------------------------- -------------------- ----------------- ---------------- -----------------
(U.S. dollars in millions)
Long-term debt, including current portion.. US$ 167.3 US$ 315.8 US$ 295.3 US$ 778.4
Fiberline C Expansion Project.............. 15.1 16.8 - 31.9
Contractual obligations with suppliers..... 45.9 15.8 4.3 66.0
Short term debt and accrued charges........ 15.4 - - 15.4
--------- ----------- ----------- ------------
Total contractual cash obligations.... US$ 243.7 US$ 348.4 US$ 299.6 US$ 891.7
Capital Expenditures
During 2002, our US$260.7 million in capital expenditures consisted of:
US$185.3 million for the Fiberline C Expansion Project, US$9.4 million for
ongoing industrial investments, US$15.4 million to purchase land, US$39.5
million for silviculture and other forestry-related investments and US$10.8
million for other projects. See "Item 4--Information on Aracruz--History and
Development of Aracruz--Capital Expenditures."
40
Financial Strategy
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 Arcel Finance Limited 5.984% US$250 million Senior Secured
Notes due 2009 in January 30, 2000, is part of our current financial strategy,
which includes increasing the average maturity of our debt. Brazilian companies
have limited sources of long-term debt financing denominated in reais, and we do
not intend to incur short-term debt denominated in reais due to the higher
associated costs. At December 31, 2002, 75% of our total indebtedness was
denominated in foreign currencies, as compared to 77% at the end of 2001.
Although our access to debt financing denominated in foreign currencies beyond
pre-export and receivables financing may also be limited, we believe that we
have access to a sufficient number of financing sources to meet our needs
without resorting to expensive short-term real-denominated financing.
At December 31, 2002, we held US$273.9 million in cash and cash
equivalents, of which US$79.1 million was denominated in reais, US$193.8 million
was indexed to the U.S. dollar, and US$1 million was indexed in other foreign
currencies. At December 31, 2002, we held US$248.5 million in debt securities
due to the redemption of securities in the amount of US$27.9 million during 2001
and fair value adjustments.
At December 31, 2001, we held US$425.6 million in cash and cash
equivalents, of which US$93.5 million was denominated in reais, US$331.1 million
was indexed to the U.S. dollar, and US$1 million was indexed in other foreign
currencies. At December 31, 2001, we held US$405.5 million in debt securities
due to the redemption of securities in the amount of US$92.3 million during 2001
and fair value adjustments. At December 31, 2000, we held US$18.1 million in
cash and cash equivalents, of which US$0.7 million was denominated in reais,
US$15.8 million was indexed to the U.S. dollar, and US$1.6 million was indexed
in other foreign currencies. At December 31, 2000, we held US$323.0 million in
debt securities due to the redemption of securities in the amount of US$96.2
million during 2000 and fair value adjustments.
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.
At present, we, like other Brazilian companies, have limited sources of
long-term debt financing denominated in reais and we do not intend to incur
short-term debt denominated in reais due to the higher costs associated with
such
41
financing. At December 31, 2002, 75% of our total indebtedness was denominated
in foreign currencies, as compared to 77% at the end of 2001 and 79% at the end
of 2000.
Because we operate internationally, we are exposed to market risks from
changes in foreign exchange and interest rates. To protect against these market
risks, we, from time to time, enter into forward foreign-exchange contracts and
interest-rate swap agreements. We 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. We believe that an event of
nonperformance by our counterparties is unlikely to occur due to our credit risk
policies.
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 2000, 2001 and 2002, our research and development expenditures
totaled approximately US$4.3 million, US$4.0 million and US$3.8 million,
respectively.
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 2002. We made
further progress in the genetic enhancement of the Aracruz Eucalyptus. One
highlight consisted of using new hybrids whose production potential is superior
to our typical enhanced clones and which have greater added value as a result of
better fiber quality. Furthermore, Aracruz became 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. During 2002,
we mapped the physical and chemical properties of the soil of nearly 60,000
additional hectares of plantations.
As with pulp, advances were also made in forestry operations for solid wood
products. In 2002, we continued to conduct studies focusing on a new concept of
forestry management for the production of large trees. The potential for a
substantial reduction in the harvest cycle was detected, which would imply a
proportional decrease in the forest area needed to supply a given amount of wood
to the sawmill.
New technologies are constantly being evaluated as we seek to maximize the
synergy between the raw material, process efficiencies and the end-use of the
product.
Work on the Aracruz Watershed Project continued during 2002. The project is
one of a series of measures to ensure the sustainability of our production.
Conducted in partnership with renowned research institutes and universities in
Brazil and abroad, the project consists of integrated 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 Aracruz's forestry management procedures, thus helping minimize
the impact of our activities on the environment. The results indicate that -
after successive eucalyptus planting cycles - our
42
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 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 2003, 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, 2003 and brief
biographical descriptions of our directors and officers:
Board of Directors
Name Age Position
--------------------------------------------------------------------- --------------------- --------------------
Erling Sven Lorentzen.................................................. 79 Chairman
Haakon Lorentzen....................................................... 48 Member
Eliezer Batista da Silva............................................... 79 Member
Carlos Alberto Vieira.................................................. 68 Member
Isaac Selim Sutton..................................................... 43 Member
Ernane Galveas......................................................... 79 Member
Jose Roberto Ermirio de Moraes......................................... 46 Member
Marcus Olyntho de Camargo Arruda....................................... 56 Member
Leon Chant Dakessian................................................... 49 Member
Executive Officers
Name Age Position
--------------------------------------------------------------------- --------------------- --------------------
Carlos Augusto Lira Aguiar............................................. 57 President
Joao Felipe Carsalade.................................................. 57 Officer
Walter Lidio Nunes..................................................... 54 Officer
Isac Roffe Zagury(1)................................................... 51 Officer
________________
(1) On June 6, 2003, we held an extraordinary meeting of the board of directors
and Isac Roffe Zagury was elected as one of our officers. He will be
exercising the functions of chief financial officer and investor relations.
As of the date of this annual report, Mr. Zagury has not taken office.
Biographical Information
Erling Sven Lorentzen. Mr. Lorentzen has been the Chairman of our board of
directors since April 24, 1972. He is also Chairman of the board of directors
and Chief Executive Officer of Lorentzen Empreendimentos S.A., which
43
indirectly controls Arapar S.A., and is a member of the Executive Committee of
the World Business Council for Sustainable Development and a member of the
Advisory board of directors of the American International Group.
Haakon Lorentzen. Mr. Lorentzen has been a Director since April 29, 1991
and is the son of Mr. Erling Lorentzen. 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.
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.
Carlos Alberto Vieira. Mr. Vieira has been a Director since April 15, 1988
and has acted as our chief financial officer since the resignation of Agilio
Leao de Macedo Filho, our prior chief financial officer. 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.
Isaac Selim Sutton. Mr. Sutton has been a Director since June 28, 1996. He
has also been an Officer and Managing Director of the Safra Group since 1994.
From 1992 to 1994, he was an Executive Director of Industria e Comercio
Cardinalli Ltda. and also a Director of the holding company of Unigel Group.
Between 1986 and 1992, he was the Marketing and Commercial General Director of
Cosmoquimica Industria e Comercio S.A. and, between 1980 and 1986, Marketing
Manager of Dow Chemical 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.
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.
Marcus Olyntho de Camargo Arruda. Mr. Arruda has been a Director since
April 18, 2002. He has also been a member of the board of directors and of the
board of officers of Votorantim Financas S/A since August 2000, as well as the
general counsel of Votorantim Participacoes S.A.
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.
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. Since the
resignation of Agilio Macedo, our former chief financial officer, in 2002, Mr.
Aguiar has been acting as our chief financial officer.
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.
44
Isac Roffe Zagury. Mr. Zagury was elected a member of our board of
directors 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
Under the Brazilian corporate law and our by-laws, we are not required to,
and currently do not, maintain a permanent fiscal committee (conselho fiscal).
However, we are required to establish a fiscal committee upon the request of
shareholders who, in the aggregate, hold at least 10% of the common shares or 5%
of the preferred shares. 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 or a company of the Votorantim group, 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.
Our by-laws provide for a non-permanent audit committee. At the annual
shareholders' meeting held on April 29, 2003, our shareholders decided to
appoint, for the fiscal year ending on December 31, 2003, the members of our
audit 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
Luiz Antonio Perdigao......................... Member
Luiz Roberto de Abreu Dias.................... Alternate
B. Compensation
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. For the year ended December
31, 2001, the aggregate compensation of all of our directors and officers was
approximately US$3.8 million, which includes bonuses in the aggregate amount of
US$0.2 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, 2003. The term of office of the current
board of directors will end on the date of the ordinary shareholders' meeting to
take place in 2006. 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 June 20, 2003.
45
Remuneration Committee
We have an ad hoc remuneration committee, formed by two 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 and Isaac Selim Sutton. 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 papers, but
any other financing arrangements may be entered into by us upon the joint
signatures of:
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 1,601 people at December 31, 2002, compared to 1,688
people at December 31, 2001. 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, 2002, 79% of our employees were employed at the Mill site, 3% were
employed at the offices in Rio de Janeiro and 18% 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 2003.
In accordance with Law No. 10,101 of December 19, 2000, employees have the
right to receive a bonus based on certain operating results of their employer.
