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ARACRUZ CELLULOSE S A 6-K 2007

Documents found in this filing:

  1. 6-K
  2. 6-K
f071009a.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the
Securities Exchange Act of 1934

For the month of
October, 2007

Aracruz Celulose S.A.

Aracruz Cellulose S.A.
(Translation of Registrant’s name into English)

Av. Brigadeiro Faria Lima, 2,277—4th floor
São Paulo, SP 01452-000, Brazil
(Address of principal executive office)

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

(Check One) Form 20-F þ  Form 40-F o

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1))

(Check One) Yes o  No þ

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7))

(Check One) Yes o  No þ

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

(Check One) Yes o  No þ

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b). 82- .)


Aracruz Celulose S.A.
Condensed Consolidated Financial
Information for the three-month and
nine-month periods ended September 30,
2007 and 2006 and Report of Independent
Registered Public Accounting Firm


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Stockholders
Aracruz Celulose S.A.
Aracruz, Espírito Santo, Brazil

1.      We have reviewed the accompanying condensed consolidated balance sheet of Aracruz Celulose S.A. and subsidiaries (“the Company”) as of September 30, 2007 and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2007 and 2006, changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2007 and 2006, all expressed in United States dollars. These condensed consolidated interim financial statements are the responsibility of the Company's management.
 
2.      We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
 
  Accordingly, we do not express such an opinion.
 
3.      Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
4.      We have previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein) and, in our report dated January 9, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 

Rio de Janeiro, Brazil, October 8, 2007

/s/Deloitte Touche Tohmatsu Auditores Independentes
Deloitte Touche Tohmatsu Auditores Independentes


Aracruz Celulose S.A.

Condensed Consolidated Balance Sheets (Unaudited)
(Expressed in thousands of United States dollars, except number of shares)

    September 30,   December 31,
Assets   2007   2006
Current assets        
       Cash and cash equivalents   85,929   48,414
       Short-term investments   492,448   531,229
       Accounts receivable, net   282,439   285,795
       Inventories, net   227,998   202,704
       Deferred income tax   15,017   15,375
       Recoverable taxes   120.916   109,165
       Prepaid expenses and other current assets   23,549   8,242
    1,248,296   1,200,924
Property, plant and equipment, net   2,426,281   2,151,212
Investment in affiliated companies   401,711   324,736
Goodwill   192,035   192,035
Other assets        
     Advances to suppliers   92,563   81,485
     Accounts receivable   20,691    
     Unrealized gain from currency interest rate swaps   17,094    
     Deposits for tax assessments   31,939   26,778
     Recoverable taxes   18,997   15,093
     Other   4,219   3,665
    185,503   127,021
Total Assets   4,453,826   3,995,928

2


Aracruz Celulose S.A.

Condensed Consolidated Balance Sheets (Unaudited)
(Expressed in thousands of United States dollars, except number of shares)

    September 30,     December 31,  
Liabilities and Stockholders' equity   2007     2006  
Current liabilities            
       Suppliers   121,570     95,574  
       Payroll and related charges   32,097     25,246  
       Income and other taxes   41,176     38,391  
       Short-term debt - export financing and other   5,438     4,677  
       Current portion of long-term debt            
           Related party   74,266     65,360  
           Other   2,840     1,854  
       Accrued finance charges   13,115     17,896  
     Dividends and interest payable on stockholders’ equity   43,297     36,545  
       Other current liabilities   4,724     1,276  
    338,523     286,819  
Long-term liabilities            
       Long-term debt            
           Related party   306,133     232,191  
           Other   962,965     922,859  
       Litigation, contingencies and commitments   83,925     101,772  
     Liabilities associated with unrecognized tax benefits   93,144     71,727  
       Interest and penalties on liabilities associated with unrecognized tax benefits   64,032     47,996  
     Deferred income taxes   215,396     96,035  
     Suppliers   3,260     3,020  
       Other long-term liabilities   41,370     30,211  
    1,770,225     1,505,811  
Minority interest   9,991     875  
Stockholders' equity            
       Share capital - no-par-value shares authorized, issued and outstanding            
     Common stock – 2007 and 2006 - 455,390,699 shares   518,385     297,265  
     Preferred stock            
           Class A - 27,958,445 shares as of September 30, 2007 and            
               37,962,555 shares as of December 31, 2006   41,305     31,056  
           Class B - 549,204,976 shares as of September 30, 2007 and            
539,200,866 shares as of December 31, 2006   853,439     583,440  
     Treasury stock            
           Class B preferred stock – 2007 and 2006 - 1,483,200 shares and            
           Common stock – 2007 and 2006 - 483,114 shares   (2,639 )   (2,639 )
       Total share capital   1,410,490     909,122  
Appropriated retained earnings   1,096,697     1,419,079  
Unappropriated retained deficit   (172,100 )   (125,778 )
    2,335,087     2,202,423  
Total Liabilities and Stockholders’equity   4,453,826     3,995,928  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

3


Aracruz Celulose S.A.

Condensed Consolidated Balance Sheets (Unaudited)
(Expressed in thousands of United States dollars, except number of shares)

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

4


Aracruz Celulose S.A.

