20-F 1 vc8675.htm FORM 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

o	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, 2006

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	OR

o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15018

Votorantim Celulose e Papel S.A.

(Exact name of Registrant as specified in its charter)

Votorantim Pulp and Paper Inc.

(Translation of Registrant’s name into English)

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

Alameda Santos, 1357, 6^th floor

01419-908, São Paulo, SP, 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:
Preferred Shares, without par value		New York Stock Exchange*
American Depositary Shares (as evidenced		New York Stock Exchange
by American Depositary Receipts), each
representing one share of Preferred Stock


*	Not for trading purposes but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those preferred shares.

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

The number of outstanding shares of each class of stock of Votorantim Celulose e Papel S.A. as of December 31, 2006.

105,702,452		Shares of Common Stock
98,443,055		Shares of Preferred Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17

Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

	o	Yes		x	No

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 VCP	14

ITEM 4A. UNRESOLVED STAFF COMMENTS	45

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	45

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	69

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	76

ITEM 8. FINANCIAL INFORMATION	78

ITEM 9. THE OFFER AND LISTING	83

ITEM 10. ADDITIONAL INFORMATION	87

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	98

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	102

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	102

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	102

ITEM 15. CONTROLS AND PROCEDURES	102

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	103

ITEM 16B. CODE OF ETHICS	103

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	103

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	104

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	104

PART III

ITEM 17. FINANCIAL STATEMENTS	105

ITEM 18. FINANCIAL STATEMENTS	105

ITEM 19. EXHIBITS	105

INTRODUCTION

All references in this annual report to:

	•	“VCP,” “we,” “our” and “us” are to Votorantim Celulose e Papel S.A. and its consolidated subsidiaries (unless the context otherwise requires);

	•	“Votorantim group” are to the group of companies, including VCP, controlled by the Ermírio de Moraes family;

	•	“Votorantim Participações S.A.”, or “VPAR”, is our immediate parent company and the holding company of the Votorantim Group “VPAR”, controls three areas of the Group’s business: Votorantim Industrial, Votorantim Finance and Votorantim New Businesses, each of them containing one or more business units;

	•	“BNDESPAR” are to BNDES Participações S.A. – BNDESPAR, a wholly owned subsidiary of BNDES, the Brazilian economic and social development bank owned by the Brazilian federal government;

	•	“Nova” are to Nova HPI Participações Ltda., a company of the Votorantim group;

	•	“the Ermírio de Moraes family” are to the families of Antonio Ermírio de Moraes, Ermírio Pereira de Moraes, Maria Helena de Moraes Scripilliti and José Ermírio de Moraes (in memoriam);

	•	the “Brazilian government” are to the federal government of the Federative Republic of Brazil;

	•	“real,” “reais” or “R$“ are to Brazilian reais, the official currency of Brazil;

	•	“US$,” “dollars” or “U.S. dollars” are to United States dollars;

	•	“ton” are to one metric ton (1,000 kilograms). One kilogram equals approximately 2.2 pounds;

	•	“BEKP” are to bleached eucalyptus kraft pulp;

	•	“ADSs” are to our American Depositary Shares, each one of our ações preferenciais, or preferred shares;

	•	“CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities commission;

	•	“Brazilian GAAP” are to accounting practices adopted in Brazil, which are based on Brazilian corporate law (Law No. 6,404 of December 15, 1976, as amended by Law No. 10,303 of October 1, 2001, as amended), the rules and regulations of the CVM, and the accounting standards issued by the Instituto dos Auditores Independentes do Brasil, the Brazilian Institute of Independent Accountants, or IBRACON; and

	•	“Commission” are to the Securities and Exchange Commission.

As used in this annual report, one hectare equals approximately 2.471 acres and one kilometer equals approximately 0.621 miles. References in this annual report to nominal production capacity or production capacity mean annual projected capacity for which the facility was designed, with the facility operating under optimal conditions, 24 hours a day, for 365 days a year and subject to reductions in rates of production for scheduled maintenance only. Actual production capacity will vary depending on operating conditions, the grades of pulp or paper produced and other factors.

The commercial selling rate is used in this annual report rather than the noon buying rate in New York City as reported by the Federal Reserve Bank of New York because the noon buying rate was not consistently reported for reais during the periods shown in this annual report. See “Item 3—Key Information—Selected Financial Data—Exchange Rates” for information regarding exchange rates applicable to the Brazilian currency since 2002.

We have prepared our consolidated financial statements included in this annual report in conformity with generally accepted accounting principles in the United States, or U.S. GAAP. Our reporting currency in this annual report for all periods is the U.S. dollar.

We make statements in this annual report about our competitive position and market share in, and the market size of, the pulp and paper 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 BRACELPA — Associação Brasileira de Celulose e Papel (the Brazilian Association of Pulp and Paper), and Valois Vision, which is a monthly report on the pulp markets. 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.

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements, principally in “Item 3D—Key Information—Risk Factors,” “Item 4B—Information on VCP—Business Overview” and “Item 5—Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current expectations about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:

	•	general economic, political and business conditions, both in Brazil and in our principal export markets;

	•	changes in market prices, customer preferences, competitive conditions and general level of demand for our products;

	•	our management’s expectations and estimates concerning future financial performance, financing plans and the effects of competition;

	•	our level of debt;

	•	anticipated trends in the pulp and paper industry, including changes in capacity and industry price movements;

	•	our capital expenditure plans;

	•	changes in currency exchange rates;

	•	our ability to produce and deliver our products on a timely basis;

	•	existing and future governmental regulation, including environmental laws, tariffs on pulp and paper imports and import tax policies in Brazil;

	•	our ability to successfully undertake or complete expansion projects and to manage the engineering, construction and regulatory challenges and costs involved in such projects; and

	•	other risk factors as set forth under “Item 3D—Key Information—Risk Factors.”