This right is contemplated in the Brazilian Constitution. Law No. 10,101
provides that each company and its employees will 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 we and our employees' labor unions
have negotiated the terms of two bonus plans, one for our management employees
and one for non-management employees, which comply with such
46
legislation's requirement. Any bonus to be paid under either of those plans is
based on us reaching certain operating targets and financial results. The total
amount paid by us under these bonus plans for 2002 amounted to approximately
US$3.8 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, 2002, 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 April
30, 2003:
Number of Number of
Common Shares Preferred Shares
------------- ----------------
Board of Directors
Erling Sven Lorentzen....................... 131 --
Haakon Lorentzen............................ 10 --
Eliezer Batista da Silva.................... 13 --
Carlos Alberto Vieira....................... 1,000 --
Isaac Selim Sutton.......................... 66 --
Ernane Galveas.............................. 91 --
Jose Roberto Ermirio de Moraes.............. -- --
Marcus Olyntho de Camargo Arruda............ -- --
Leon Chant Dakessian........................ -- --
Executive Officers
Carlos Augusto Lira Aguiar.................. -- 60,599
Joao Felipe Carsalade....................... -- 23,000
Walter Lidio Nunes.......................... -- --
Total....................................... 1,311.0 83,599
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 the Chairman of our board
of directors), 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."
47
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
December 31, 2002 of each shareholder known to us to own more than 5% of each
class of our capital stock and of our officers and directors as a group:
Share Ownership at June 15, 2003
-------------------------------------------------------------------------
Common Stock Class A Stock(1) Class B Stock
--------------------- -------------------- -----------------------
Shares % Shares % Shares %
-------- --------- -------- --------- -------- ---------
(in millions of shares, except percentages)
Newark Financial Inc.(2).................. 127.5 28.0% -- 0.0% -- 0.0%
Arapar S.A.(3)(4)(5)...................... 127.5 28.0 -- 0.0 -- 0.0
Sociedade de Empreendimentos, 127.5 28.0 27.7 68.8 57.9 10.8
Publicidade e Participacao S.A.(6)......
BNDES Participacoes S.A.(7)............... 56.9 12.5 10.0 24.8 34.2 6.4
Others.................................... 16.0 3.5 2.6 6.4 444.7 82.8
-------- --------- -------- --------- -------- ---------
Total................................. 455.4 100.0% 40.3 100.0% 536.8 100.0%
======== ========= ======== ========= ======== =========
______________
Source: Banco Itau S.A.
(1) Each share of our Class A Stock may be converted into one share of 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., an indirect subsidiary of VCP, 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 our board of directors. Haakon
Lorentzen, also a member of our board of directors, owns indirectly 2.6% of
the stock of Lorentzen Empreendimentos S.A.
(4) Fort James International Holdings Ltd. owns indirectly approximately 43.7%
of Arapar S.A. through its wholly owned subsidiary, Brusara Participacoes
Ltda., and its other affiliates. Fort James International Holdings Ltd. is
a subsidiary of Fort James Corporation, which is one of our ten largest
customers, accounting for approximately 5.4%, 3.9% and 4.4% of our total
sales during 2000, 2001 and 2002, respectively.
(5) Den Norske Bank ASA owns indirectly approximately 23.3% of Arapar S.A. Den
Norske Bank ASA has agreed to finance our acquisition of certain equipment.
See "--Related Party Transactions."
(6) 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.
(7) 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 Shareholders' Agreement.
While we are a signatory to the Shareholders' Agreement, our sole obligation
under the agreement is to administer compliance by the Principal Shareholders in
accordance with the terms of the Shareholders' Agreement. The Shareholders'
Agreement relates only to our Common Stock. The 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 Shareholders' Agreement. In addition, the 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 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
48
in (a) or (b) above. The 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 Shareholders' Agreement will
expire in 2008.
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. Each of the Parties holds
approximately 28% of Aracruz' voting shares.
Notwithstanding the Shareholders' Agreement dated January 22, 1988, which
will be in force and effect until May 11, 2008, the 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 1988 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 1988 agreement.
B. Related Party Transactions
BNDES Loan Agreements
BNDES is our principal lender. As of December 31, 2002, we had outstanding
loans with BNDES with an aggregate principal amount outstanding of approximately
R$925.9 million (equivalent to US$262.1 million), which represented
approximately 33% of our total indebtedness. The interest payable by us on the
real-denominated debt is equal to the TJLP, plus 1.8% to 5% 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 2.9% to 11.97% per annum. Approximately
two-thirds of our debt with BNDES was incurred in connection with the Fiberline
C Expansion Project.
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$30.8 million outstanding as of
December 31, 2002). 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. Each of Arapar
S.A., SODEPA and Mondi had agreed to act as a guarantor of 32% of our
obligations undertaken pursuant to one outstanding BNDES debt loan agreement in
the amount of US$7.1 million. As a consequence of the acquisition by Newark
Finance Inc. of the total interests of Mondi on November 1, 2001, Mondi was
substituted for Newark Finance Inc. as guarantor of such BNDES debt loan
agreement.
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 December 31, 2002 approximately US$8.4
million was outstanding under this agreement. On January 1,
49
1998, Companhia de Navegacao Norsul, or Norsul, a company indirectly controlled
by Mr. Erling Sven Lorentzen, the 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 2001 and 2002,
Norsul shipped approximately 310,000 and 396,000 tons of pulp to us,
representing approximately 24% and 25% of our export sales, respectively.
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 2002, we produced approximately 1,656,000 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 (1,585,000 tons). During 2001, we produced approximately 1,272,000 tons
of bleached eucalyptus pulp. Pulp sales in 2001 were approximately 1,301,000
tons, of which approximately 1,265,000 tons, or 97%, 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 brought
by our employees' unions, six suits claimed additional compensation for alleged
hazardous work conditions. In 1995, we received an unfavorable decision with
respect to one of these claims. 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 will reduce 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. We have recorded
additional provisions in the amount of approximately US$4.22 million and have
also deposited approximately US$0.77 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
50
signed by and among the parties involved, extinguishing this suit and keeping in
full effect the terms of the Forestry Partners Program.
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 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, 2002, we advanced approximately R$4.9 million
(US$2.7 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, 2002, we have placed approximately
US$4.8 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$40.3 million as of December 31, 2002. We believe this
provision is sufficient to cover any possible losses in connection with this
action.
In December 1994, we filed a lawsuit with the federal court in the city of
Rio de Janeiro for the right to deduct from the calculation of income tax and
social contribution any depreciation, amortization and depletion due to the
difference of 70.28% between the official accounting statements index of
monetary correction and the consumer price index, or IPC, during January and
February of 1989. Based upon existing Supreme Court precedents, the court
recognized the right to deduct, from the calculation, 42.72% of such
depreciation, amortization and depletion. Starting in the third quarter of 2000,
we have been deducting 42.72% from the income tax and social contribution basis
of calculation. On December 31, 2002, we recorded a provision for contingencies
in the amount of approximately US$15.1 million to cover any unfavorable decision
in this lawsuit.
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.
51
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, 2002 was
approximately R$126.0 million (equivalent to US$35.7 million), or 6.8% 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;
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.
52
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 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 1997. The exchange rates used to convert dividends in reais
into U.S. dollars were the rates in effect on the related payment dates.
53
Year Common Stock Class A Stock Class B Stock
---- ------------ ------------- -------------
(in U.S. dollars per share)
1998(1)................. 0.02 0.09 0.02
1999(2)................. 0.01 0.06 0.02
2000(3)................. 0.05 0.06 0.06
2001(4)................. 0.06 0.06 0.06
2002(5)................. 0.07 0.08 0.08
2003(6)................. 0.10 0.11 0.11
------------------
(1) Including dividend declared on April 17, 1998 and paid on May 11, 1998.
(2) Including dividend declared on March 25, 1999 and paid on April 22, 1999.
(3) Including dividend declared on April 5, 2000 and paid on April 30, 2000.
(4) Including dividend declared on March 30, 2001 and paid on April 12, 2001.
(5) Including dividend declared on April 30, 2002 and paid on May 9, 2002.
(6) Including dividend declared on April 29, 2003 and paid on May 15, 2003.
Dividend Preferences
Depending on the amount of our annual adjusted net income, holders of our
Class A Stock are entitled to a 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 dividends distributions. Our by-laws
recently have been amended accordingly.
B. Significant Changes
On April 10, 2003, we announced our consolidated first quarter results
prepared in accordance with U.S. GAAP. We reported a net income of US$58.5
million for the three-month period ended March 31, 2003 as compared with a net
loss of US$7.7 million for the same period in 2002. Net revenues were US$217.6
million for the period ended March 31, 2003, which in turn were US$93.4 million
higher than the corresponding period in 2002. This increase was mainly due to a
higher sales volume (US$70.0 million) and higher pulp prices (US$22.1 million).
Total sales volume in the first quarter of 2003 was 497,000 tons and our total
pulp production for that period was 497,000 tons. For the market as a whole in
the month of January, pulp list prices reached US$480 per ton in the United
States. As of March 1, 2003, eucalyptus pulp prices increased in Europe to
US$530 per ton.
On May 30, 2003, we executed an agreement with Klabin S.A. and Klabin do
Parana Produtos Florestais Ltda., together known as the Klabin Sellers, for the
acquisition of the capital stock of Riocell S.A., or Riocell, one of our
competitors, held by the Klabin Sellers. The purchase price for those shares was
US$610.5 million, which may be adjusted based on the balance sheet of Riocell
prior to the closing of the acquisition and other conditions.
54
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. Each ADS represents one share of Class B Stock. 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, 2002 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.