Condensed Consolidated Statements of Operations
(Expressed in thousands of United States dollars, except number of shares and per-share amounts)
(Unaudited)
Continued

    Three-month period     Nine-month period  
    ended September 30     ended September 30  
    2007     2006     2007     2006  
Operating revenues                        
       Sales of eucalyptus pulp                        
Domestic   33,283     20,340     94,718     53,795  
Export   484,951     468,869     1,443,390     1,336,205  
    518,234     489,209     1,538,108     1,390,000  
       Sales taxes and other deductions   62,729     57,204     192,989     166,576  
Net operating revenues   455,505     432,005     1,345,119     1,223,424  
Operating costs and expenses                        
       Cost of sales   290,925     261,192     844,287     759,543  
       Selling   19,527     17,809     58,105     55,806  
       Administrative   14,209     19,249     40,172     39,769  
       Other, net   3,359     5,102     (12,918 )   12,503  
    328,020     303,352     929,646     867,621  
Operating income   127,485     128,653     415,473     355,803  
Non-operating (income) expenses                        
       Financial income   (36,605 )   (39,772 )   (149,393 )   (146,930 )
       Financial expenses   (5,818 )   38,344     39,086     119,168  
       (Gain) loss on currency                        
remeasurement, net   (4,268 )   (464 )   (3,793 )   (6,934 )
       Other   (29 )         (32 )   (2 )
    (46,720 )   (1,892 )   (114,132 )   (34,698 )
Income before income taxes, minority                        
     interest and equity in results of                        
     affiliated companies   174,205     130,545     529,605     390,501  
Income tax expense (benefit)                        
       Current   12,671     (13,575 )   46,463     23,541  
       Deferred   49,514     6,471     119,743     26,036  
    62,185     (7,104 )   166,206     49,577  
Minority interest   2,220     184     9,116     373  
Equity in results of affiliated companies   4,455     (5,743 )   26,875     12,292  
Net income   105,345     143,208     327,408     328,259  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

5


Aracruz Celulose S.A.

Condensed Consolidated Statements of Operations
(Expressed in thousands of United States dollars, except number of shares and per-share amounts)
(Unaudited)
Continued

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

6


Aracruz Celulose S.A.

Condensed Consolidated Statements of Operations
(Expressed in thousands of United States dollars, except number of shares and per-share amounts)
(Unaudited)
Continued

    Three-month period   Nine-month period
    ended September 30   ended September 30
    2007   2006   2007   2006
Basic and diluted earnings per share                
       Class A preferred stock   0.107   0.145   0.331   0.332
       Class B preferred stock   0.107   0.145   0.331   0.332
       Common stock   0.097   0.132   0.301   0.302
Weighted-average number of shares                
       outstanding (thousands)                
       Class A preferred stock   37,140   38,013   37,853   38,019
       Class B preferred stock   538,540   537,667   537,827   537,661
       Common stock   454,908   454,908   454,908   454,908

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

7


Aracruz Celulose S.A.

Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
(Unaudited)

    Nine-month period  
    ended September 30,  
    2007     2006  
Cash flows from operating activities            
Net income   327,408     328,259  
Adjustments to reconcile net income to net cash            
provided by operating activities:            
       Depreciation and depletion   159,511     162,302  
       Equity results of affiliated company   26,875     12,292  
       Deferred income tax   119,743     26,036  
       (Gain) loss on currency remeasurement   (3,793 )   (6,934 )
       (Gain) loss on sale of equipment   649     59  
Decrease (increase) in operating assets            
       Accounts receivable, net   (22,415 )   (17,231 )
       Interest on short-term investments   (35,498 )   8,281  
       Inventories, net   (25,294 )   (43,276 )
       Recoverable taxes   877     (12,905 )
       Other   (15,390 )   (4,942 )
 Increase (decrease) in operating liabilities            
       Suppliers   21,638     (549 )
       Payroll and related charges   5,115     4,080  
       Litigation, contingencies and liabilities associated with            
unrecognized tax benefits   (11,187 )   10,630  
       Accrued finance charges   (5,059 )   8,848  
       Other   12,996     9,008  
Net cash provided by operating activities   556,176     483,958  
Cash flows from investing activities            
Short – term investments            
       Applications   (72,506 )   (116,784 )
       Redemptions   204,123     173,631  
Proceeds from sale of equipment   344     326  
Investments in affiliate   (103,850 )   (24,500 )
Additions to property, plant and equipment   (435,562 )   (198,266 )
Net cash provided by (used in) investing activities   (407,451 )   (165,593 )

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

8


Aracruz Celulose S.A.

Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
(Unaudited)
(Continued)

    Nine-month period  
    ended September 30,  
    2007     2006  
Cash flows from financing activities            
Net borrowings (repayments) short-term debt, net   8,052     (74,748 )
Long-term debt            
   Borrowings            
     Related parties   87,656        
       Other   235,000     809,000  
   Repayments            
       Related parties   (51,698 )   (47,515 )
       Other   (201,854 )   (711,689 )
Dividends and interest on stockholders´ equity paid   (191,027 )   (214,793 )
Net cash used in financing activities   (113,871 )   (239,745 )
Effect of changes in exchange rates on cash and cash equivalents   2,661     (2,158 )
Increase in cash and cash equivalents   37,515     76,462  
Cash and cash equivalents, beginning of the period   48,414     34,114  
Cash and cash equivalents, end of the period   85,929     110,576  
Supplementary cash flow information            
     Interest paid   64,227     56,372  
     Income taxes paid   38,254     19,470  
Non-cash transaction:            
     Unpaid accrued dividends and interest on            
         stockholders’ equity   43,297     38,196  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

9


Aracruz Celulose S.A.

Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Expressed in thousands of United States dollars, except number of shares)
(Unaudited)

    Nine-month period     Nine-month period  
    ended September 30, 2007     ended September 30, 2006  
    Shares     US$     Shares     US$  
Share capital                        
 Common stock                        
 Balance, January 1   455,390,699     297,265     455,390,699     297,265  
 Capital increase         221,120              
 Balance, September 30   455,390,699     518,385     455,390,699     297,265  
 Preferred stock – Class A                        
 Balance, January 1   37,962,555     31,056     38,022,178     31,105  
 Conversion to Class B stock   (10,004,110 )   (8,184 )   (9,345 )   (8 )
 Capital increase         18,433              
 Balance, September 30   27,958,445     41,305     38,012,833     31,097  
 Preferred stock - Class B                        
 Balance, January 1   539,200,866     583,440     539,141,243     583,391  
 Conversion from Class A stock   10,004,110     8,184     9,345     8  
 Capital increase         261,815              
 Balance, September 30   549,204,976     853,439     539,150,588     583,399  
 Treasury stock                        
 Balance, January 1 and September 30   (1,966,314 )   (2,639 )   (1,966,314 )   (2,639 )
 Balance carried forward   1,030,587,806     1,410,490     1,030,587,806     909,122  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

10


Aracruz Celulose S.A.

Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Expressed in thousands of United States dollars, except number of shares )
(Unaudited)
Continued

    Nine-month period     Nine-month period  
    ended September 30, 2007     ended September 30, 2006  
    Shares   US$     Shares   US$  
Balance brought forward   1,030,587,806   1,410,490     1,030,587,806   909,122  
Appropriated retained earnings                    
   Investments reserve                    
       Balance, January 1       1.184,905         823,434  
       Transfer to share capital - capital                    
           increase       (501.368 )          
       Transfer from unappropriated                    
         retained earnings       140,898         63,058  
       Balance, September 30       824,435         886,492  
   Fiscal-incentive reserve                    
       Balance, January 1       75,870         69,300  
           Transfer from unappropriated                    
retained earnings       12,340         5,307  
       Balance, September 30       88,210         74,607  
   Legal reserve                    
       Balance, January 1       158,304         120,065  
       Transfer from unappropriated                    
         retained earnings       25,748         9,195  
       Balance, September 30       184,052         129,260  
   Total balance, September 30       1,096,697         1,090,359  
Unappropriated retained earnings                    
   Balance, January 1       (125,778 )       42,502  
   Net income       327,408         328,259  
   Dividends and interest on                    
         stockholders’ equity       (194,744 )       (182,584 )
 Transfer to appropriated                    
     retained earnings       (178,986 )       (77,560 )
   Balance, September 30       (172,100 )       110,617  
Total stockholders’ equity   1,030,587,806   2,335,087     1,030,587,806   2,110,098  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

11


Aracruz Celulose S.A.

Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Expressed in thousands of United States dollars, except number of shares )
(Unaudited)
Continued

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

12


  Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

1      Basis of presentation and summary of significant accounting policies
 
  The unaudited condensed consolidated interim financial statements of Aracruz Celulose S.A. and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these interim financial statements include all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. Operating results for the first nine months are not necessarily indicative of the results to be expected for the entire year.
 
  The interim financial statements have been prepared in accordance with US GAAP, which differ in certain respects from the statutory financial statements prepared in accordance with accounting practices adopted in Brazil.
 
  Except as disclosed in the notes hereto, the interim financial statements are based upon accounting policies and methods consistent with those used and described in the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2006. The consolidated balance sheet at December 31, 2006 has been derived from the Company’s audited financial statements at that date. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s 2006 Annual Report on Form 20-F filed with the Securities and Exchange Commission (SEC).
 
  Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
 
  Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation (Note 10).
 
  In preparing the condensed consolidated interim financial statements, the use of estimates is required to account for certain assets, liabilities and other transactions. The Company's condensed consolidated interim financial statements therefore include various estimates concerning the selection of useful lives of property, plant and equipment, carrying values of goodwill, provisions necessary for losses on accounts receivable and for contingent liabilities and other similar evaluations. Actual results may vary from estimates.
 
  The Company has reported its financial statements in U.S. dollars since 1994 when the SEC permitted foreign registrants to report in U.S. dollars rather than in the currency of the country in which they are incorporated.
 

13


  Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

  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 Nº 52 - "Foreign Currency Translation" (“SFAS 52”). The U.S. Dollar is used as the Company's functional currency as this has been, and remains, in the opinion of the Company’s Board of Directors and Management, the currency in which it principally operates as well as being the Company’s primary unit of economic measure. Translation gains and losses are recognized in the income statement, rather than in shareholders’ equity; and non-monetary assets and liabilities (such as inventory and fixed assets) are converted at the historical exchange rate rather than at the end of period exchange rate.
 
2      Recently issued accounting pronouncements
 
  In September 2006, the FASB issued SFAS No. 157 – “Fair value measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements.
 
  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company continues to evaluate the impact of this statement on its consolidated financial statements but believes that such pronouncement will not generate a material impact on the Company’s consolidated results of operations or financial position.
 
  In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of SFAS No. 115”(“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for the Company’s fiscal year ending January 31, 2009. The Company is currently assessing the impact of this statement on its consolidated financial statements.
 

14


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

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 deferred tax balances at each period are computed at the rates to be in force in the subsequent years and the current tax balances at each period include taxes to be paid currently. The statutory enacted rates applicable for federal income tax and social contribution were 25% and 9%, respectively, which represented a composite statutory rate of 34%, for both 2007 and 2006.
 