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

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

We maintain our books and records in reais, which are the basis for our statutory financial statements, prepared as prescribed under Law No. 6,404/76, as amended, known as the Brazilian corporate law, and used to determine income taxes and mandatory minimum dividend calculations. The statutory financial statements (not included in this annual report) are prepared in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on the Brazilian corporate law, the rules and regulations of the CVM, and the accounting standards issued by the Instituto dos Auditores Independentes do Brasil, the Brazilian Institute of Independent Accountants, or IBRACON. We have also prepared consolidated balance sheets at December 31, 2006 and 2005 and the related consolidated statements of income, cash flows and changes in shareholders’ equity for the years ended December 31, 2006, 2005 and 2004, all stated in U.S. dollars in accordance with U.S. GAAP. Our U.S. GAAP financial statements are included in this annual report. The selected financial information at and for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 are derived from our U.S. GAAP financial statements audited by PricewaterhouseCoopers Auditores Independentes, São Paulo, Brazil.

The following table presents a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our financial statements, including the notes thereto, included elsewhere in this annual report.

	For the Years Ended December 31,

	2006			2005			2004			2003			2002

		(U.S. dollars in millions, unless otherwise indicated)
STATEMENT OF INCOME DATA
Net operating revenue:
Domestic sales	US$	685		US$	564		US$	512		US$	443		US$	410
Export sales		632			566			498			373			199

Total net sales		1,317			1,130			1,010			816			609
Operating costs and expenses:
Cost of sales		813			654			518			421			329
Selling, marketing, general and administrative		199			193			161			115			88
Other operating expenses, net		20			36			6			12			15

Total		1,032			883			685			548			432

Operating profit		285			247			325			268			177

Non-operating income (expenses):
Financial income (expenses), net		18			(40	)		(29	)		(6	)		14
Foreign exchange gain (losses), net		(4	)		(5	)		12			(14	)		(11	)
Total		14			(45	)		(17	)		(20	)		3

Income before income tax and equity in results of affiliates		299			202			308			248			180
Income tax (expense) benefit		(4	)		8			(36	)		(23	)		10

Income before equity in results of affiliates		295			210			272			225			190
Equity in earnings (losses) of affiliates		77			54			31			19			(121	)

Net income	US$	372		US$	264		US$	303		US$	244		US$	69

Net income applicable to preferred stock		188		US$	124		US$	143		US$	115		US$	32
Net income applicable to common stock		184			140			160			129			37

Net income	US$	372		US$	264		US$	303		US$	244		US$	69

Basic earnings per share (in U.S. dollars):⁽¹⁾
Preferred	US$	1.97		US$	1.46		US$	1.67		US$	1.34		US$	0.38
Common		1.79			1.33			1.51			1.22			0.35
Weighted average number of shares outstanding (in thousands):
Preferred		92,240			85,451			85,773			85,510			85,107
Common		105,702			105,702			105,702			105,702			105,702
Dividends per share (in U.S. dollars):⁽²⁾
Preferred	US$	0.80		US$	0.45		US$	0.58		US$	0.22		US$	0.19
Common		0.72			0.41			0.52			0.20			0.17

	As at December 31,

	2006		2005		2004		2003		2002

	(U.S. dollars in millions)
BALANCE SHEET DATA
Cash and cash equivalents	US$	405	US$	261	US$	151	US$	290	US$	90
Available for sale securities		365		446		—		—		—
Held-to-maturity investments⁽³⁾				—		278		303		320
Property, plant and equipment, net		1,945		1,758		1,443		1,202		907
Investment in affiliates, including goodwill		900		596		249		245		218
Total assets		4,404		3,731		2,644		2,468		1,918
Short-term debt⁽⁴⁾		242		132		79		48		66
Long-term debt, including current portion		1,299		1,364		866		1,098		973
Shareholders’ equity		2,275		1,737		1,498		1,185		767

	For the Years Ended December 31,

	2006			2005			2004			2003			2002

	(U.S. dollars in millions, except for percentages)
OTHER FINANCIAL DATA
Gross margin		38.3	%		42.1	%		48.7	%		48.4	%		46.0	%
Operating margin		21.6	%		21.9	%		32.2	%		32.8	%		29.1	%
Capital expenditures⁽⁵⁾		248			247			218			165			317
Acquisition of interest in equity affiliate⁽⁶⁾		36			275			—			—			—
Goodwill impairment in investee⁽⁷⁾		—			—			—			—			136
Depreciation and depletion		193			117			89			72			51
Cash flow provided by (used in):
Operating activities		382			234			277			238			185
Investing activities		(113	)		(626	)		(170	)		(97	)		(260	)
Financing activities		(107	)		505			(258	)		39			36

	For the Years Ended December 31,

	2006		2005		2004		2003		2002

OPERATIONAL DATA
Number of employees (at year end)		3,498		3,620		3,624		3,702		3,848
Nominal production capacity (thousand metric tons):
Pulp		1,480		1,400		1,400		1,150		850
Paper		640		635		610		580		580
Sales volumes (thousand metric tons):		1,611		1,493		1,459		1,175		906
Domestic market:		591		506		515		477		521
Market pulp		109		80		80		77		82
Paper		482		426		435		400		439
Printing and writing		371		331		338		313		353
Other specialty papers⁽⁸⁾		111		95		97		87		86
International market:		1,020		987		944		698		385
Market pulp		832		787		764		530		253
Paper		188		200		180		168		132


(1)	Based on the weighted average number of shares outstanding for each period. Following the reverse stock split of our shares and ADSs on October 18, 2004, we have retrospectively adjusted all shares and ADS data to reflect the reverse split. For additional information on earnings per share, see Note 2(l) to our consolidated financial statements and “Item 5A—Operating Results.”
(2)	Dividends paid per shares in U.S. dollars. Dividends per share were adjusted to reflect the reverse stock split that occurred in October 2004.
(3)	Includes current and non-current portions.
(4)	Excludes current portion of long-term debt.
(5)	Represents cash expenditures for acquisition of property, plant and equipment, excluding the investment in Aracruz Celulose S.A.
(6)	Includes the excess of the cost of investment over the underlying fair value of net assets on the acquisition of a 23.03% indirect interest in Ripasa S.A. Celulose e Papel (Ripasa) in 2005 for US$275 million. In July 2006, VCP disbursed an additional US$36 million to Ripasa minority preferred shareholders in settlement of their claims challenging Ripasa’s corporate restructuring. In May, 2006, shareholders of VCP, Suzano, Ripasa and Ripar approved the corporate restructuring that allowed Ripasa’s minority preferred shareholders to exchange their interests in Ripasa for VCP and Suzano shares, thus increasing VCP’s capital increased by US$168 million.
(7)	Pursuant to Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investment in Common Stock,” we reduced the carrying value of our investment in Aracruz Celulose S.A. to quoted market value at December 31, 2002. This impairment provision of US$136 million (gross of deferred income tax effects of US$46 million) was charged directly to income (“Equity loss of investee”).
(8)	Includes sales of thermal and carbonless papers, sales of third-party products by KSR and sales of specialty papers produced at the Mogi das Cruzes mill, such as label papers, finish foil, soap wrapping papers, etc.