55
Nominal reais per
---------------------------------
Share of Class B Stock U.S. dollars per ADS (1)
--------------------------------- ---------------------------------
Sao Paulo Stock Exchange NYSE
--------------------------------- ---------------------------------
High Low High Low
-------------- ------------- -------------- -------------
1998:
Annual........................... R$2.27 R$0.72 US$16.50 US$4.87
1999:
Annual........................... R$5.43 R$1.14 US$26.25 US$8.19
2000:
Annual........................... R$5.42 R$2.54 US$27.13 US$11.63
2001:
First Quarter.................... R$3.55 R$2.87 US$16.88 US$12.35
Second Quarter................... 4.95 3.08 18.70 12.46
Third Quarter.................... 5.00 4.13 18.07 14.30
Fourth Quarter................... 5.37 4.11 20.07 14.71
Annual...........................
2002:
First Quarter.................... R$5.24 R$4.26 US$20.91 US$16.99
Second Quarter................... 6.26 4.67 22.74 18.64
Third Quarter.................... 6.62 5.36 19.50 14.66
Fourth Quarter................... 6.51 5.43 18.85 14.05
Annual...........................
Share price for the most recent six months:
December 2002.................... R$6.76 R$5.99 US$18.85 US$16.33
January 2003..................... 6.90 6.17 20.40 18.30
February 2003.................... 7.21 6.55 20.22 18.41
March 2003....................... 7.18 6.59 21.00 18.70
April 2003....................... 6.75 6.12 21.80 20.19
May 2003......................... 6.41 5.35 21.40 18.45
_____________________________________
(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, 2002 was R$6.76 per share,
which is equivalent to US$19.13 per ADS, translated at a rate of R$3.5333 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, 2002
was US$18.56 per ADS. On June 26, 2003, the last reported closing sale price for
the Class B Stock on the Sao Paulo Stock Exchange was R$6.15 per share,
equivalent to US$21.54 per ADS translated at the exchange rate of R$2.8555 per
US$1.00, the commercial market selling rate on such date.
As of December 31, 2002, an aggregate of 346,205,234 shares of Class B
Stock, or an aggregate of approximately 64.7% of the outstanding Class B Stock,
was held in the form of ADSs.
To take advantage of the market price of our stock, we engaged in a stock
buy-back program in late 1997 which is subject to the limitations set forth in
the Brazilian corporate law and CVM regulations. In 2000 and 2002, the total
number of shares of Class B Stock bought back by us under this program 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 2001.
56
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
nonmembers. 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, 2002, the Sao Paulo Stock Exchange had an aggregate
market capitalization of approximately US$124.04 billion and an average monthly
trading volume of approximately US$49.28 billion for the year 2002. In
comparison, the NYSE had a market capitalization of approximately US$13.4
trillion in the year 2001. 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, 2002, we accounted
for approximately 1.3% 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, 2002, the five most actively traded shares
represented approximately 40.6% 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.
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,
57
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 directors; and (ii) engage in any activity and perform
any services, directly or indirectly related to our principal activities,
including import and export.
58
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 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 A Stock and 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:
o amend the company's by-laws;
59
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.
60
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, 2002, 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.
61
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 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
62
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).
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 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 are not subject
to tax in Brazil on gains obtained on sales of Class B Stock that occur abroad
to persons who are not resident in Brazil or on the proceeds of a redemption of,
or liquidating distribution with respect to, the Class B Stock. Since January 1,
1996, 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 10% on gains obtained on sales or exchanges that occur in
Brazil (e.g., on a Brazilian stock exchange). According to Law No. 9,959, dated
as of January 27, 2000, the rate of 10% referred to above will be increased to
20% for transactions which occur after January 1, 2002. However, a Foreign
Holder who withdraws Class B Stock in exchange for ADSs generally will not be
subject to Withholding Income Tax. 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
63
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.
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
The following discussion summarizes the principal U.S. federal income tax
consequences of the acquisition, ownership and disposition of Class B Stock or
ADSs. The following discussion deals only with U.S. Holders (as defined below)
that will hold Class B Stock or ADSs as "capital assets" (generally property
held for investment) within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"), and does not address the tax treatment of
holders that may be subject to special rules under U.S. federal income tax law,
such as banks, insurance companies, dealers in securities, persons that will
hold Class B Stock or ADSs in a hedging transaction or as a position in a
"straddle" or "conversion transaction" for tax purposes, persons that have a
"functional currency" other than the U.S. dollar, partnerships and other
pass-through entities and persons that own or are treated as owning 10% or more
of our voting shares. If a partnership (or other entity treated as a partnership
for U.S. federal income tax purposes) is a beneficial owner of Class B Stock or
ADSs, the treatment of a partner in the partnership will generally depend upon
the status of the partner and upon the activities of the partnership. A holder
of Class B Stock or ADSs that is a partnership and partners in such partnership
should consult their tax advisors.
In the opinion of Shearman & Sterling LLP, this discussion, insofar as it
relates to U.S. federal income tax matters currently applicable to holders of
Class B Stock or ADSs, fairly summarizes, subject to the limitations stated
herein, the material tax consequences of acquiring, owning and disposing of the
Class B Stock or ADSs.
This summary is based on the Code, judicial decisions, published rulings,
administrative pronouncements and Treasury Regulations, as in force on the date
of this annual report on Form 20-F. Changes to (or changes in the interpretation
of) any of the foregoing authorities could apply on a retroactive basis, and
could affect the tax consequences described herein. In addition, such statements
are based in part on representations of the Depositary and assume that the
obligations contemplated by the Deposit Agreement and related documents will be
performed in accordance with their terms. This summary is not exhaustive of all
possible tax considerations and prospective purchasers are advised to consult
their own tax advisors concerning the overall tax consequences to them,
including the consequences under state, local and foreign tax laws, of the
acquisition, ownership and disposition of Class B Stock or ADSs. In this
discussion, references to "ADSs" also refer to shares of Class B Stock and
references to a "U.S. Holder" are to a holder of an ADS (i) that is a citizen or
resident alien individual of the United States of America, (ii) that is a
corporation (or other entity treated as a corporation for U.S. federal income
tax purposes) created or organized under the laws of the United States of
America or any state thereof, (iii) that is an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) that
is a trust, if (A) a court within the United States of America is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust or (B) the trust has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person.
For U.S. federal income tax purposes, U.S. Holders of ADRs will be treated
as owners of the ADSs represented by such ADRs and of the Class B Stock
represented by such ADSs.
Taxation on Dividends
A U.S. Holder will recognize ordinary dividend income for U.S. federal
income tax purposes in an amount equal to the amount of any cash and the value
of any property distributed by us as a dividend to the extent that such
distribution is paid out of our current or accumulated earnings and profits, as
determined for U.S. federal income tax purposes ("e&p"), when such distribution
is received by the Custodian. Any such dividend may be taxed at a preferential
rate
64
under recently enacted legislation, as discussed further below. To the extent
that a distribution exceeds our e&p, such excess will be treated as a nontaxable
return of capital to the extent of the U.S. Holder's tax basis in the ADSs, and,
thereafter, will be treated as gain from the sale or exchange of property. The
taxable amount of any distribution will include the amount of any Brazilian tax
withheld in respect of such distribution, and the taxable amount of a
distribution paid in reais will be measured by reference to the exchange rate
for converting reais into U.S. dollars in effect on the date the distribution is
received by the Custodian, regardless of whether the payment is in fact
converted to U.S. dollars. If the Custodian does not convert such reais into
U.S. dollars on the date received, the U.S. Holder may recognize foreign
currency loss or gain when the Custodian (or Depositary) does convert such reais
into U.S. dollars. U.S. Holders should consult their own tax advisors regarding
the U.S. federal income tax treatment of any foreign currency gain or loss if
any Brazilian currency amounts received by the U.S. Holder or the Depositary are
not converted into U.S. dollars on the date of receipt. Dividends paid by us
will not be eligible for the dividends received deduction generally allowed to
U.S. corporations under the Code.
Distributions out of e&p with respect to the ADSs generally will be treated
as dividend income from sources outside the United States and generally will be
treated separately along with other items of "passive" (or in the case of
certain U.S. Holders, "financial services") income for purposes of determining
the credit for foreign income taxes allowed under the Code. Subject to certain
conditions and limitations, any Brazilian withholding tax paid in connection
with a distribution with respect to the ADSs may be claimed as a credit against
the U.S. federal income tax liability of a U.S. Holder (or, if such U.S. Holder
elects, such Brazilian withholding tax may be taken as a deduction in computing
taxable income). The United States Treasury has expressed concerns that holders
of foreign securities, such as depositary shares or depositary receipts, may be
claiming foreign tax credits in situations where an intermediary has taken
actions inconsistent with the ownership of the underlying security by the person
claiming the credit. Accordingly, the discussion above regarding the
creditability of Brazilian withholding tax on dividends could be affected by
future actions that may be taken by the United States Treasury. U.S. Holders
should consult their own tax advisors concerning the availability and
utilization of the foreign tax credit.
Taxation on Capital Gains
A U.S. Holder's tax basis in an ADS generally will equal the cost of such
ADS to such U.S. Holder. Upon the sale or other taxable disposition of an ADS, a
U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in
an amount equal to the difference between the amount realized on the disposition
of the ADS and the U.S. Holder's tax basis in the ADS. Such gain or loss
generally will be subject to U.S. federal income tax and generally will be
treated as capital gain or loss from U.S. sources. As further discussed below,
capital gains of individuals derived with respect to capital assets held for
more than one year may be eligible for various reduced rates of taxation. The
deductibility of capital losses is subject to limitations under the Code.