  The amounts reported as income tax expense in the consolidated statements of income are reconciled to the statutory rates as follows:
 
    Three-month period     Nine-month period  
    ended September 30     ended September 30,  
    2007     2006     2007     2006  
Income before income taxes, minority interest and                        
equity in results of affiliated companies   174,205     130,545     529,605     390,501  
Federal income tax and social contribution                        
 at statutory rates   59,230     44,385     180,066     132,770  
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:   23,960     (1,531 )   62,304     25,746  
     Effects of reduced tax rates on non-Brazilian                        
subsidiaries   (3,805 )   (39,130 )   (25.424 )   (74,300 )
     Fiscal incentive - Technological innovation   (496 )         (3,855 )      
     Deduction of interest on stockholders´ equity   (15,258 )   (12,394 )   (40,676 )   (38,000 )
   Other   (1,446 )   1,566     (6,209 )   3,361  
Income tax expense (benefit) reported in                        
   the consolidated statements of income   62,185     (7,104 )   166,206     49,577  

15


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

The major components of the deferred tax accounts in the balance sheet are as follows:

    September, 30     December, 31  
    2007     2006  
Deferred Tax Asset - Current Assets            
         Unrealized profits on intercompany inventory            
             transactions   15,017     15,375  
Net Deferred Tax Liability – Long-Term            
         Taxation of foreign exchange variation payable            
                 on cash basis   161,574     71,607  
         Difference in basis of accounting for            
Property, plant and equipment   64,861     67,963  
         Tax loss carryfowards from operations   (13,400 )   (11,512 )
         Deductible temporary differences - other provisions   2,361     (32,023 )
       Net deferred tax liability – long-term   215,396     96,035  

Although realization of deferred tax assets is not assured, management believes that such realization is more likely than not to occur and, therefore, has not recognized any valuation allowances.

3.2      Fiscal incentive - ADENE
 
  As a result of the Barra do Riacho operations being located within the geographic area of ADENE (Agency for the Development of the Northeast) and since Decree No. 4,213, of April 16, 2002, which recognizes the pulp and paper sector as a priority in the development of the region, Aracruz requested and was granted by the Federal Revenue Service in December 2002 the right to benefit from reductions in corporate income tax.
 
  On January 9, 2004, the Company was notified by the Liquidator of the former Superintendência de Desenvolvimento do Nordeste (SUDENE) of its decision to revoke the fiscal benefits previously granted to the Company based on an opinion of the Legal Counsel to the National Integration Ministry on the definition of the geographical area eligible for the recognition of such benefit.
 

16


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

During 2004 and 2005, ADENE issued several acts with the objective of annulling the tax benefit used by the Company. Such acts were always challenged by the Company and no final decision on the merits was issued at this point. Nevertheless, in December 2005 the Company was notified by the Federal Revenue Service (SRF) to pay the amount corresponding to the tax incentive it had recorded, plus interest, in the total amount of US$ 97 million.

The Company presented its defense in January 2006 but its arguments have not been accepted by the Federal Revenue Service. The Company appealed to the Federal Taxpayers Council and is currently awaiting a decision.

The Company's management, based on the advice of external legal counsel, believes that the cancellation of the tax incentive is mistaken and shall not prevail, both with respect to the amounts already recorded and with respect to the remaining period. In respect of the tax incentive recorded until 2004 (US$66.8 million on December 31, 2004), it is management's understanding, based on the advice of external legal counsel, that the tax assessment shall be overruled, since the tax incentive was recorded pursuant to strict legal requirements and acts of the SRF and ADENE. The Company's management also believes, based on external legal counsel's opinion, that the cancellation of the tax incentive (scheduled to last up to 2012 for Fiberlines A and B and 2013 for Fiberline C) is illegal due to the fact that the incentive was granted upon compliance of predetermined conditions (implementation, expansion and modernization of industrial plants). Therefore, the Company has a vested right to use the tax incentive until the date set forth in the Law and in the acts issued by ADENE.

Notwithstanding its confidence in the robustness of its rights, the Company, considering the facts occurred during the years 2004 and 2005, which indicate ADENE's and SRF's intention to cancel the tax incentive, decided to be conservative and ceased to recognize the incentive in the calculation of income tax payable from 2005 on and until a final Court decision has been granted.

Based on the opinion of its legal advisors, the Company’s management believes that the ultimate resolution of this matter will be in favor of the Company's arguments, both with respect to the tax incentive recorded up to 2004 and with respect to those to be recorded from 2005 on. Thus, no provisions for loss were booked for the amounts of the benefits already recognized.

17


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

3.3 Recoverable taxes            
    September, 30     December, 31  
    2007     2006  
Recoverable taxes            
       Prepaid income tax and social contribution   98,627     76,533  
       Withholding income tax on financial investments   15,660     20,021  
       Value-Added Tax Credit - ICMS (*)   145,885     145,264  
       Valuation allowance on Value-Added Tax Credit   (140,826 )   (140,204 )
       PIS and COFINS contribution on acquisition of   19,515     21,720  
goods            
       Other   1,052     924  
Total recoverable taxes   139,913     124,258  
Current   120,916     109,165  
Long-term   18,997     15,093  
Total   139,913     124,258  

(*) 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 exempt from ICMS. The Company has the legal right, not contested by the state authorities, to claim those credits against the state of Espírito Santo. However, the Company cannot determine whether negotiations with the State authorities will result in the utilization of the credits in the foreseeable future. Consequently, the Company has been constituting a valuation allowance of 100% of the total credits outstanding related to the Barra do Riacho Plant.

The amount of US$ 5,059, not covered by the valuation allowance consists of ICMS credits of the Guaíba Plant that the Company usually recovers in the course of its operations.

18


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

4 Accounts receivable, net

    September, 30     December, 31
    2007     2006
Customers - pulp sales          
       Domestic   13,525     8,540
       Export   245,050     261,608
Other   28,576     20,281
    287.151     290,429
Allowance for doubtful accounts   (4,712 )   (4,634)
Total current, net   282,439     285,795
Long-Term   20,691      
Total   303,130     285,795

At September 30, 2007, there were two customers, one of whom accounted for 36% and the other 16% of total customer receivables (December 31, 2006 38% and 11%, respectively). No other customer accounted for more than 10% of total customer receivables.