Exchange Rates

On March 4, 2005, the National Monetary Council (CMN) of the Brazilian Central Bank issued resolutions 3265 and 3266 setting forth important modifications to the Brazilian exchange market. Changes turned the Brazilian exchange market into a more flexible one and, consequently, made the Brazilian market more competitive. The main changes set forth by the two resolutions can be summarized as follows:

Both Brazilian foreign exchange markets, the floating rate exchange market (Mercado de Câmbio de Taxas Flutuantes) and free rate exchange market (Mercado de Câmbio de Taxas Livres), were unified into a unique exchange market. The free rate exchange market was used mainly for import and export transactions and foreign investment, while the floating rate exchange market was mainly used for transfers of funds from or to Brazil.

Most trade and financial foreign-exchange transactions, including transactions relating to the purchase or sale of preferred shares or the payment of dividends with respect to preferred shares or ADSs, were carried out on the commercial market at the applicable commercial market rate. Purchase of foreign currencies in the commercial market could only be carried out through a Brazilian bank authorized to buy and sell currency in that market. In both markets, rates are freely negotiated but could be strongly influenced by intervention by the Brazilian Central Bank, or the Central Bank.

In 2002, the real depreciated by 34% against the U.S. dollar. In 2003, 2004, 2005 and 2006 the real appreciated 22%, 9%, 13% and 9%, respectively against the US dollar. Resolution No. 3,265 by the National Monetary Council, dated March 4, 2005, consolidated the foreign exchange markets into one single exchange market, effective as of March 14, 2005. According to this Resolution, all foreign exchange transactions must be carried out through institutions authorized to operate in the consolidated market and are subjected to registration with the Central Bank’s electronic registration system. Foreign exchange rates continue to be freely negotiated. As of December 31, 2006, the commercial market rate for purchasing U.S. dollars was R$ 2.1380 to US$ 1.00. We cannot assure you that the real will not devalue or appreciate substantially in the near future. See “Item 5—Operating and Financial Review and Prospects—Overview—Brazilian Economic Environment.”

The following table shows the commercial selling rate for U.S. dollars for the periods and dates indicated.

	*Exchange Rate of Reais* per US$ 1.00**

Year Ended December 31,	Low		High		Average⁽¹⁾		Period-end

2002		2.2709		3.9552		2.9203		3.5333
2003		2.8219		3.6623		3.0775		2.8892
2004		2.6544		3.2051		2.9263		2.6544
2005		2.1633		2.7621		2.4357		2.3407
2006		2.0586		2.3711		2.1751		2.1380

*Exchange Rate of Reais* per US$ 1.00 - Month Ended**	Low		High

July 31, 2006		2.1646		2.2130
August 31, 2006		2.1329		2.1905
September 30, 2006		2.1282		2.2188
October 31, 2006		2.1331		2.1676
November 30, 2006		2.1353		2.1870
December 31, 2006		2.1380		2.1693


Source: Central Bank.
(1)	Represents the daily average exchange rate during each of the relevant periods.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

We are subject to various risks resulting from changing competitive, economic, political and social conditions that could harm our business, results of operations or financial condition. The risks described below are not the only ones we face.

Risks Relating to VCP and the Pulp and Paper Industry

The market prices for our products are cyclical.

The prices we are able to obtain for our products depend on prevailing world prices for market pulp and paper. World prices have historically been cyclical and subject to significant fluctuations over short periods of time depending on a number of factors, including:

	•	worldwide demand for pulp and paper products;

	•	worldwide production capacity and inventories;

	•	the strategies adopted by major pulp and paper producers; and

	•	the availability of substitutes for our products.

All of these factors are beyond our control. Over the last three years, bleached eucalyptus kraft pulp (BEKP) or market pulp prices in the United States, Europe and Asia, respectively, have fluctuated from lows of US$ 525, US$ 490, and US$ 440 per ton in the first quarter of 2004, to highs of US$ 715, US$ 680, and US$ 650 per ton at December 30, 2006 in these respective regions. Such price fluctuations occur not only year to year but also within a year as a result of global and regional economic conditions, and supply and demand. The price of paper products, although less volatile than the price of pulp, also experiences fluctuations in response to global demand and production and fluctuations in pulp prices. Capacity adjustments have also occurred on the paper side, and in the first half of 2006 we saw paper prices increasing for several grades in the United States and Europe. For uncoated woodfree papers, international prices climbed 15% in the first six months of 2006 but declined approximately 5% in the last quarter of the year. For a more detailed discussion of prices of pulp and paper, see Item 4.B “Information on VCP – Business Overview – Cyclical nature of world pulp prices.”

It is possible that the market prices for pulp and paper 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.

A slowdown in demand in China may adversely affect our exports.

China has been an increasingly important market to us since the expansion of our pulp exports in 2002. According to the Pulp and Paper Products Council (PPPC) the demand for chemical and market pulp in China grew to about 7.5 million tons in 2006, a 10% increase over 2005, and represented 15% of the world pulp demand in 2006, compared to approximately 2% in 1995. China currently represents approximately 15% of our total export volume and 14% of our total sales volume, including the volume originated from Ripasa. There is no assurance that demand by China for pulp will continue its current pace of growth in the future or that China will continue to constitute a significant part of our exports. A decline in demand by China for our products could adversely affect our exports and, therefore, our financial results.

We face significant competition in some of our lines of business, which may adversely affect our market share and profitability.

The pulp and paper industry is highly competitive. Competitive features within the industry include the following:

	•	in the domestic paper market, we face competition from larger international companies that have greater ability to support strategic expenditures directed to increase market share; and

	•	in the international pulp and paper markets, we compete with larger competitors that have greater financial strength and higher production capacities.

Traditionally, imports of pulp and paper have not provided substantial competition for us in Brazil due to, among other factors, logistical costs, tariff rates and exchange rates on those products. If the Brazilian government decreases import tariffs, we may face a sudden increase in competition in the domestic market by foreign producers.