If Brazilian withholding tax is imposed on a sale or other taxable
disposition of ADSs (see "Brazilian Tax Considerations" above), the amount
realized by a U.S. Holder will include the gross amount of the proceeds of such
sale or disposition before deduction of the Brazilian withholding tax. The
availability of U.S. foreign tax credits for such Brazilian taxes, as well as
for any Brazilian taxes imposed on distributions that do not constitute
dividends for U.S. federal income tax purposes, is subject to certain
limitations and involves the application of rules that depend on a U.S. Holder's
particular circumstances. U.S. Holders should consult their own tax advisors
regarding the application of the foreign tax credit rules to their investment
in, and disposition of, ADSs.
For U.S. federal income tax purposes, redemption by us of an ADS will be
treated as a sale of such ADS if such U.S. Holder does not own (and is not
deemed to own) any other equity interest in us after the redemption, or if
certain other conditions are met.
Passive Foreign Investment Companies
If during any taxable year of ours 75% or more of our gross income consists
of certain types of "passive" income, or the average value during a taxable year
of our "passive assets" (generally assets that generate passive income) is 50%
or more of the average value of all our assets, we will be treated as a "passive
foreign investment company" ("PFIC") under U.S. federal income tax law. If we
are treated as a PFIC, a U.S. Holder may be subject to increased tax
65
liability upon the sale of ADSs, or upon the receipt of certain dividends,
unless such U.S. Holder makes an election to be taxed currently on its pro rata
portion of our income, whether or not such income is distributed in the form of
dividends, or otherwise makes a "mark-to-market" election with respect to our
stock as permitted by the Code. In addition, a U.S. Holder would not be entitled
to (if otherwise eligible for) the preferential reduced rate of tax payable on
certain dividend income under recently enacted United States tax legislation, as
discussed below. Based on our operations and business plans, we do not believe
that we are currently a PFIC, and do not expect to become a PFIC in the
foreseeable future.
U.S. Backup Withholding and Information Reporting
The information reporting requirements of the Code generally will apply to
distributions to a U.S. Holder in respect of the ADSs. Subject to certain
exceptions, U.S. Holders may also be subject to "backup" withholding tax at a
rate of 28% on distributions with respect to, and proceeds from the sale and
other taxable disposition of, ADSs if such U.S. Holder fails to supply a correct
taxpayer identification number and certain other information in the required
manner. Backup withholding will not apply with respect to payments made to
certain recipients, such as corporations and tax-exempt organizations. Any
amounts withheld under the U.S. backup withholding rules from a payment with
respect to the ADSs generally may be refunded or credited against such U.S.
Holder's U.S. federal income tax liability, provided that the required
information is properly furnished to the U.S. Internal Revenue Service. U.S.
Holders should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such
exemption, if applicable.
Recent United States Tax Law Changes Applicable to Individuals
Recently enacted United States tax legislation (the "2003 Tax Act")
generally has reduced the rates of tax payable by individuals (as well as
certain trusts and estates) on certain items of income. For example, for capital
assets held for over one year and sold or exchanged on or after May 6, 2003 but
in taxable years beginning before January 1, 2009, the maximum rate of tax
generally will be 15% (rather than the higher rates of tax generally applicable
to items of ordinary income). Further, "qualified dividend income" received by
individuals in taxable years beginning after December 31, 2002 and beginning
before January 1, 2009, generally will be taxed at the rates applicable to these
capital gains (i.e., a maximum rate of 15%) rather than the higher rates
applicable to other items of ordinary income. For this purpose, "qualified
dividend income" generally includes dividends paid on stock in United States
corporations as well dividends paid on stock in foreign corporations if, among
other things, (1) the stock of the foreign corporation is readily tradable on an
established securities market in the United States, or (2) the foreign
corporation is eligible for the benefits of a comprehensive income tax treaty
with the United States, such qualifying treaties to be identified by the
Secretary of the United States Treasury Department. For this purpose, stock
should be treated as so traded if an ADR or ADS backed by such stock is so
traded. The precise extent to which dividends paid on stock by foreign
corporations will constitute "qualified dividend income" and the effect of such
status on the ability of a taxpayer to utilize associated foreign tax credits is
not entirely clear, but it is anticipated that there will be administrative
pronouncements concerning these provisions in the future. Holders are urged to
consult their own tax advisors regarding the impact of the provisions of the
2003 Tax Act on their particular situations.
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
66
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.
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
2002 according to U.S. GAAP rules.
The table below sets forth the assets and liabilities for the year 2002 in
terms of currency denomination:
Denomination
---------------------------------------
Total Year Ended U.S.-dollar
December 31, 2002 real-denominated denominated
--------------------- -------------------- ---------------
(in US$ millions)
Assets:....................................... 2,698.8 356.9 2,341.9
Current Assets.......................... 524.4 295.2 229.2
Long-Term Assets........................ 87.2 61.7 25.5
Permanent Assets........................ 2,087.2 0.0 2,087.2
Liabilities:.................................. 2,698.8 317.0 2,381.8
Current Liabilities..................... 238.5 75.7 162.8
Long-Term Liabilities................... 699.7 241.3 458.4
Stockholders' Equity.................... 1,760.6 0.0 1,760.6
As a result of our exposition to exchange rate fluctuation, the gain and
loss on currency translations at the end of 2002 (after the local currency
devaluation) was a net gain of US$14.9 million.
67
Having our revenues 98% U.S. dollar-denominated and our costs and expenses
almost entirely local currency denominated, we highly benefit from the 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, 2002, approximately 24.6% 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 2002, the TJLP ranged from 9.5% to 10.0% for the year. In
2001, the TJLP ranged from 9.25% to 10%. The interest payable by us on the
real-denominated debt is equal to the TJLP, plus 1.8% to 5.0% per annum. See
"Item 5B. Liquidity and Capital Resources" and "Item 7B. Related Party
Transactions--BNDES Loan Agreements."
As of December 31, 2002, we had outstanding loans with BNDES with an
aggregate amount of approximately R$925.9 million (equivalent to US$262.0
million at the year end's exchange rate), mainly denominated in reais.
As measured by the General Market Price Index, the inflation rate for 2001
was 10.4%. However, as a result of the devaluation of the real, inflation in
2002 increased to 25.3%. 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 2003 through 2010.
Principal Amount Outstanding (in millions of U.S. dollars)
----------------------------------------------------------------
Denomination Interest rate 2003 2004 2005 2006 2007 2008-2010 Total
------------------------------------------------- -------- ------ -------- ------ -------- ----------- -------
Local currency TJLP (1).................... 30.6 31.9 29.7 29.9 29.9 42.5 194.5
Foreign currency Foreign currency basket (2). 4.7 8.2 8.1 8.1 8.1 12.8 50.0
Fixed....................... 9.8 43.8 51.1 50.0 50.0 58.4 263.1
LIBOR....................... 133.1 139.3 3.7 3.7 1.9 0.0 281.7
-------- ------ -------- ------ -------- ----------- -------
Total per year.................................. 178.2 223.2 92.6 91.7 89.9 113.7 789.3
________________
(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.
68
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)) within
90 days of the date of this annual report, have concluded that, as of that date,
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 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. [RESERVED]
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, 2002 and 2001................F-3
Consolidated statements of income for each of the three years in the
period ended December 31, 2002...........................................F-5
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2002...........................................F-7
Consolidated statements of changes in stockholders' equity for each of the
three years in the period ended December 31, 2002........................F-9
Notes to consolidated financial statements..............................F-12
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 First Addition to the Loan Agreement between the Company and
BNDES, dated June 13, 2001 (free translation into English),
incorporated herein by reference to the Company's annual report
dated April 16, 2002.
69
4.2 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.
4.3 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.
4.4 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).
4.5 Mater Indenture among Arcel Finance Limited, as Issuer, Aracruz
Trading S.A., as provider of the Parent 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.
4.6 First Supplemental Indenture, dated as of February 6, 2002 to
the Master Indenture dated as of February 6, 2002 among Arcel
Finance Limited, as Issuer, Aracruz Trading S.A., as Seller and
as Servicer, Aracruz Celulose S.A., as Parent, 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 in the amount of US$250,000,000 5.984% Senior
Secured Notes due 2009.
4.7 Agreement for the Rendering of Sea Transportation Services
between the Company and Norsul, dated December 19, 2000 (free
translation into English), incorporated herein by reference to
the Company's annual report dated June 30, 2001.
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 acting Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
70
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/ Carlos Augusto Lira Aguiar
---------------------------------------
Name: Carlos Augusto Lira Aguiar
Title: Acting Chief Financial Officer
Date: June 27, 2003
CERTIFICATION
I, Carlos Augusto Lira Aguiar, certify that:
1. I have reviewed this annual report on Form 20-F of ARACRUZ
CELULOSE S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
By: /s/ Carlos Augusto Lira Aguiar
----------------------------------------
Name: Carlos Augusto Lira Aguiar
Title: Chief Executive Officer
CERTIFICATION
I, Carlos Augusto Lira Aguiar, certify that:
1. I have reviewed this annual report on Form 20-F of ARACRUZ
CELULOSE S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
By: /s/ Carlos Augusto Lira Aguiar
----------------------------------------
Name: Carlos Augusto Lira Aguiar
Title: Acting Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of PricewaterhouseCoopers Auditores Independentes.....................F-2
Consolidated balance sheets at December 31, 2002 and 2001....................F-3
Consolidated statements of income for each of the three years in the
period ended December 31, 2002...............................................F-5
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2002...............................................F-7
Consolidated statements of changes in stockholders' equity for each of the
three years in the period ended December 31, 2002............................F-9
Notes to consolidated financial statements..................................F-12
Aracruz Celulose S.A.