Long-Term receivables represent the balance of consideration receivable on the sale to third parties of Value-added tax credits ("ICMS"). The sale has been approved by tax authorities and the balance will be collected in 60 monthly installments, updated with an interest rate of Interbank Certified Depositary plus 2% per year.

5 Inventories

    September, 30   December, 31
    2007   2006
Finished products   148,406   130,192
Raw materials   32,693   27,027
Spare parts and maintenance supplies   46,899   45,485
    227,998   202,704

19


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

6      Investment in affiliated companies
 
  During the first nine months of 2007 the Company increased its share capital invested in Veracel Celulose S.A. in the amount of US$ 103,850. Such capital increase did not affect the Company’s interest in Veracel as the other shareholder proportionally increased its share capital investment.
 
7      Short-term borrowings and long-term debt
 
  (a)      Short-term borrowings - export financing and other
 
  At September 30, 2007, the balance of short-term debt consisted of rural credit in the amount of US$ 5,438 (US$ 4,677 as of December 31, 2006) with interest rate of 6.75%.
 
  (b)      Long-term debt
 
        September 30,     December 31,  
        2007     2006  
    Denominated in Brazilian currency:            
                   BNDES term loans with varying interest rates;            
                     principally the "Long-term interest Rate" (TJLP) plus            
                     1.8 to 4.5% p.a. (2006 - 1.8% to 4.5% p.a.) due 2007            
                         to 2016   338,365     258,193  
                   Credit Export Note – 100% CDI p.a., due 2008 to 2013   56,805     48,859  
                   BNDES term loans – 7.64% to 9.54% p.a. (2006 –            
                       8.05% to 9.35% p.a.), due 2007 to 2016 and indexed            
                       to BNDES basket of currencies   42,034     39,358  
        437,204     346,410  
    Denominated in US Dollars:            
                 Import financing – (2007 – 5.55% to 6.20% p.a.)         1,854  
Pre                        -export financing – 5.73% to 6.34% p.a. (2006 -            
                     5.75% to 6.48% p.a.) due 2012 to 2016   909,000     874,000  
        909,000     875,854  
    Total   1,346,204     1,222,264  
    Less current maturities   (77,106 )   (67,214 )
    Total long-term debt   1,269,098     1,155,050  

20


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

The long-term portion of the Company's debt at September 30, 2007 becomes due in the following years:

2008   21,156
2009   52,873
2010   22,635
2011   23,317
2012 and thereafter   1,149,117
Total   1,269,098

8      Stockholders’ equity
 
  At September 30, 2007, the Company's principal common stockholders and their common stock ownership interests, either direct or indirect are as follows: Arapar S.A. (an affiliate Group Lorentzen), Arainvest Participações S.A. (an affiliate of Banco Safra S.A.), and Newark Financial Inc (an affiliate of Votorantim Celulose e Papel (VCP)) with 28% each; Banco Nacional de Desenvolvimento Econômico e Social – BNDES with 12.5%.
 
  At September 30, 2007, Arainvest, Treasure Hold Investments Corp (an affiliate of Banco Safra S.A) and the Banco Nacional de Desenvolvimento Econômico e Social - BNDES also owned preferred stocks which in total amounted to 14.9% and 7.7%, respectively, of the total preferred stocks.
 
  Brazilian law permits the payment of cash dividends only from retained earnings and certain reserves registered in the Company's statutory accounting records. At September 30, 2007, after considering appropriated retained earnings which may 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 US$ 1,161 million.
 
  Appropriated retained earnings is composed of the following reserves:
 
  a)      Fiscal-incentive reserve - Consists of the appropriations from retained earnings equivalent
 
  to the cumulative amounts by which income tax rates have been reduced each year as a result of the Barra do Riacho operations of the Company being located in a development area (see note 3.2). The fiscal-incentive reserve may be used to increase capital and absorb losses, but is not available as cash dividends.
 
  b)      Investment reserve - the investments reserve represents discretionary appropriations,
 
  ratified by the stockholders, for plant expansion and other capital projects. The amount of the reserve is based on an approved capital budget presented by management. After completion
 

21


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

of the projects, the Company retains 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.

c) Legal reserve - 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. The legal reserve may be used to increase capital and to absorb losses, but is not available for distribution as cash dividends.

The Annual Shareholders' Meeting held on April 24, 2007 approved Management's proposal to increase capital, without issuing new shares, using part of the income reserves, in the amount of R$ 1,017 million (equivalent to US$ 501 million), according to Articles 169, first paragraph, and 199 of the Corporate Law (Law 6.404/76, as amended).

Dividends and interest on stockholders’ equity

The Company’s by-laws guarantee a minimum annual dividend equal to 25% of the adjusted net income for the year, as required by the Brazilian Corporate Law. In accordance with the Company’s by-laws and the Brazilian Corporate Law, adjusted net income is represented by the net income for the year less appropriation of the above mentioned legal reserve.

Brazilian law permits the payment of cash dividends only from retained earnings. Since January 1, 1996, Brazilian corporations are allowed to attribute interest on stockholders’ equity. The calculation is based on the stockholders’ equity amounts as reported in the statutory accounting records. The interest rate applied may not exceed the long-term interest rate (“TJLP”) determined by the Brazilian Central Bank. Also, such interest may not exceed the greater of 50% of net income for the year or 50% of retained earnings plus reserves out of which dividends may be paid (as discussed above in this note), determined in each case on the basis of the statutory financial statements. The amount of interest attributed to stockholders is considered a deductible charge of the Company for corporate income tax purposes.