In addition, most markets are served by several suppliers, often from different countries. Many factors influence our competitive position, including mill efficiency and operating rates and the availability, quality and cost of wood, energy, water, chemicals and labor, and exchange rate fluctuations. See “Item 3D—Risks Relating to Brazil-- Exchange rate instability may adversely affect our financial condition and results of operations and the market price of our preferred shares and ADSs.” Some of our competitors have greater financial and marketing 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. In addition, downward pressure on the prices of pulp and paper by our competitors may affect our profitability.

Delays in the expansion of our facilities or in building new facilities may affect our costs and results of operations.

As part of our strategy to increase our international market share and improve our competitiveness through greater economies of scale, we may expand or build one or more production facilities. The expansion or construction of a production facility involves various risks. These risks include engineering, construction, regulatory and other significant challenges that may delay or prevent the successful operation of the project or significantly increase our costs. Our ability to complete successfully any expansion or new construction project on time is also subject to financing and other risks.

	We may be adversely affected because:

	•	we may not be able to complete any expansion or new construction project on time or within budget;

	•	our new or modified facilities may not operate at designed capacity or may cost more to operate than we expect; and

	•	we may not be able to sell our additional production at attractive prices.

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.

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.

In addition, environmental laws and regulations in certain countries may be more stringent than the ones we are subject to in Brazil, which may lead to such countries imposing trade related sanctions against Brazil or our industry. Furthermore, our inability to comply with more stringent foreign environmental laws and regulations may prevent us from seeking lower cost financing from foreign governmental related or multilateral development organizations, which may condition future financing on our compliance with more stringent environmental laws and regulations.

Our insurance coverage may be insufficient to cover our losses, especially in cases of damage to our forests.

Our insurance may be insufficient to cover losses that we might incur. We have comprehensive insurance with leading insurers to cover damages to our mills caused by fire, general third-party liability for accidents and operational risks and international and domestic transportation. However, we do not maintain insurance coverage against fire, disease and other risks to our forests. The occurrence of losses or other damages not covered by insurance or that exceed our insurance limits could result in significant unexpected additional costs.

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:

	•	we could fail to successfully integrate the operations, services and products of any acquired company;

	•	we could fail to select the best partners or fail to effectively plan and manage any alliance strategy;

	•	the acquisitions could increase our costs;

	•	our management’s attention could be diverted from other business concerns; and

	•	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 and paper 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. See “Item 4A—Information on VCP—History and Development of VCP.”

We are controlled by a defined group of individuals who have the power to control all our subsidiaries and us.

We are controlled by the Ermírio de Moraes family, which indirectly controls all of our outstanding common voting shares. Consequently, our controlling shareholders have the power to control us and all of our subsidiaries, including the power to:

	•	elect our directors; and

	•	determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and dispositions and the timing and payment of any future dividends.

We currently engage in, and expect in the future to engage in, commercial and financial transactions, from time to time, with our controlling shareholders or their affiliates. Commercial and financial transactions between our affiliates and us create the potential for, or could result in, conflicts of interests. For a discussion of certain related party transactions, see “Item 7—Major Shareholders and Related Party Transactions—Related Party Transactions.”

We rely on third parties for some of our technology.

We rely on third parties for the technology that we use to make some of our value-added paper products. For example, Oji Paper of Japan has granted us the right to use its technology to manufacture and sell certain thermal papers in Brazil and to sell these products in some other countries. If a third-party licensor of technology that we use refused to continue licensing its technology to us, our results of operations could be adversely affected.

Various other risks could have a material adverse effect on our financial results.

Our operations are subject to various other risks affecting our forests and manufacturing processes, including fire, drought, disease, climate changes, strikes, post closings, shipping costs, electrical failures and factory explosions, which could have a material adverse effect on our financial results.

Risks Relating to Brazil

Brazilian economic and political conditions and perceptions of these conditions in the international market have a direct impact on our business and the market price of our preferred shares and ADSs.

Our operations are conducted in Brazil, and in 2006 we sold approximately 37% of our products in terms of volume to Brazilian customers. Accordingly, our financial conditions and results of operations are substantially dependent on economic conditions in Brazil. Brazil’s gross domestic product grew by 4.9% in 2004, 2.3% in 2005 and about 2.8% in 2006, but we cannot assure you that gross domestic product will increase or remain stable in the future. Future developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, the consumption of pulp and paper. As a result, these developments could impair our business strategies, financial condition or results of operations.

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 affect 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:

	•	currency fluctuations;

	•	inflation;

	•	price instability;

	•	energy policy;

	•	interest rates;

	•	tax policy; and

	•	other political, diplomatic, social and economic developments in or affecting Brazil.

Historically, the political scenario has influenced the performance of the Brazilian economy. In the past, political crises have affected the confidence of investors and the general public, which resulted in economic deceleration and affected the trading prices of common shares issued by companies listed on the stock exchange. In October 2006, elections were held in all states of Brazil and at the federal level to elect new state governors and reelect the President. President Luis Inacio Lula da Silva was reelected. We cannot predict whether the government will continue the policies of the previous administration or will pursue different policies, whether these new policies, if implemented, will be effective, 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, financial condition, results of operations or prospects 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, in the past, experienced extremely high rates of inflation. More recently, according to the Índice Geral de Preços-Disponibilidade Interna, or IGP-DI, a general price inflation index, the Brazilian general price inflation rates were 12%, 1% and 4% in 2004, 2005 and 2006, respectively. Inflation itself and certain governmental measures to combat inflation in the past have had significant negative effects on the Brazilian economy. Our cash costs and operating expenses are substantially all 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. If either the rate of Brazilian inflation increases more rapidly than any 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 will 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—Overview—Brazilian Economic Environment.”

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 significant portion of our revenues and assets is 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 “Item 3—Key Information—Selected Financial Data—Exchange Rates.”

Our production costs and operating expenses are substantially all in reais and will generally decrease, as expressed in U.S. dollars, as a result of any devaluation of the real. If either the rate of Brazilian inflation increases more rapidly than the rate of appreciation of the U.S. dollar against the real or the rate of appreciation of the U.S. dollar against the real increases more rapidly then the rate of the Brazilian inflation. then, as expressed in U.S. dollars, our operating expenses may increase and (assuming constant U.S. dollar sales prices) our profit margins will decrease. In addition, any significant devaluation of the real may produce exchange losses on unhedged debt denominated in foreign currency.

