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The Company has been involved in an administrative claim regarding the enlargement of Indian
reservations in an area owned by the Company. In April 1998, the Indian communities signed
two Terms of Settlement recognizing the legitimacy of the Ministry of Justice Edicts 193, 194
and 195, dated March 6, 1998, that restricted expansion of the reservation to 2,571 hectares
of land belonging to the Company. Additionally, the Company committed itself to a financial aid
program to be implemented through social, agricultural, educational, shelter and health projects,
up to an amount of approximately R$ 13.5 million (equivalent to U.S.$ 6.9 million at December
31, 2000), 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, 2000, the Company had donated to the Indian Associations approximately R$
2.6 million (U.S.$ 1.8 million) (U.S. $ 445 in 2000) under the Terms of Settlement.

Aracruz Celulose S.A.

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

(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, 2000, the Company is contesting this notification and has
placed approximately U.S.$ 9,942 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 Verão

In December 1994, the Company petitioned the Tribunal Regional Federal da 2ª região (the
“Tribunal”) to include in the determination of income tax and social contribution the IPC
difference in January 1989 of 70.28%. The Tribunal subsequently accepted the use of 42.72%.
Beginning in the third quarter of 2000 with the substantial utilization of the Company's net
operating losses in Brazil, the Company began remitting income tax using the 42.72% deduction
and has included a provision for contingencies of U.S.$ 20,362.

(v) PIS and COFINS contributions

The Company is questioning in Court certain changes in the rates and rules for the calculation of
the PIS and COFINS contributions determined by Law 9718/98. The Company recorded a
provision in the amount of U.S.$ 26,981 in relation to these contributions, which it believes is
sufficient to cover any possible loss which could arise from this case.

(vi) Others

The Company has, based on the advice of its legal counsel, recorded additional provisions in
the amount of U.S.$ 4,690 relating to several other legal disputes and has also made deposits in
the amount of U.S.$ 6,003 in escrow accounts.
(b) “Take-or-pay” contract

In connection with the sale of the electrochemical plant (see Note 2), the Company and
CanadianOxy Chemicals Holding Ltd. (CXY) 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 CXY a volume of chemical products
conservatively projected for the next 6 years. 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.
Aracruz Celulose S.A.

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

(c) Compliance with Regulations

The Company™s forestry and manufacturing operations are subject to both Federal and State
government environmental regulations. The Company™s management believes that it is in
compliance, in all material respects, with all applicable environmental regulations.

17 Derivative Instruments, Hedging and Risk Management Activities

The Company is engaged in the exportation of market pulp to various markets throughout the
world. Management considers the Company™s functional currency to be the U.S. dollar and
approximately 22% of the Company™s indebtedness was Real-denominated, consisting of loans
bearing interest at variable rates. These activities expose the Company to credit and foreign
currency fluctuation risks, as well as risks associated with the effects of changes in floating
interest rates. The Company maintains an overall risk management strategy to minimize
significant unplanned fluctuations caused by foreign exchange rate volatility.

The Company™s Treasury assesses, at least on a weekly basis, macroeconomic issues and the
implications of these issues on the Company™s financial performance. The Treasury reports to
the Chief Financial Officer. The responsibilities of the Treasury includes the proposal of the
Company™s corporate risk management policy and its implementation, and the evaluation of the
effectiveness of the Company™s overall risk management strategy.

The Company may use derivative and non-derivative instruments to implement its overall 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. The
Company does not hold or issue financial instruments for trading purposes.

(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 may use foreign currency forward-exchange contracts,
foreign currency swaps and forward currency options contracts to implement this strategy.

Aracruz Celulose S.A.

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

At December 31, 2000, the Company had entered into five forward foreign-exchange contracts
to protect its foreign currency denominated accounts receivable and bank balances against
exchange rate movements in the aggregate amount of EUR 3,103 thousand (1999 “ EUR
23,840 thousand), equivalent in aggregate to U.S.$ 2,885 (1999 “ U.S.$ 24,173). The
contracts expire in January, February and March 2001. The Company realized a net loss in
2000 associated with its forward foreign exchange contracts of U.S.$ 227 (1999 “ U.S.$

Additionally, the Company has been investing substantially all of its financial resources in long-
term U.S. dollar denominated or U.S. dollar indexed available-for-sale debt securities to
protect against the exchange risk of a devaluation of the Brazilian real in relation to the U.S.

(b) Interest Rate Risk Management

The Company´s strategy for interest rate management has been to maintain a diversified
portfolio of 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, 2000 the Company had no outstanding interest rate swap

(c) Commodity Price Risk Management

The Company is exposed to commodity price risks through the fluctuation of pulp prices. The
Company currently does not utilize derivative financial instruments to manage its exposure to
fluctuations in commodity prices, but may utilize them in the future.

18 Nonderivative financial instruments

Fair value - the Company considers that the carrying amount of its financial instruments
generally approximates fair market value. Fair value have been determined as follows:

Cash - the carrying amount of cash is a reasonable estimate of its fair value.

Cash equivalents and short-term investments and bank deposits - cash equivalents are
represented, principally, by short-term investments. Their fair value, and that of other bank
deposits not meeting the definition of cash equivalents, were estimated using the rates currently
offered for deposits of similar remaining maturities.

Aracruz Celulose S.A.

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

Debt securities - the fair value of the Company's debt securities 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.
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.

19 Geographical information

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

Year ended December 31,

1998 1999 2000

North America 181,439 252,078 267,859
Europe 193,608 194,640 368,992
Asia 83,472 94,847 109,122
Other 3,644 9,164 5,927

Total 462,163 550,729 751,900

Sales to one unaffiliated customer represented 25% of net sales in 2000, sales to one
unaffiliated customer represented 26% in 1999 and 2 unaffiliated customers represented 30% in
1998. Sales to no other individual customers represented more than 10% of net sales.

Aracruz Celulose S.A.

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

20 Related parties
Transactions with related parties resulted in the following balance sheet and income statement

December 31,

1999 2000

Assets Liabilities Assets Liabilities
Balance sheet
Current assets
Cash and cash equivalents 35 2
Accounts receivable 5,892 9,530
Current liabilities “ suppliers
Long-term debt (including
current portion and accrued
finance charges) 242,847 171,133

5,927 242,847 9,532 171,133

Year ended December 31,

1998 1999 2000

Income Expense Income Expense Income Expense
Income statement
Operating revenues 34,108 36,855 44,555
Financial expenses 25,304 78,168 14,152

34,108 25,304 36,855 78,168 44,555 14,152

Aracruz Celulose S.A.

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

21 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

Allowances deducted from
related balance sheet
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

Allowances deducted from
related balance sheet
Accounts receivable 112 400 22 490
Inventories 3,522 3,522
Investments (other assets -
other) 802 1 801
Property, plant and
equipment, net 18,591 1,573 20,164
Deferred income tax 75,068 36,307 38,761

Allowances deducted from
related balance sheet
Accounts receivable 122 10 112
Inventories 3,485 1,664 1,627 3,522
Investments (other assets -
other) 802 802
Property, plant and
equipment, net 6,500 12,098 7 18,591
Deferred income tax 83,625 8,557 75,068

* * *



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