The Company paid US$ 252 million of dividends and interest on stockholders' equity during the year ended December 31, 2006. In the first nine months of 2007, the Company paid US$ 190 million of dividends and interest on stockholders' equity (of which US$ 117 million related to 2006 results and US$ 73 million related to the first nine months of 2007), and accrued US$ 40 million of interest on stockholders' equity in September to be paid during October 2007.

22


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

Basic and diluted earnings per share:

Basic and diluted earnings per share ("EPS") as of September 30, 2007 and December 31, 2006, as presented in the Company's statements of operations, have been calculated on the following basis taking into consideration the Dividend Allocation between Class A and Class B preferred stock and common stock as discussed in the following summary of significant rights, terms, privileges and conversion features of the Company's stock:

    Common   Class A Stock   Class B Stock
    Stock        
Voting   Yes   No, except in the event that   No, except in the event that
Rights       dividends are not paid for 3   dividends are not paid for 3
        consecutive years. Voting rights will   consecutive years. Voting
        then be granted until the dividends in   rights will then be granted
        arrears for those 3 years are paid.   until the dividends in arrears
            for those 3 years are paid.
Privileges   None   Priority in the return of capital in the   Priority in the return of capital
        liquidation of the Company;   in the liquidation of the
            Company;
        Right to receive cash dividends in an    
        amount 10% higher than dividends   Right to receive cash
        attributable to each common stock.   dividends in an amount 10%
            higher than dividends
        Priority in the distribution of a   attributable to each common
        minimum annual cash dividend   stock.
        equivalent to 6% of the capital    
        attributable to it.    
Conversion   None   Can be converted into Class B Stock   Cannot be converted into
Features       at any time, at the option and cost of   Class A Stock nor to Common
        the stockholder. Conversion rate 1:1.   Stocks at any time.

Earnings, if any, in excess of the Class A preferred share minimum dividend will be distributed as dividends to Class B preferred stock and common stock, up to the equivalent on a per-share basis of those paid to Class A preferred stock. Any earnings remaining for distribution thereafter are shared ratably among Class A preferred, Class B preferred and common shares.

23


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

The earnings per share calculations:                    
    Nine   -month period ended September 30 2007
        Preferred stock   Common    
        Class A   Class B   Stock   Total
Dividends and interest on stockholders’ equity       4,302   61,131   47,005   112,438
Undistributed earnings       8,226   116,875   89,869   214,970
Net income for the period       12,528   178,006   136,874   327,408
Weighted average number of shares       37,853   537,528   454,908    
Basic and diluted earnings per share       0.33   0.33   0.30    

    Nine   -month period ended September 30 2006
        Preferred stock   Common    
        Class A   Class B   Stock   Total
Dividends and interest on stockholders’ equity       7,017   99,236   76,330   182,583
Undistributed earnings       5,599   79,177   60,900   145,676
Net income for the period       12,616   178,413   137,230   328,259
Weighted average number of shares       38,019   537,661   454,908    
Basic and diluted earnings per share       0.33   0.33   0.30    
There were no dilutive securities outstanding in 2007 and 2006.            

9 Litigations, contingencies and commitments

    September 30, 2007 December 31, 2006
         
Labor - (i)   18,532   14,102
Tax:        
   PIS and COFINS obligations - (ii)   49,714   74,329
   Other   15,679   13,341
    83,925   101,772
24


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statementsa
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

(a)      Litigations and contingencies
 
  (i)      Labor proceedings
 
    At September 30, 2007, the Company had a total provision recorded for labor proceedings of US$ 18.5 million (US$ 14.1 million on December 31 2006) and a corresponding deposit in an escrow account of US$ 7.1 million (US$ 5.8 million on December 31, 2006).
 
    Labor proceedings consist principally of those related to the effect of variation in the inflation indexes (economic plans) on the 40% penalty applicable to the Mandatory Fund for Unemployment Benefit (FGTS), and also of additional amounts allegedly owed to certain employees that perform hazardous activities.
 
  (ii)      PIS and COFINS contributions
 
    At September 30, 2007, the provision for contingencies included US$ 49.7 million (US$ 74.3 at December 31, 2006) for PIS (Social Integration Program) and COFINS (Social Fund) payable on exchange gains on U.S. dollar denominated debt resulting from the appreciation of the Real against the U.S. dollar, principally in the period from early 1999 until September 2002. In September 2007, based on the opinion of its legal advisors, the Company decided to reverse approximately US$ 37.3 million of this provision, considering that it is no longer payable pursuant to article 150, § 4º of the National Tax Code.
 
    The Company is taking action in court against certain changes in the rates and rules for the calculation of the PIS and COFINS contributions determined by Law 9.718/98, the basis of calculation of which includes financial income and exchange and monetary variations. In November 2001 the Company was granted a favorable judgment.
 
    After analyzing certain legal decisions on similar legal actions of other companies and their implications for Aracruz’s case, the Company decided to cancel, on August 29, 2003, part of the legal action, regarding the rate increase and the basis of calculation modifications (except for foreign exchange variation), and decided to pay the accrued amount in installments according to a special tax collection called PAES program, enacted by Law 10.684/2003. Notwithstanding, due to a judgment issued by the Brazilian Supreme Court in July 2006 which considered the modification in the rules for the calculation of PIS and COFINS to be unconstitutional, the Company requested and was granted a provisional remedy allowing it not to pay the PAES installments related to such modification.
 

25


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

(iii) Social charges proceedings

In March 1997, the Company received notification from the INSS (the Brazilian Social Security System) relating basically to the value of housing allowances paid to certain employees over a period of several years. INSS considered that the reduced amount of housing allowances to the employees represented a fringe benefit and, consequently, the corresponding social charge was underpaid. The Company has been contesting this notification in the amount of US$ 7.5 million in Court aiming to its annulment. As at September 30, 2007, the Company has placed approximately US$ 12.3 million in an escrow account to cover this claim. The Brazilian Superior Court of Justice granted a decision in favor of the Company on examination of the first judicial claim related to the matter. Based on the opinion of its legal advisors, 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 recognized.