In 2004 the real appreciated an additional 9% against U.S. dollar due to the positive results in the Brazilian trade balance, positive finance inflow (due to high interest rate), lower external vulnerability and the weakness of the U.S. dollar against other currencies. For the same reasons, we witnessed another 13% appreciation of the real against the U.S. dollar during 2005 and another 9% during 2006.

The Central Bank has intervened occasionally to control unstable movements in the foreign exchange rate. We cannot 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, nor can we predict what impact such an event might have on our financial condition or results of 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 our ADSs and the market price of our preferred shares and ADSs.

Developments in other markets may adversely affect the market price of our preferred shares and ADSs.

The market for securities backed 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 in such countries may differ significantly from economic conditions in Brazil, the reaction of investors to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. 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. Crises in other emerging market countries may hamper investor enthusiasm for securities of Brazilian issuers, including ours. This could adversely affect the trading price of the ADSs and our preferred shares and could also make it difficult for us to access the capital markets and finance our operations in the future on acceptable terms, or at all.

In addition, recent speculation about future increases in U.S. interest rates has created volatility in the emerging markets. Future increases in U.S. interest rates may adversely affect the market price of 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 our ADSs.

You may be adversely affected if the Brazilian government imposes restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and, as it has done in the past, on the conversion of the real into foreign currencies. These restrictions could hinder or prevent the conversion of dividends, distributions or the proceeds from any sale of preferred shares or ADSs, as the case may be, into U.S. dollars and the remittance of U.S. dollars abroad. We cannot assure you that the government will not take this type of or similar measures in the future. Holders of our ADSs could be adversely affected by delays in, or a refusal to grant, any required governmental approval for conversion of real payments and remittances abroad in respect of the preferred shares, including the preferred shares underlying the ADSs. In such a case, our ADS depositary will distribute reais or hold the reais it cannot convert for the account of the ADS holders who have not been paid.

Exchanging ADSs for the underlying preferred shares may have unfavorable consequences.

The Brazilian custodian for the preferred shares 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 preferred shares and sales proceeds related thereto. If you decide to exchange your ADSs for the underlying preferred shares, you will be entitled to continue to rely, for five business days from the date of exchange, on the ADS depositary’s electronic certificate of registration. Thereafter, you may not be able to obtain and remit U.S. dollars or other foreign currencies outside Brazil upon the disposition of the preferred shares, or distributions relating to the preferred shares, and you will generally be subject to less favorable tax treatment on gains with respect to the preferred shares, unless you obtain your own electronic certificate of registration with the Central Bank, under Resolution No. 2,689 of January 26, 2000 of the National Monetary Council, which entitles foreign investors to buy and sell on the Brazilian stock exchanges. 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 CVM. In order to complete this process, the investor will need to appoint at least one representative in Brazil with powers to perform certain actions relating to the foreign investment and will usually need to have a consultant or an attorney who has expertise in Central Bank and CVM regulations. These expenses or delays could adversely impact your ability to receive dividends or distributions relating to the preferred shares or the return of your capital in a timely manner. If you decide to exchange your preferred shares back into ADSs once you have registered your investment in the preferred shares, you may deposit your preferred shares with the custodian and rely on the ADS depositary’s electronic certificate of registration, subject to certain conditions. We cannot assure you that the ADS depositary’s electronic 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 restrictions applicable to you, the disposition of the underlying preferred shares or the repatriation of the proceeds from disposition could not be imposed in the future. See “Item 8—Financial Information—Dividend Policy and Dividends—Payment of dividends.”

The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our preferred shares or ADSs.

Investments in securities, such as the preferred shares 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. Accordingly, the ability of the holders to sell the preferred shares underlying the ADSs at a price and time at which holders wish to do so may be substantially limited. The São Paulo Stock Exchange (Bolsa de Valores de São Paulo), or BOVESPA, the main Brazilian stock exchange, had a market capitalization of approximately US$ 723 billion as of December 31, 2006, and an average daily trading volume of approximately US$ 420 million, US$ 667 million and US$ 1.1 billion in 2004, 2005 and 2006, respectively. In comparison, the New York Stock Exchange had a market capitalization of approximately US$ 23 trillion as of December 31, 2006, and an average daily trading volume of approximately US$ 46 billion, US$ 56 billion and US$ 87 billion for 2004, 2005 and 2006, respectively.

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 51% of the aggregate market capitalization of BOVESPA as of December 31, 2006. The top ten stocks in terms of trading volume accounted for approximately 51.3% and 46.1% of all shares traded on BOVESPA, in December 31, 2005 and 2006, respectively.

Because we are subject to specific rules and regulations as a Brazilian company, holders of our preferred shares or 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. 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 standing to bring shareholders’ derivative suits, and 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 10—Additional Information—Memorandum and Articles of Association.”

Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.

You may not be able to exercise the preemptive rights relating to the preferred shares underlying your ADSs unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available and the ADS depositary determines to make the rights available to you. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the ADS depositary or, if the preemptive rights cannot be sold, the rights will be allowed to lapse. See “Item 10—Additional Information—Exchange Controls—Preemptive Rights.”

ITEM 4. INFORMATION ON VCP

A. History and Development of VCP

We are incorporated under the laws of the Federative Republic of Brazil under the name Votorantim Celulose e Papel S.A., as a corporation with unlimited duration. We have the legal status of a sociedade por ações, or a stock corporation, operating under the Brazilian corporate law. Our principal executive offices are located at Alameda Santos, 1357, 6^thfloor, 01419-908, São Paulo, SP, Brazil (telephone: 55-11-2138-4168/4261/4287). Our agent for service of process in the United States is CT Corporation, 111 Eighth Avenue, New York, New York 10011.

At December 31, 2006, our industrial facilities consisted of two integrated pulp and paper mills, Jacareí and Luiz Antônio, and two facilities exclusively dedicated to paper production, Piracicaba and Mogi das Cruzes, all located in the state of São Paulo. At December 31, 2006, our installed capacity was 1,480,000 tons per year of pulp and 640,000 tons per year of coated, uncoated and specialty papers. Approximately 72% of our paper sales volume and 12% of our pulp sales volume are sold to the domestic market.