Consolidated Financial Statements at
December 31, 2001 and 2002 and
Report of Independent Accountants
Report of Independent Accountants
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, 2001 and 2002 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers Vitoria, Brazil
Auditores Independentes January 10, 2003
F-2
Aracruz Celulose S.A.
Consolidated Balance Sheets
Expressed in thousands of United States dollars
(Except number of shares)
--------------------------------------------------------------------------------
December 31,
----------------------------
Assets 2001 2002
------------- -------------
Current assets
Cash and cash equivalents 20,125 25,474
Debt securities available-for-sale 405,493 248,455
Accounts receivable, net
Related party 3,520 2,781
Other 89,208 130,308
Inventories, net 69,685 81,553
Deferred income tax, net 3,439 8,653
Recoverable income and other taxes 46,744 25,985
Prepaid expenses and other current assets 2,603 1,207
------------- -------------
640,817 524,416
------------- -------------
Property, plant and equipment, net 1,913,191 2,000,071
------------- -------------
Investment in affiliated company 80,893 87,107
------------- -------------
Other assets
Advances to suppliers 20,198 28,229
Deposits for tax assessments 15,669 10,605
Deferred income tax, net 8,611 361
Recoverable income and other taxes 89,944 45,170
Other 8,874 2,855
------------- -------------
143,296 87,220
------------- -------------
December 31,
------------------------------
Liabilities and stockholders' equity 2001 2002
-------------- --------------
Current liabilities
Suppliers 57,656 45,902
Payroll and related charges 10,242 7,426
Income and other taxes 31,096 2,054
Current portion of long-term debt
Related party 47,180 47,281
Other 143,815 120,033
Short-term borrowings - export financing and
other 120,052 10,811
Accrued finance charges 14,808 4,555
Other accruals 431 442
-------------- --------------
425,280 238,504
-------------- --------------
Long-term liabilities
Long-term debt
Related party 232,600 214,772
Other 304,583 396,319
Tax assessments and litigation contingencies 70,662 65,620
Suppliers 4,699 20,113
Other 2,324 2,668
-------------- --------------
614,868 699,492
-------------- --------------
Commitments and contingencies (Note 15)
Minority interest 319 255
-------------- --------------
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 - 2001 - 40.479.797 shares; 2002 -
40,326,290 shares 33,087 32,990
Class B - 2001 - 582,049,217 shares; 2002 -
536,837,131 shares 581,409 581,506
Common stock - 2001 and 2002 - 455,390,699 297,265 297,265
shares
Treasury stock
Class A preferred stock - 2001-33,301
shares; Class B preferred stock -
2001 - 45,330,292 shares, 2002 -
1,374,000 shares; and Common
stock - 2001 and 2002- 483,114 shares (57,807) (2,285)
-------------- -------------
Total share capital 853,954 909,476
Other cumulative comprehensive income
Net unrealized gain on available-for-sale
securities 10,920
Appropriated retained earnings 295,106 117,173
Unappropriated retained earnings 577,750 733,914
-------------- -------------
1,737,730 1,760,563
2,778,197 2,698,814
============== =============
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)
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------------
2000 2001 2002
----------------- ------------------ ----------------
(Reclassified)
Operating revenues
Sales of eucalyptus pulp
Domestic 43,601 23,579 17,126
Export 800,634 583,365 700,622
----------------- ------------------ ----------------
844,235 606,944 717,748
Sales taxes and other deductions (63,240) (32,589) (48,765)
----------------- ------------------ ----------------
Net operating revenues 780,995 574,355 668,983
----------------- ------------------ ----------------
Operating costs and expenses
Cost of sales 412,313 420,606 468,875
Selling 21,492 23,253 28,242
Administrative 22,454 22,012 22,302
Provision for loss on ICMS credit 10,754 45,093
Other, net 11,978 14,807 8,968
----------------- ------------------ ----------------
468,237 491,432 573,480
----------------- ------------------ ----------------
Operating income 312,758 82,923 95,503
----------------- ------------------ ----------------
Non-operating (income) expenses
Equity in results of affiliated company 1,313 (1,195) (6,076)
Financial income (64,849) (54,749) (61,611)
Financial expenses 101,461 70,215 82,014
Loss (gain) on currency remeasurement, net (8,812) 18,029 (14,888)
Other, net (120) (171) (212)
----------------- ------------------ ----------------
28,993 32,129 (773)
----------------- ------------------ ----------------
Income before income taxes and minority interest 283,765 50,794 96,276
----------------- ------------------ ----------------
Income tax expense (benefit)
Current 40,461 35,722 (23,988)
Deferred 41,604 (2,992) 8,415
----------------- ------------------ ----------------
82,065 32,730 (15,573)
----------------- ------------------ ----------------
Minority interest in losses of subsidiary 11 43 64
----------------- ------------------ ----------------
Net income for the year 201,711 18,107 111,913
================= ================== ================
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,
----------------------------------------------------
2000 2001 2002
--------------- ---------------- ---------------
(Reclassified)
Basic and diluted earnings per share
Class A preferred stock 0.20 0.05 0.11
Class B preferred stock 0.20 0.02 0.11
Common stock 0.18 0.01 0.10
Weighted-average number of shares
Outstanding (thousands)
Class A preferred stock 40,903 40,651 40,395
Class B preferred stock 552,889 536,512 536,768
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,
------------------------------------------------------
2000 2001 2002
---------------- ---------------- ----------------
Cash flows from operating activities
Net income for the year 201,711 18,107 111,913
Adjustments to reconcile net income to cash
provided by operating activities:
Non-cash items
Depreciation and depletion 167,960 162,567 171,527
Equity in results of affiliated company 1,313 (1,195) (6,076)
Deferred income tax 41,604 (2,992) 8,415
Loss (gain) on currency remeasurement (8,812) 18,029 (14,888)
Loss on sale of equipment 1,643 8,883 1,077
Other (1,346)
Decrease (increase) in assets
Accounts receivable, net (11,226) (5,122) (50,557)
Inventories, net (11,337) 13,552 (11,868)
Interest receivable on debt securities (36,398) 4,792 54,817
Recoverable income taxes (1,047) (27,025) 10,246
Other (890) 5,019 6,708
Increase (decrease) in liabilities
Suppliers 7,788 27,977 10,437
Payroll and related charges 3,458 (353) (1,537)
Income and other taxes and litigation
contingencies 45,323 31,382 (3,751)
Accrued finance charges (8,381) 5,825 (9,927)
Other 407 714 1,061
---------------- ---------------- ----------------
Net cash provided by operating activities 393,116 260,160 276,251
---------------- ---------------- ----------------
Cash flows from investing activities
Debt securities (96,165) (92,279) 27,927
Proceeds from sale of equipment 677 392 1,199
Acquisition of companies (101,215) (5,137)
Additions to property, plant and equipment (118,152) (416,353) (260,658)
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities (314,855) (513,377) (231,532)
---------------- ---------------- ----------------
F-7
Aracruz Celulose S.A.