(iv) Value-Added Tax Credit

In October 2006, the Company received tax assessments, issued by the government of the State of Espírito Santo, in the total amount of US$ 41.2 million, related to the alleged non compliance of formal obligations and supposedly inappropriate ICMS credits from fixed assets and other goods acquired for utilization in the process of pulp production. The company has paid a minor part of that value and has been contesting another 17 notifications, in the amount of US$ 40.1 million. The Company has already been granted favorable decisions in tax notifications amounting to US$ 6.3. Based on the opinion of its legal advisors, who evaluate the chances of success in court are between possible and probable, no provision has been recognized.

(vi) Environmental 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.

(vii) Other

Based on an analysis of the disputes involved and on consultation with its legal counsel, the Company has recorded additional provisions in the amount of US$ 15.7 million relating to several other legal disputes and has also made deposits in the amount of US$ 12.6 million in escrow accounts as of September 30, 2007.

26


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

27


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

(b)      Commitments
 
  (i) Indian Communities - Terms of settlement
 
  In the first semester of 1998, the Indian communities and the Company entered into Terms of Settlement in which both parties recognized the legitimacy of the Ministry of Justice Edicts 193, 194 and 195, dated March 6, 1998, that determined the enlargement of the Indian reservation by 2,571 hectares of land belonging to the Company. 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 US$ 7.3 million at September 30, 2007), monetarily restated by one of the official inflation indexes, to be disbursed within a twenty-year period, conditioned to the accomplishment of certain obligations by the Indian communities.
 
  Despite the fact that the Terms of Settlement were in force, in 2005 members of the Indian communities invaded some forestry areas and the industrial premises of the Company. Although the Company had obtained provisional measures to be reintegrated in the possession of the invaded areas, as of the end of the first quarter of 2007, these invaders still occupy approximately 11,000 hectares of land to which the Company is legally entitled. Since the invasion represented the breach of the Terms of Settlement by the Indian communities, the Company - after having notified the communities themselves, the National Indian Foundation - FUNAI and the Federal Public Prosecutor (Ministério Público Federal) – in 2005 suspended all its commitments towards the Indian communities under the Terms of Settlement. During the period in which the Terms of Settlement were being complied with, the Company had donated to the Indian Associations the amount of approximately R$ 9.6 million, equivalent to US$ 5.1 million.
 
  On February 17, 2006 FUNAI published Dispatches No. 11 and 12 in the Official Federal Gazette, approving the conclusion of the working group set up by FUNAI Edict No. 1.299/05, which recommends the extension of Indian reserves by approximately 11,000 hectares, comprised almost entirely of lands whose title and possession belong to Aracruz. These areas were identified by the working group as being land traditionally occupied by Indians. Confident in the robustness of its rights, the Company presented its challenge of those Dispatches on June 19, 2006. In early 2007 the Ministry of Justice, who shall ultimately decide the matter, returned the administrative procedure to FUNAI, determining that it widen the studies "with a view towards preparing an appropriate recommendation that assuages the interest of both parties".
 

On August 27, 2007, the Ministry of Justice based on the conclusions of the working group set up by FUNAI Edict No. 1.299/05, issued Edicts nr. 1.463 and 1.464 determining the enlargement of the Indian reservation by 11,000 hectares, 98% of which (i.e., approximately 10,700 hectares) are lands owned or legally possessed by the Company. Notwithstanding, all

28


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

the eucalyptus wood planted in the area (approximately 6,800 hectares of forest) shall be harvested by the Company as a compensation for improvements, as recognized by federal authorities. On top of that, since September 18, 2007 all parties involved started negotiations aiming to set forth a timetable for the harvest of the wood and to grant the Company the necessary legal assurance with respect to future land demarcation in the Northern region of the State Espírito Santo.

(ii) “Take-or-Pay” contract

In connection with the sale of its electrochemical plant to Canexus Química Brasil Ltda (Canexus) in 1999, the Company and Canexus entered into a long-term contract for chemical products supply, amended in 2002 to include additional volumes. According to the "take-or-pay" clause, the company is committed to acquire from Canexus a volume of chemical products conservatively projected. Volumes purchased by the Company in addition to the minimum agreed (take-or-pay) for a given year may be compensated with lower volumes acquired in subsequent years. For the take-or-pay quantities, the Company will pay in accordance with the terms of the contract. There are remaining take-or-pay committed volumes until 2008, regarding the 2002 contractual amendment.

(iii) Wood supply

The Company signed a contract with Suzano Papel e Celulose S.A. with a view to a loan of 1,700 thousand m³ of eucalyptus wood, which were received through September of 2005. The remaining balance as of September 30, 2007 is 1,500 thousand m³ of eucalyptus wood and, based on its present forest formation costs, the Company has booked the amount of US$ 6,986 under liabilities. The contract calls for return of an equivalent volume on similar operating conditions between 2007 and 2009.

10 Liabilities associated with unrecognized tax benefits

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. Beginning January 1, 2007, the Company records the financial statement effects of an income tax position when it is more likely than not, based on the technical merits, that it will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured and recorded as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position will be sustained. The benefit associated with previously unrecognized tax positions are generally recognized in the first period in which the more-likely-than-not threshold is met at the reporting date, the tax matter is ultimately settled through negotiation or litigation or when the related statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. The recognition, derecognizing and measurement of

29


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

tax positions are based on management’s best judgment given the facts, circumstance and information available at the reporting date.