We also have a paper distribution division, KSR, with an extensive product line, including graphic papers and products. We have an automated, modern warehouse system that permits efficient distribution and that is supported by a specialized transportation fleet for deliveries throughout Brazil.

Our activities began in 1988 when the Votorantim group purchased Celpav Celulose e Papel Ltda., or Celpav, a pulp and paper producer based in the state of São Paulo. We began production in 1991 after expanding and modernizing our facilities. In September 1992, the Votorantim group purchased Indústrias de Papel Simão S.A., or Papel Simão. In 1995, Celpav became a subsidiary of Papel Simão, and Papel Simão changed its name to Votorantim Celulose e Papel S.A. We later transferred our operating assets to Celpav and, in July 1999, Celpav was merged into VCP.

In 1991, our annual capacity was 350,000 tons per year of pulp and 280,000 tons per year of paper. With the acquisition of Papel Simão, the Votorantim group added 220,000 tons of pulp and 250,000 tons of paper to the annual pulp and paper production capacity, respectively. Following the acquisition of Papel Simão, the Votorantim group’s combined pulp and paper operations were the third largest in Brazil in terms of sales. We further increased our pulp production capacity by 230,000 tons in 1996 with the addition of a new pulp production line at the Jacareí mill. We also added a new coater in 1996 at the Piracicaba mill, which increased our annual production capacity of thermal and carbonless paper to 40,000 tons per year and further production optimizations in 2001 raised the production capacity by 50,000 tons of pulp per year. Our annual production capacity of coated paper increased to 175,000 tons per year with the addition of a new coater at the Jacareí mill in 1997 and the addition of a new on-line coater at the Piracicaba mill in 1998. As a result of these additions and other optimization projects, our paper production capacity reached 635,000 tons per year in 2005.

On December 29, 1999, we sold our 51% stake in Indústria de Papel de Salto Ltda., or Salto, to Arjo Wiggins Participações e Comércio Ltda., a subsidiary of Arjo Wiggins S.A., a French company, for a cash payment of US$ 23 million. Salto produced security, industrial and other specialty papers, including paper used for bank notes, checks, identification cards, vouchers and bibles. Under the terms of the sale agreement, we are obligated to indemnify Arjo Wiggins against certain losses in excess of amounts recorded. In December 2004 we amended the agreement in which we were obligated to indemnify Arjo Wiggins. The obligations are now limited to US$ 6 million. To date, we have not paid any amounts under this indemnification provision, and we believe any amounts paid will not be significant. We realized a gain of US$ 13 million on this sale.

On April 19, 2000, we completed a registered offering of 7,920,000 ADSs. Each ADS represented 500 preferred shares, and the ADSs were listed on the New York Stock Exchange under the symbol “VCP.” Of the 7,920,000 ADSs being offered at that time, we sold 2,047,648 ADSs and certain of our shareholders sold the remaining 5,872,352 ADSs. Concurrently, 440,000,000 preferred shares were sold in Brazil.

On August 14, 2000, our board of directors approved the Jacareí expansion, which has expanded the pulp production capacity at our Jacareí mill by approximately 570,000 metric tons, raising our total current annual installed capacity from 850,000 in 2002 to 1.40 million metric tons per year in 2005. The Jacareí expansion project included reforestation projects, which were completed at the same time as the Jacareí expansion. We had invested a total of US$ 495 million in the Jacareí expansion. The government-owned development bank, Banco Nacional de Desenvolvimento Econômico e Social—BNDES, or BNDES, financed part of our investment in the Jacareí expansion. See “Item 4—Information on VCP—Property, Plant and Equipment—Expansions.”

On October 3, 2001, we purchased 28.0% of the voting shares (representing 12.35% of the total capital) of Aracruz Celulose S.A., or Aracruz, from the Mondi Group, for approximately US$ 370 million. Aracruz is a Brazilian pulp exporter whose ADSs trade on the New York Stock Exchange under the symbol “ARA.” We acquired our interest in Aracruz in order to increase our exposure to the international pulp market, and we accounted for this investment under the equity method. We financed this acquisition with a bridge loan in the amount of US$ 370 million in 2001, which was refinanced in May 2002 with a US$ 380 million syndicated loan and fully paid in 2005. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Debt.” Our acquisition of 28% of Aracruz’s voting shares was unconditionally approved by the Conselho Administrativo de Defesa Econômica, known as CADE, the Brazilian antitrust regulator, on November 25, 2003. We reduced the book value of our investment in Aracruz to an amount equal to the market value of Aracruz ADRs at December 31, 2002. The impairment provision of US$ 136 million was determined based on the market price of US$ 18.56 per each Aracruz ADRs on December 31, 2002, and the amount was charged directly to income. On December 31, 2006, the market price for each Aracruz ADRs was US$ 61.21. On December 31, 2005 and 2004 the market price for each Aracruz ADR was US$ 40.01 and US$ 37.70, respectively.

We do not expect to have significant operational involvement at Aracruz at this time. A subsidiary of ours became a party to the Aracruz shareholders’ agreement, along with BNDESPAR, the Lorentzen Group and the Safra Group. Under the shareholders’ agreement, our subsidiary is entitled to and has appointed three directors to the Aracruz board of directors, which currently consists of ten directors. The shareholders’ agreement, which expires on May 11, 2008, provides that the maximum number of shares of voting stock of Aracruz to be held by any party to the shareholders’ agreement may not exceed 28% of the total outstanding shares of voting stock of Aracruz. In addition, the shareholders’ agreement requires that each person or entity who acquires shares of voting stock of Aracruz from any of the parties to the shareholders’ agreement become a party to such agreement.

On December 1, 2001, VCP Exportadora e Participações S.A., or VCP Exportadora, indirectly acquired VCP North America Inc., incorporated in Delaware, United States, or VCP North America, and VCP Trading N.V. incorporated in Curaçao, or VCP Trading, from Votorantim International Holding N.V., for US$ 50,000 and US$ 30,000, respectively, for the purpose of centralizing our commercial operations in VCP Exportadora.