Consolidated Statements of Cash Flows
Expressed in thousands of United States dollars
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
Cash flows from financing activities
Short-term debt, net 57,134 (15,224) (78,789)
Long-term debt
Issuances
Related parties 160,889 112,199
Other 280,374 250,000
Repayments
Related parties (62,699) (53,214) (43,309)
Other (289,085) (54,945) (203,756)
Bank deposits, as compensating balances 2,589
Treasury stock acquired (22,718) (2,175)
Dividends paid (57,963) (63,169) (73,765)
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities (372,742) 254,711 (39,595)
--------------- --------------- ---------------
Effect of changes in exchange rates on cash and
cash equivalents (18) 540 225
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (294,499) 2,034 5,349
Cash and cash equivalents, beginning of year 312,590 18,091 20,125
--------------- --------------- ---------------
Cash and cash equivalents, end of year 18,091 20,125 25,474
=============== =============== ===============
Supplementary cash flow information
Financial charges paid 69,303 49,258 60,412
=============== =============== ===============
Income taxes paid, including escrow deposits
for tax assessments 20 66 140
=============== =============== ===============
Withholding income tax on financial income 25,825 34,020 1,404
=============== =============== ===============
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)
--------------------------------------------------------------------------------
----------------------------------------------------------------------
2000 2001
------------------------------- ---------------------------------
Shares U.S.$ Shares U.S.$
-------------- -------------- --------------- --------------
Share Capital
Preferred stock - Class A
Balance, January 1 40,941,849 33,465 40,929,550 33,455
Treasury stock cancelled
Conversion to Class B stock (12,299) (10) (449,753) (368)
-------------- -------------- --------------- --------------
Balance, December 31 40,929,550 33,455 40,479,797 33,087
-------------- -------------- --------------- --------------
Preferred stock - Class B
Balance, January 1 581,587,165 581,031 581,599,464 581,041
Treasury stock cancelled
Conversion from Class A stock 12,299 10 449,753 368
-------------- -------------- --------------- --------------
Balance, December 31 581,599,464 581,041 582,049,217 581,409
-------------- -------------- --------------- --------------
Common stock
Balance, January 1 and December 31 455,390,699 297,265 455,390,699 297,265
-------------- -------------- --------------- --------------
Treasury stock
Balance, January 1 (28,753,707) (35,089) (45,848,707) (57,807)
Treasury stock cancelled
Treasury stock acquired (17,095,000) (22,718)
-------------- -------------- --------------- --------------
Balance, December 31 (45,848,707) (57,807) (45,848,707) (57,807)
-------------- -------------- --------------- --------------
Total share capital 1,032,071,006 853,954 1,032,071,006 853,954
-------------- -------------- --------------- --------------
Year ended December 31,
----------------------------------
2002
--------------------------------
Shares U.S.$
--------------- --------------
40,479,797 33,087
(35,301)
(118,206) (97)
--------------- --------------
40,326,290 32,990
--------------- --------------
582,049,217 581,409
(45,330,292)
118,206 97
--------------- --------------
536,837,131 581,506
--------------- --------------
455,390,699 297,265
--------------- --------------
(45,848,707) (57,807)
45,365,593 57,697
(1,374,000) (2,175)
--------------- --------------
(1,857,114) (2,285)
--------------- --------------
1,030,697,006 909,476
--------------- --------------
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)
--------------------------------------------------------------------------------
--------------------------------------------------------------------
2000 2001
------------------------------- ---------------------------------
Shares U.S.$ Shares U.S.$
-------------- -------------- --------------- --------------
Balance brought forward 1,032,071,006 853,954 1,032,071,006 853,954
-------------- -------------- --------------- --------------
Net unrealized gain on
available-for-sale securities
Balance, January 1 514 1,095
Unrealized gain (loss) on available-for-sale
securities, net of reclassification adjustments 988 14,664
Tax effect on above (407) (4,839)
-------------- --------------
Balance, December 31 1,095 10,920
-------------- --------------
Appropriated retained earnings
Unrealized income reserve
Balance, January 1 9,016
Transfer from (to) unappropriated retained earnings (9,016)
-------------- --------------
Balance, December 31 -------------- --------------
Investments reserve
Balance, January 1 143,917 282,475
Treasury stock cancelled
Transfer from (to) unappropriated retained earnings 138,558 (40,354)
--------------- --------------
Balance, December 31 282,475 242,121
--------------- --------------
Legal reserve
Balance, January 1 50,492 57,775
Transfer from (to) unappropriated retained earnings 7,283 (4,790)
--------------- --------------
Balance, December 31 57,775 52,985
--------------- --------------
Total appropriated retained earnings 340,250 295,106
--------------- --------------
Balance carried forward 1,032,071,006 1,195,299 1,032,071,006 1,159,980
-------------- --------------- ---------------- --------------
Year ended December 31,
-------------------------------------
2002
-------------------------------------
Shares U.S.$
----------------- ------------------
1,030,697,006 909,476
10,920
(16,299 )
5,379
---------------
---------------
---------------
---------------
242,121
(57,697)
(102,904)
---------------
81,520
---------------
52,985
(17,332)
---------------
35,653
---------------
117,173
---------------
1,030,697,006 1,026,649
--------------- ---------------
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)
--------------------------------------------------------------------------------
-------------------------------------------------------------------
2000 2001
------------------------------- --------------------------------
Shares U.S.$ Shares U.S.$
-------------- --------------- ---------------- --------------
Balance brought forward 1,032,071,006 1,195,299 1,032,071,006 1,159,980
-------------- --------------- ---------------- -------------
Unappropriated retained earnings
Balance, January 1 572,701 577,822
Net income for the year 201,711 18,107
Cash dividends (per share: 2000 - U.S.$ 0.06
to Class A preferred stock and U.S.$ 0.05 to
both Class B preferred and common stock; 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 both Class A
preferred and Class B preferred stock and
U.S.$ 0.07 to common stock)
Transfer from (to) reserves (59,765) (63,323)
(136,825) 45,144
-------------- ------------
Balance, December 31 577,822 577,750
-------------- -------------
Total stockholders' equity 1,032,071,006 1,773,121 1,032,071,006 1,737,730
============== ============== ================ =============
Comprehensive income is comprised as follows:
Net income for the year 201,711 18,107
Net unrealized gain on available-for-sale securities
Increase(decrease)in the unrealized gain arising during the 581 9,825
year, net of tax --------------- ------------
581 9,825
--------------- -------------
Total comprehensive income 202,292 27,932
=============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
Year ended December 31,
--------------------------------------
2002
--------------------------------------
Shares U.S.$
----------------- -----------------
1,030,697,006 1,026,649
------------- ---------
577,750
111,913
(75,985)
120,236
---------
733,914
---------
1,030,697,006 1,760,563
============= =========
111,913
(10,920)
---------
(10,920)
---------
100,993
=========
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.
During the first quarter of 2001, in an effort to improve its reporting
practices, the Company changed its policy regarding the classification of
freight costs in the statement of income. As a result of this change,
oceanic freight charges, which had previously been classified as a
reduction of export sales of eucalyptus pulp, and other freight charges,
which had previously been classified as selling expenses, are classified as
component of cost of sales. Additionally, management identified certain
administrative expenses that it believes are indirectly related to the
production process and, beginning January 1, 2001, these costs are
classified as a component of cost of sales. Prior year amounts have been
restated to conform to the current year's presentation.
The Company has reported 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$) in accordance with the criteria set forth in Statement
of Financial Accounting Standards N(0) 52 - "Foreign Currency Translation"
("SFAS 52"). The Board of Directors and management have historically
considered the U.S. dollar as the Company's functional currency as this has
been, and remains in their opinion, the currency in which it principally
operates as well as being the Company's primary unit of economic measure.
Accordingly, the Company's management has concluded that the Company's
functional currency is and will continue to be the U.S. dollar.
F-12
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
Gains and losses resulting from the remeasurement of the financial
statements, as well as those resulting from foreign currency transactions,
have been recognized in the statements of income. The impact of the
devaluation of the Real on the Company's monetary assets and liabilities in
2002 was a net gain of U.S.$ 14.9 million (U.S.$ 18.0 million loss in 2001
and U.S.$ 8.8 million gain in 2000). The exchange rates at December 31,
2002, 2001 and 2000 were, respectively: U.S.$ 1: R$ 3,5333, R$ 2,3204 and
R$ 1,9554.
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.
(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., Aracruz Empreendimentos S/C Ltda, Terra
Plana Agropecuaria Ltda and Alcoprado Empreendimentos Ltda.
(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, debt securities and trade accounts receivable. The Company
limits its credit and performance risk associated with cash and cash
equivalents by placing its investments with highly rated financial
institutions and in very short-term securities, and the Company's debt
securities are principally comprised of U.S. dollar denominated notes which
are issued and guaranteed as to principal and interest by the Brazilian
government. An allowance for doubtful accounts is established to the extent
the Company's trade receivables are estimated not to be fully collectible.
F-13
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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) 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 45% 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.
(g) Debt securities available-for-sale
In accordance with SFAS 115 - "Accounting for Certain Investments in Debt
and Equity Securities", the Company's investments in securities are
classified in accordance with their nature and management's intentions.
Available-for-sale debt securities are carried at cost plus accrued
interest, adjusted to market value. Any unrealized gains or losses, net of
taxes, are excluded from income and recognized as a separate component of
stockholders' equity until realized.
(h) 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
F-14
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
borrowings, and, on foreign currency borrowings (including those
denominated in U.S. dollars), at the contractual interest rates.
F-15
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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.
(i) 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.
(j) 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. The Company did not
record a provision for impairment in 2000, 2001 and 2002.
(k) 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
significant amounts were accrued at December 31, 2001 and 2002, since
future severance costs are not reasonably estimable.
(l) Compensated absences
The liability for employees' future vacation compensation is accrued as
vacation vests during the year.
F-16
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
(m) Revenues and expenses
Revenues arise from annual and long-term contracts and from spot sales 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.
(n) 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 will be reported in other
comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to the
income statement in the periods in which earnings are impacted by the
hedged item. The ineffective portion of all hedges will be 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-17
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
(o) 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.
(p) 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 2000, 2001 and 2002.
(q) 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 Recently issued accounting pronouncements
The Financial Accounting Standards Board ("FASB"), during 2001, issued the
following Statements of Financial Accounting Standards ("SFAS"): July -
SFAS No. 141, Business Combinations ("SFAS 141") and SFAS No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"); August - SFAS No. 143, Accounting
for Asset Retirement Obligations ("SFAS 143"); October - SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). During 2002, the FASB also issued the following SFAS: January - SFAS
No. 145, Extinguishment of Debt ("SFAS 145"); July - SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146").
SFAS 141 requires the purchase method of accounting for all business
combinations and applies to all business combinations initiated after
September 30, 2001 and to all business combinations accounted for by the
purchase method that are completed after
F-18
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
September 30, 2001. Adoption of SFAS 141 did not have a material impact on
the financial position and results of operations of the Company.
SFAS 142 requires that goodwill as well as other intangible assets with
indefinite lives not be amortized but be tested annually for impairment and
is effective for fiscal years beginning after December 15, 2001.
Accordingly, the Company reviewed its goodwill in purchase of investments
in the amount of US$ 23,408 by applying the recognition and measurement
provisions described in the SFAS No 121 - Accounting for the Impairment of
Long Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS
121"). The Company did not identify any impairment loss on the
afore-mentioned goodwill as of December 31, 2002.
SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFAS 143 is effective for
fiscal years beginning after September 15, 2002. Management estimates that
adoption of SFAS 143 will not have a material impact on financial position
and results of operations of the Company.
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. It
supersedes, with certain exceptions, SFAS 121, Accounting for the
Impairment of Long - Lived Assets and for Long - Lived Assets to be
Disposed Of, and is effective for fiscal years beginning after December 15,
2001. The adoption of SFAS 144 did not have a material effect on the
Company's financial position and results of operations.