30


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

Differences between a tax position taken or expected to be taken in the Company’s tax returns and the amount of benefit recognized and measured in the financial statements result in unrecognized tax benefits, which are recorded 'in the balance sheet as a either a liability for unrecognized tax benefits or reductions to recorded tax assets, as applicable. The liability for unrecognized tax benefits expected to be realized within one year are classified as current in the balance sheet.

Interest and penalties are accrued with respect to unrecognized tax benefits in accordance with the legislation of the respective taxing jurisdictions.

The adoption of FIN 48 did not have a material impact in the Company’s statements of operations and financial position and did not result in a cumulative adjustment to retained earnings at adoption.

As a consequence of adoption, on January 1, 2007 the Company did reclassify certain recorded liabilities related to unrecognized tax benefits of US$ 71,727, previously recorded as part of the litigations, contingencies and commitments line in the consolidated balance sheet at December 31, 2006. At September 30, 2007, the Company’s recorded liability for unrecognized tax benefits was US$ 93,144, reflecting increases resulting from current year tax positions and the effects of currency remeasurement. These unrecognized tax benefits primarily refer to tax positions taken by the Company related to the deductibility of social contribution taxes in the determination of federal income taxes on profits generated by export sales and related to the timing of utilization of historical tax loss carryforwards used to offset income tax and social contribution payable. Included in the balance at September 30, 2007 are approximately US$ 13 million of tax positions for which there is uncertainty as to the timing of such benefits. As a result of deferred tax accounting, the disallowance of a shorter benefit period would not affect the annual effective tax rate but could accelerate the payment of cash to the taxing authority to an earlier period.

The Company recognizes interest and penalties accrued on unrecognized tax benefits as a component of interest expense and other non-operating expenses, respectively. The Company has recorded US$ 64,032 of accrued interest and penalties associated with unrecognized tax benefits at September 30, 2007, recorded as a component of other long-term liabilities. As a consequence of adopting FIN 48 and consistent with the Company’s classification of interest and penalties, the corresponding interest and penalties of US$ 47,996 accrued at December 31, 2006 with respect to the previously recorded liabilities associated with unrecognized tax benefits have also been reclassified from the litigations, contingencies and commitments line to the line of interest and penalties on liabilities associated with unrecognized tax benefits , in the long-term liabilities. The Company recognized approximately US$ 2,666 and US$ 7,622 in accrued interest for the three and nine months ended September 30, 2007, respectively (US$ 2,961 and US$ 9,252 for the three and nine months ended September 30, 2006, respectively).

31


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

The Company or its subsidiaries file income tax returns in Brazil and in other foreign federal and state jurisdictions. Generally, the tax years 2002 through 2006 remain open and subject to examination by the relevant tax authorities.

11      Derivative instruments and risk management activities
 
  The Company’s foreign currency risk and interest rate management strategy may use derivative instruments to protect against foreign exchange and interest rate volatility.
 
  During the three-month and nine month periods ended September 30, 2007 the Company has recognized, as financial income, gains of US$ 24.3 million and US$ 79.3 million, respectively (for the three-month and nine month-month periods ended September 30, 2006 - US$ 8.6 million and US$ 73.4 million, respectively) on foreign currency derivative instruments registered in BM&F - Brazilian Mercantile & Futures Exchange.
 
  It also has recognized, under financial income, losses of US$ 26.6 million and US$ 9.2 million on interest rate derivative instruments registered in BM&F - Brazilian Mercantile & Futures Exchange for the three-month and nine-month periods ended September 30, 2007, respectively (there were no such derivative instruments for the three-month and nine-month periods ended September 30, 2006, respectively). These are marked to market on a daily basis, and at September 30, 2007 the fair value of these contracts were reported as a liability of US$ 1.3 million (December 31, 2006: US$1.4 million liability).
 
  During the three-month and nine month periods ended September 30, 2007 the Company recognized, gains of US$ 18.9 million and US$ 22.1 million, respectively, on swap transactions (TJLP or interest long-term rate against Dollar). There were no such derivative instruments for the three-month and nine-month periods ended September 30, 2006, respectively. As of September 30, 2007, the notional amounts of these swaps totaled US$ 315.3 million.
 
12      Segment information
 
  The Company has adopted SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) with respect to the information it presents about its operating segments and geographical information. SFAS 131 introduces a “management approach” concept for reporting segment information, whereby financial information is required to be reported on the same basis that the top decision-maker uses such information internally for evaluating segment performance and deciding how to allocate resources to segments. The Company has determined that its operation has only one segment - pulp. Sales by geographic area are determined based on the location of the customers.
 

32


Aracruz Celulose S.A.

Notes to Condensed Consolidated Interim Financial Statements
(Expressed in thousands of United States dollars, unless otherwise stated)
(Unaudited)

The Company's exports from Brazil, classified by geographic destination, are as follows:

    Three-month period   Nine-month period
    ended September 30   ended September 30
    2007   2006   2007   2006
North America   174,008   171,689   520,156   476,033
Europe   215,674   169,658   608,742   522,445
Asia   95,162   121,721   311,258   323,001
Other   107   5,801   3,234   14,726
Total   484,951   468,869   1,443,390   1,336,205

In the three-month and nine-month periods ended September 30, 2007, two unaffiliated customers accounted for 32% and 14% and 30% and 15% of net sales (30% and 20% and 30 % and 16% for the three-month and nine-month periods ended September 30, 2006, respectively). No other individual customers represented more than 10% of net sales.

 

*                        *                     *

33

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: October 9, 2007

ARACRUZ CELULOSE S.A.
By: /s/ Carlos Augusto Lira Aguiar
Name: Carlos Augusto Lira Aguiar
Title: Chief Executive Officer


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