In January 2002, we incorporated VCP Florestal, which assumed all of the assets and liabilities relating to our forestry operations. In March 2002, we incorporated VCP Overseas Holding KfT, or Overseas Holding, our wholly owned subsidiary incorporated in Hungary. In June 2002, we incorporated St. Helen Holding III, B.V., located in Curaçao.

In February 2003, Arapar S.A. and Lorentzen Empreendimentos S.A., collectively Grupo Lorentzen, on the one hand, and SODEPA, on the other hand, as shareholders of Aracruz, entered into an agreement pursuant to which each party agreed not to sell its shareholding in Aracruz without the consent of the other.

As of December 31, 2003, we had a 50% stake in each of Voto-Votorantim I and Voto-Votorantim II. We also had three wholly owned subsidiaries, VCP Terminais Portuários S.A., VCP Exportadora and VCP Florestal. In April 2001, we incorporated VCP Exportadora as a wholly owned subsidiary, and in the fall of 2001 we incorporated Newark, which was used to acquire our interest in Aracruz.

In November 2004, we signed an agreement with Suzano Bahia Sul Papel e Celulose S.A., or Suzano, for the acquisition of the common and preferred stock of Ripasa S.A. Celulose e Papel, or Ripasa. On March 31, 2005, we finalized the acquisition, through a 50% joint venture, of 77.59% (our interest – 38.795%) indirect interest in the voting capital and 46.06% (our interest – 23.03%) indirect interest in the total capital of Ripasa, for US$ 275 million. A purchase option was also signed for the option to purchase 37,449,084 common shares and 12,388,719 preferred shares, totaling 22.41% of the voting stock and 13.45% of the total stock, to be exercised within six years, for a total amount of US$ 160 million.

On January 26, 2005, in an Extraordinary General Meeting, our shareholders determined that VCP Florestal be merged into us to achieve cost reductions and increased business synergies between the two companies. VCP Florestal was dissolved as a result of the merger and we succeeded it with respect to all rights and obligations thereof. There was no increase in our capital stock as a result of the merger as we owned all the shares of VCP Florestal.

On July 20, 2005, VCP and Suzano announced a corporate restructuring to be implemented in Ripasa, which would allow that company’s minority shareholders (around 1,300 shareholders) to migrate to VCP and Suzano in the following proportions (based on independent valuations): each Ripasa preferred share would correspond to 0.0627 VCP preferred shares plus 0.1450 Suzano class “A” preferred shares, and each Ripasa common share would correspond to 0.0627 VCP preferred shares plus 0.1450 Suzano common shares. This restructuring was examined by the CVM, which did not object to or restrict its realization; however, the restructuring was suspended by judicial decision. Given the potentially lengthy period of delay to reach a favorable outcome and the fact that the synergies generated by the acquisition of Ripasa are not being fully realized, on April 26, 2006, VCP and Suzano, in order to settle the judicial action and implement the restructuring, entered into an agreement with the group of Ripasa’s preferred shareholders, who had brought the action to block the acquisition. Ripasa’s minority shareholders received shares of VCP and Suzano plus a complementary amount in cash equivalent to R$ 1.0538 for each Ripasa preferred share in their possession on the date of registration. Ripasa’s restructuring was concluded and, in September 2006, VCP and Suzano started to sell Americana’s unit products as a pre-consortium stage. We are still waiting for the Brazilian authorities’ approval to transform Ripasa’s unit of Americana into a consortium (Conpacel). and VCP would be in charge of selling 50% of its production as any other VCP’s unit. The purchase of Ripasa is being analyzed by Brazilian antitrust authorities and is subject to their review and approval. See “Competition” for more details about the Ripasa transaction.

In November 2004, we signed an agreement with Suzano Bahia Sul Papel e Celulose S.A., or Suzano, for the joint acquisition of all of the common and preferred stock of Ripasa. On March 31, 2005, we finalized the acquisition, through a 50% joint venture, of 77.59% (our interest – 38.795%) indirect interest in the voting capital and 46.06% (our interest – 23.03%) indirect interest in the total capital of Ripasa. We disbursed US$ 275 million for our 50% interest in the venture. A purchase and sale option was also signed for the sale of 37,449,084 common shares and 12,388,719 preferred shares, totaling 22.41% of the voting stock and 13.45% of the total stock, to be exercised up to 2010 for a total amount of US$ 160 million for VCP and Suzano interest at that date (our interest was approximately US$ 80 million).

Following the corporate restructuring, the already mentioned call options and the put option of certain former minority shareholders of Ripasa, were modified to substitute the Ripasa shares for shares in VCP and Suzano as those former Ripasa minority shareholders had exchanged their shares for shares in VCP and Suzano. Accordingly, VCP has a call option to acquire 3,124,139 of its own non-redeemable preferred shares during a twelve-month period starting on March 31, 2010. At December 31, 2006, the total updated amount was US$ 266 million for VCP and Suzano interest. The former shareholders of Ripasa, now shareholders of VCP, who are party to the agreement, have a put option which may require VCP to acquire all their non-redeemable preferred shares during a period of five years through March 31, 2010. According to the agreement, as a required condition precedent, the put/call options can only be exercised if the underlying shares are free of liens and encumbrances.

In November 2005, we announced the beginning of the social and environmental licensing process for the implementation of a bleached eucalyptus pulp factory to be built in Rio Grande do Sul. If implemented, this unit will occupy an area of approximately 450 to 500 hectares, located in the region of Rio Grande-Pelotas-Arroio Grande. Overall investment in the factory and in the forest base is estimated at US$ 1.3 billion, and the expected annual volume is one million tons of pulp. We expect that an environmental licensing study will be completed in 2007. The basic engineering and the technical proposals will be developed in 2008 and 2009, when the project will be submitted for approval by our board of directors.

In February 2006, we announced that Standard & Poor’s Ratings Services (S&P) assigned its ‘BBB-’ foreign and local currency global scale corporate credit ratings to VCP, an investment grade rating category. According to S&P, the outlook is stable for VCP, which reflects the assumptions that VCP will improve its financial performance by 2006 based on the recovery of the domestic paper sector; will continue to adopt a prudent financial policy, presenting comfortable levels of cash holdings; and will start to show debt de-leverage at the same pace as its debt amortization, depending on future investment opportunities.

In April 2006, for administrative and economic reasons, we merged VCP Exportadora e Participações S.A., a wholly owned subsidiary, into VCP and assumed all of the assets and liabilities relating to its export operations.