SFAS 145 addresses financial accounting and reporting for extinguishment of
debt. It supersedes SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt; SFAS No. 44, Accounting for Intangible Assets of
Motor Carries and SFAS 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS 145 also amends certain paragraphs of SFAS
13, Accounting for Leases. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. Management estimates that the adoption of SFAS 145 will
not have a material impact on 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)
--------------------------------------------------------------------------------
SFAS 146 establishes the financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including certain costs incurred in a reestructuring)". SFAS 146 is
effective for fiscal years initiated after December 31, 2002. management
estimates that the adoption of SFAS 146 will not have a material impact on
financial position and results of operations of the Company. The Company
accounts for its investment in Veracel using the equity method of
accounting. At December 31, 2002 the Company's investment in Veracel
included goodwill of U.S.$ 15,583. For the year ended December 31, 2002,
the Company recognized an equity gain of U.S.$ 6,076 (2001 - gain of U.S.$
1,195 and 2000 - loss of U.S.$ 1,313).
3 Taxes
3.1 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 are presented as follows:
Year ended December 31 - %
-------------------------------------------------
2000 2001 2002
-------------- ------------- ------------
Federal income tax rate 25.0 25.0 25.0
Social contribution (*) 9.0 to 12.0 9.0 9.0
-------------- ------------- ------------
Composite tax rate 34.0 to 37.0 34.0 34.0
============== ============= ============
(*) Pursuant to a Provisional Measure, the social contribution rate was
increased to 12% for the period May 1, 1999 to January 31, 2000 and was reduced
to 9% for the period February 1, 2000 to December 31, 2002.
Law 10,637, of December 30, 2002, confirmed the social contribution as 9% from
January 1, 2003 on.
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,
--------------------------------------------
2000 2001 2002
-------------- ------------ ------------
Income before income taxes and minority
Interest 283,765 50,794 96,276
============== ============ ============
Federal income tax and social
contribution at statutory rates 93,646 17,270 32,734
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 (4,688) (4,131) (89,660)
Depreciation on difference in asset basis 22,406 21,083 40,746
Valuation allowance (reversal)
Operations in Brazil (5,394)
Operations outside Brazil (29,737) (2,474)
Other permanent items 5,832 982 607
-------------- ------------ -----------
Income tax expense (benefit) in the consolidated
statements of income 82,065 32,730 (15,573)
============== ============ ===========
F-21
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,
---------------------------------
2001 2002
--------------- ---------------
Assets
Tax loss carryforwards
Operations in Brazil 11,491 1,354
Operations outside Brazil
Expenses not currently deductible 21,646 34,633
Other capitalized investments (24,526) (35,626)
Others 3,439 8,653
--------------- -------------
12,050 9,014
Current assets 3,439 8,653
--------------- ------------
Long-term assets 8,611 361
=============== ============
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.
3.2 Other taxes
In addition, at December 31, 2002, the Company had recoverable taxes in the
total amount of U.S.$ 71,155 relating mainly to the withholding income tax
on financial income (U.S.$ 45,149), which can be offset with future income
tax payable.
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,
F-22
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
in the view of the financial difficulties of the state, the Company does
not foresee a short-term solution to the utilization of the credits.
Based on these facts, 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, 2002, the Company had ICMS credits in the
amount of U.S.$ 55,327 and a valuation allowance in the same amount.
During 2001, certain changes were introduced in the Brazilian tax
legislation including earnings from foreign subsidiaries in the
determination of taxable income in Brazil. As a result, the Company
recorded in 2002 a provision of U.S.$ 37.7 million (2001 - U.S.$ 13.6
million) relating to income taxes on its foreign subsidiaries taxable
income for the year, which was fully offset with tax loss carryforwards .
4 Cash and cash equivalents
December 31,
-----------------------------
2001 2002
-------------- ------------
Brazilian reais 1,328 4,176
United States dollars 17,813 20,658
Other European currencies 984 640
-------------- ------------
20,125 25,474
============== ============
Cash equivalents denominated in Brazilian Reais represent principally
investments in certificates of deposit placed with major financial
institutions in Brazil. The amount invested in United States dollars at
December 31, 2002 consists primarily of time deposits with prime financial
institutions and at December 31, 2001 of money market fund quotas,
comprised of securities rated as investment grade.
5 Debt securities available-for-sale
At December 31, 2002, comprised of certificates of deposit with prime
institutions in Brazil, with maturities from October 2003 to December 2005.
The fair value of the Company's debt securities available for sale amounted
to U.S.$ 248,455 (2001 - U.S.$ 405,493), with no unrealized gain, net of
tax (2001 - U.S.$ 10,920), recorded as a component of other cumulative
comprehensive income. During 2002, the Company sold
F-23
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
securities amounting approximately U.S.$ 297 million and realized gains,
net of tax, of U.S.$ 10,920, included in income for the period.
6 Accounts receivable, net
December 31,
-----------------------------
2001 2002
-------------- ------------
Customers - pulp sales
Domestic 3,421 4,305
Export 84,042 124,689
Advances to suppliers 2,522 1,036
Other 3,060 4,130
-------------- ------------
93,045 134,160
Allowance for doubtful accounts (317) (1,071)
-------------- ------------
Total, net 92,728 133,089
============== ============
At December 31, 2002, two customers accounted for 35% of total customer
receivables (At December 31, 2001 one customer accounted for 23%) and no
other accounted for more than 10%.
Export receivables are denominated in the following currencies:
December 31,
---------------------------
2001 2002
------------ ------------
United States dollars 82,276 122,127
European currency units - EURO 1,766 2,562
------------ ------------
84,042 124,689
============ ============
Export receivables in currencies other than U.S. dollars are swapped into
U.S. dollars through forward foreign exchange contracts as discussed in
Note 16.
F-24
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
7 Inventories, net
December 31,
--------------------------
2001 2002
------------ ----------
Finished products 27,780 36,689
Work in process 919 1,078
Timber 5,837 2,853
Raw materials 8,552 11,445
Spare parts and maintenance supplies,
less allowance for loss of U.S.$ 3,512
(2001 - U.S.$ 2,615) 26,597 29,488
------------ ----------
69,685 81,553
============ ==========
Spare parts include parts which, when utilized, are expected to extend the
useful lives of plant and equipment and will be capitalized.
8 Property, plant and equipment
December 31, 2001 December 31, 2002
----------------------------------------- ----------------------------------------
Accumu- Accumu-
lated lated
depre- depre-
Cost ciation Net Cost ciation Net
------------ -------------- ------------ ------------ ------------ -------------
Land 206,211 206,211 232,550 232,550
Timber resources 523,122 352,690 170,432 228,490 28,293 200,197
Buildings,
improvements,
and installations 472,799 282,835 189,964 504,992 290,300 214,692
Equipment 1,812,318 868,242 944,076 2,199,046 974,957 1,224,089
Information
technology
equipment 47,753 30,872 16,881 49,072 35,140 13,932
Other 143,510 109,957 33,553 147,645 118,346 29,299
------------ -------------- ------------ ------------ ------------ -------------
3,205,713 1,644,596 1,561,117 3,361,795 1,447,036 1,914,759
Construction in
progress 352,074 352,074 85,312 85,312
------------ -------------- ------------ ------------ ------------ -------------
Total 3,557,787 1,644,596 1,913,191 3,447,107 1,447,036 2,000,071
============ ============== ============ ============ ============ =============
F-25
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, will increase the Company's
production capacity at its site in northern Espirito Santo State to 2
million tons per year. The new production volume will require 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
expects to reach full production capacity in 2003. The total budgeted
investment in the Expansion project is approximately US$ 825 million, of
which US$ 575 million will be invested in the production line and the
balance in land, forest and other investments. As of December 31, 2002 the
Company had invested approximately US$ 656 million.
During 2002, the Company capitalized approximately US$ 7.5 million (2001 -
U.S.$ 12.9 million) of interest cost on funds primarily used to construct
the new pulp line -"Fiberline C".
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
is 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 (R$ 193.3 million - U.S. $ 49.6 million),
net of the assignment to the buyers of the rights of a preexisting wood
supply agreement (R$ 40.5 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 is share in the agreement (50%) as a liability (land and
forests) and as an asset (supply agreement). Aracruz and Bahia Sul each
will separately control its share of the assets. The Company paid the first
installment in December 2002.
F-26
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
9 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 U.S.$ 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 and Odebrecht S.A. own the remaining 45%
and 10%, respectively. During 2003, the Company and Stora Enso will jointly
decide, based upon prevailing market conditions, whether to proceed with a
planned construction of Veracel's own green field plant. Upon closing
of the purchase agreement, the Company and Veracel entered into a
three-year wood supply contract to provide wood for the Company's mill
expansion currently in progress. Under the terms of the contract, which
began in January 2002, Veracel supplies up to 3.85 million cubic meters of
wood at U.S.$ 40.50 per cubic meter.
10 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, 2001 and 2002 were,
respectively, 4.7% and 4.1%.
At December 31, 2002, U.S.$ 7,925 of short-term borrowings fall due within
90 days, U.S.$ 849 from 91 to 180 days and U.S.$ 2,037 from 181 to 360
days.
F-27
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
11 Long-term debt
December 31,
---------------------------------
2001 2002
-------------- ---------------
Denominated in Brazilian currency - term loans with
varying interest rates; principally the "Long-term
Interest Rate" (TJLP) plus 7.8% to 11.0%
(2001 - 7.8% to 11.0%), due 2003 to 2009 196,952 191,177
-------------- ---------------
Denominated in foreign currencies
Term loans - 2.9% to 11.97 % (2001 - 3.5% to
11.65%), due 2003 to 2009 309,747 134,940
Securitization of receivables - 5.98% due 2009
(2001 - 7.98%) 13,222 250,000
Import financing - 2.27% to 7.08% (2001 - 2.2%
to 7.8%), due 2003 to 2007 28,257 22,288
Pre-export financing - 2.93% to 3.24%(2001 -
3.52% to 6.71%) to 2004 180,000 180,000
--------------- ---------------
531,226 587,228
-------------- --------------
Total 728,178 778,405
Less current maturities 190,995 167,314
--------------- ---------------
537,183 611,091
============== ==============
In February and September 2001, the Company obtained bank financing against
export receivables in the amount of US$ 180 million, with annual interest
rates ranging from 2.93% to 3.24%. These loans will be repaid until April
2004.
During September 2001, Aracruz Trading S.A. obtained long term financing of
US$ 100 million, with maturities from May 2004 to June 2004 and annual
interest rates ranging from 2.90% to 2.92%, secured against future export
sales receivables. In December 2002, Aracruz Trading S.A. pre-payed the
amount of U.S.$ 37.5 million
In December 2002, the Company has a line of credit from BNDES in the amount
of R$ 987 million (equivalent to US$ 262 million), denominated in Brazilian
Reais and foreign currencies, to be repaid from 2003 through 2009, which
has been fully drawn at December 31, 2002, with annual interest rates
ranging from 2.9% to 11.0%. These funds were primarily used to finance the
construction of the new Fiberline C plant and forestry operations.
F-28
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
Also, during September 2001, Aracruz Trading S.A. obtained long term
financing of US$ 100 million, with maturities from May 2004 to June 2004
and annual interest rates ranging from 2.90% to 2.92%, secured against
future export sales receivables. In December 2002, Aracruz Trading S.A.
pre-payed the amount of U.S.$ 37.5 million.
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 return, the Company securitized the financing
by selling to the SPE 95% of its current and future export accounts
receivable. Each month such collections in excess of contractual funding
requirements are transferred to the Company. The financing bears fixed
annual interest of 5.98% and will be repaid in 60 monthly installments
beginning March 1, 2004, with monthly interest payments which began in May
1, 2002. The net proceeds were transferred to Aracruz Celulose S.A. as
advances for future purchases of pulp.
The long-term portion of the Company's debt at December 31, 2002 becomes
due in the following years:
2004 223,231
2005 92,632
2006 91,692
2007 89,851
2008 and thereafter 113,685
--------------
Total 611,091
==============
12 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,
2002, SODEPA and the Banco Nacional de Desenvolvimento Economico e Social -
BNDES also owned preferred stocks which in total amounted to 14.8% and
7.6%, respectively, of the total preferred stocks.
F-29
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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. Approval was also given
to keeping 483,114 ordinary shares in treasury with a view to maintaining
the number of existing voting shares. 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, 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.
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.
F-30
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
The following presents the earnings per share calculations:
2000 2001 2002
------------ ------------ -----------
Net income for the year 201,711 18,107 111,913
Less priority Class A preferred stock dividends (2,219) (1,889) (1,233)
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 (52,429) (16,218) (29,007)
Remaining net income to be equally allocated to
Class A and Class B preferred stock and
common stock while maintaining the
Dividend Ratio 147,063 81,673
============ =========== ===========
Weighted average number of shares
outstanding (thousands)
Class A preferred 40,903 40,651 40,395
Class B preferred 552,889 536,512 536,768
Common 454,908 454,908 454,908
Basic and diluted earnings per share
Class A preferred 0.20 0.05 0.11
Class B preferred 0.20 0.02 0.11
Common 0.18 0.01 0.10
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, 2002, 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.$ 62 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.
F-31
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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,
2002, such capital stock was R$ 1,855 million and the balance in the legal
reserve was R$ 126 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, 2002, the
stockholders approved the payment of dividends of R$ 180,000 thousand,
equivalent to US$ 75,985 at that date, representing dividends of R$ 181.69
- US$ 76.70 per thousand shares of Class A and B preferred stock and R$
165.17 - US$ 69.72 per thousand shares of common stock. The dividends were
paid in May 2002.
13 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 ARUS is to supplement the social
security pension benefits of the employees of the Company and affiliated
company and other companies. ("Sponsors").
The Sponsors and eligible employees make monthly contributions under the
plan to ARUS, which owns and administers (or places with a trustee) its
investments and other assets, which comprised, principally, of bank
certificates of deposit, investments funds, marketable equity securities
and real estate.
Contributions made by the Company to the plan amounted to U.S.$ 1,183,
U.S.$ 1,031 and US$ 989 in 2000, 2001 and 2002, respectively, and
represented the annual pension expense of the Company for the plan.
F-32
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
During 2001, the company provided for U.S.$ 2.5 million of income taxes on
financial income of the pension entity Fundacao Aracruz de Seguridade
Social - ARUS. The taxation of this investment income was being disputed by
ARUS and other Brazilian pension entities and has finally been legislated
by the Provisional Measure No.2222/01 which establishes that withholding
income tax will be applied to their investment portfolio on a retroactive
basis. The Company reached an agreement with the Federal authorities based
on the Provisional Measure and paid the income tax in January 2002.
14 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.
15 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, 2002, the Company had a total provision
recorded for other cases of U.S.$ 4.3 million based on the Court's
computation framework and existing labor jurisprudence and a corresponding
deposit in an escrow account of U.S.$ 2.7 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
F-33
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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.$ 5.8 million at December 31, 2001), to be disbursed within a
twenty-year period, conditioned to the accomplishment of certain
obligations by the Indian communities.
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, 2002, the Company
had donated to the Indian Associations approximately R$ 4.9 million (U.S.$
2.7 million) (U.S.$ 2.2 up to December 31, 2001) 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, 2002, the Company is contesting this notification and has
placed approximately U.S.$ 4,8 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 Tribunal Regional Federal of
the 2nd Region (the "Tribunal") to include in the determination of income
tax and social contribution the effects of the variation in the IPC
(Consumer Price Index) in January 1989 of 70.28%. 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 the 42.72% deduction and has made a provision for contingencies
of US$ 15,074 to cover the effects of the use of this deduction until a
final court ruling is obtained.
(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, 2002, the provision for contingencies included
U.S.$ 40.3 million related to PIS and COFINS on exchange gains on U.S.
dollar denominated debt resulting from the appreciation of the
F-34
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
Real against the U.S. dollar that occurred following the significant
devaluation in early 1999.
(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, 2002.
(vii) Others
The Company has, based on the advice of its legal counsel, recorded
additional provisions in the amount of U.S.$ 6.0 million relating to
several other legal disputes and has also made deposits in the amount of
U.S.$ 7.9 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 CanadianOxy 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.
(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.
16 Derivative instruments, hedging and risk management activities
F-35
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
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 startegy 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, 2002 the
Company had no outstanding interest rate swap contracts.
(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.
F-36
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
17 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, 2002 and 2001. 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.
18 Geographical information
The Company's exports from Brazil, classified by geographic destination,
are as follows:
Year ended December 31,
---------------------------------------------------------
2000 2001 2002
---------------- ----------------- -----------------
(Reclassified)
North America 284,135 119,593 278,988
Europe 387,497 229,913 290,877
Asia 122,169 232,371 119,966
Other 6,833 1,488 10,791
---------------- ----------------- -----------------
Total 800,634 583,365 700,622
================ ================= =================
F-37
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
Sales to two unaffiliated customer represented 35 % of net sales in 2002.
One unaffiliated customer represented 21% and 25% in 2001 and 2000,
respectively. No other individual customers represented more than 10% of
net sales.
19 Related parties
Transactions with related parties resulted in the following balance sheet
and income statement balances:
December 31,
--------------------------------------------------------------
2001 2002
------------------------------ ------------------------------
Assets Liabilities Assets Liabilities
------------- --------------- ------------- ---------------
Balance sheet
Current assets
Cash and cash equivalents 1 132
Accounts receivable 3,520 2,781
Current liabilities - suppliers 714
Long-term debt (including
current portion and accrued
finance charges) 281,944 264,093
------------ --------------- ------------- --------------
3,521 282,658 2,913 264,093
============ =============== ============= ==============
Year ended December 31,
--------------------------------------------------------------------------------
2000 2001 2002
------------------------- -------------------------- --------------------------
Income Expense Income Expense Income Expense
------------ ------------ ------------ ------------ ------------- ------------
Income statement
Operating revenues 44,555 23,336 31,016
Financial expenses 14,152 10,292 129,424
------------ ------------ ------------ ------------ ------------- ------------
44,555 14,152 23,336 10,292 31,016 129,424
============ ============ ============ ============ ============= ============
F-38
Aracruz Celulose S.A.
Notes to Consolidated Financial Statements
Expressed in thousands of United States dollars
(unless otherwise stated)
--------------------------------------------------------------------------------
20 Supplementary information -
Valuation and qualifying accounts
Additions Deductions
Balance at charged to credited to
beginning costs and costs and Balance at
Description of year expenses expenses end of year
------------------------------------ ------------- --------------- --------------- ----------------
2002
Allowances deducted from
related balance sheet accounts:
Accounts receivable 317 863 19 1,161
Inventories 2,615 461 2,154
Investments (other assets -
other) 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 -
other) 801 801
Deferred income tax 2,474 2,474
2000
Allowances deducted from
related balance sheet accounts:
Accounts receivable 490 44 446
Inventories 3,522 1,319 4,841
Investments (other assets -
other) 801 801
Property, plant and
equipment, net 20,164 20,164
Deferred income tax 38,761 36,287 2,474
* * *
F-39