In September 2006, we announced a plan to divest our non-integrated special paper mill located in the city of Mogi das Cruzes in the state of São Paulo. We have already declared that we intend to sell our 50% stake in the other three production mill of Ripasa (besides the Americana mill), which produce cardboard and special papers. This divestment plan is part of our strategy to focus and grow in the production of market pulp and printing & writing papers (coated and uncoated) in large scale. For additional information on our divestiture plan, see note 4 (c) to our financial statements.

In September, 2006, International Paper Investments (Holland) B.V. (“International Paper”), a wholly owned subsidiary of International Paper Company, and VCP entered into an Exchange Agreement (the “Exchange Agreement”). Pursuant to the terms of the Exchange Agreement, International Paper will exchange its pulp mill project (the “Project Mill”) being developed in Tres Lagoas, state of Mato Grosso do Sul, Brazil (together with approximately 100,000 hectares of surrounding forestlands) for VCP’s Luiz Antonio pulp and uncoated paper mill and approximately 60,000 hectares of forestlands located in the state of São Paulo, Brazil. International Paper has already fully funded the project mill in the amount of US $1.15 billion.

The Luiz Antonio mill produces 355,000 metric tons of uncoated papers and 100,000 metric tons of market pulp annually. The 100,000 metric tonnes of market pulp will be supplied to VCP, for its use in other facilities, on competitive terms under a long-term supply agreement. The Tres Lagoas project mill is expected to be completed in January 2009 and to have a capacity of 1,100,000 tons of market pulp per annum.

Under the Exchange Agreement, International Paper is granted the right to construct, at its cost, up to two paper machines adjacent to, and integrated with, the Project Mill. If International Paper exercises its right to build one or both paper machines adjacent to the Project Mill, (1) certain parcels of real property will be retained by International Paper upon which the paper machines and ancillary facilities will be constructed and (2) the paper machines will be supported by long-term supply agreements under which VCP will provide International Paper pulp on competitive terms and utilities and other services at rates based on VCP’s actual operating costs. The companies expect the conclusion of the exchange of assets to be on February 1, 2007. See Item 5A “Operating Results – Recent Developments” and Item 10.C “Additional Information – Material Contracts.”

In November 2006, Fitch Ratings has assigned ‘BBB-’ foreign and local currency issuer default ratings (IDRs) to Votorantim Celulose e Papel (VCP). According to Fitch Ratings, the rating outlook is stable. VCP’s ratings are supported by its strong business position and solid financial profile. The rating confirms the right strategy by Votorantim Celulose e Papel to diversify its products and markets, maintaining competitive costs and the commitment with business sustainability.

Capital Expenditures

Our capital expenditures disbursements totaled US$ 248 million in 2006, US$ 247 million in 2005 and US$ 218 million in 2004. We expect our capital expenditure to be US$244 million in 2007. The increase in capital expenditures from 2004 to 2006 was mainly due to large investment in a new forest reserve (land acquisition and plantation) in Rio Grande do Sul State, in the south of Brazil.

Currently our main capital expenditure plans for future expansion projects, besides the already fully funded Três Lagoas pulp mill, the new forest in the south of Brazil and debottlenecking of the Americana pulp mill (50% stake in the former Ripasa). We believe that the consolidation of our participation in Ripasa as a production unit, with 50% of volumes being sold by VCP, the corresponding synergies and our prior investments in our own facilities will allow us to continue to grow and continue to undertake our business plan.

The table below sets forth a breakdown of our most significant capital expenditures for the periods indicated:

	For the years ended December 31,

	2006		2005		2004

	(in US$ millions)
Expansion	US$	47	US$	32	US$	27
Forests (includes land purchase)		116		131		112
Improvements/modernization		33		35		33
Other (includes maintenance and information technology)		52		49		46

Total	US$	248	US$	247	US$	218

As part of our capital investment program for 2007, we intend to invest US$ 58 million (of a total of US$ 119 million) in land acquisition and planting in Rio Grande do Sul, continuing our strategy of building a forest base in the south of Brazil and US$ 30 million for the debottlenecking of the Americana mill, that is expected to increase by 35,000 tons (our 50% stake) the pulp capacity of the mill over the 2005 to 2007 period. We are also in the process of purchasing more land for forestry plants to reduce our dependence on raw materials from third parties. The following table shows the estimated breakdown of planned capital expenditures during 2007, which is expected to be financed by cash generated from operations and by existing cash:

	US$ in millions

Expansion projects	$	57
Forests (includes land purchase)		119
Improvements/modernization		12
Other (includes maintenance and information technology)		56

Total	$	244

Note: Três Lagoas new pulp mill capital expenditure is not included in these figures as these amounts have been already fully funded by International Paper.

B. Business Overview

We are one of the largest pulp and paper products companies in Brazil and the leading Brazilian producer of wood-free printing and writing papers and specialty papers in terms of net sales and total assets, according to Bracelpa. We produce eucalyptus pulp, which is a high-quality variety of hardwood pulp. In 2005 and 2006, we sold approximately 63% of our pulp production to third parties, and we use the remainder internally to manufacture a wide range of printing and writing paper products, including coated and uncoated printing and writing papers, thermal papers, carbonless papers and other specialty papers. Exports account for approximately half of our 2006 revenues. In 2005 and 2006, we sold approximately 66% and 63%, respectively, of our pulp and paper tonnage outside of Brazil.

Operations

Our total sales volume was 1,459,079 in 2004, 1,492,527 tons in 2005 and 1,611,398 tons in 2006. Our net revenues were US$1,010 million in 2004, US$1,130 million in 2005 and US$1,317 million in 2006.

In 2006, 37% of the volume and 52% of total sales were derived from the domestic market compared to 34% and 50%, respectively, in 2005 and 35% and 51%, respectively, in 2004. In the pulp market, the domestic market accounted for 12% of the sales volume and 11% of the revenues derived from pulp in 2006. In the paper market, the domestic market accounted for 72% of the sales volume and for 79% of the revenues derived from paper in 2006. The table below sets forth the percentages of our net revenues in 2006, 2005 and 2004 that correspond to the domestic and export markets and the breakdown by product of our net revenues:

	2006			2005			2004

Sales by market
Domestic		52	%		50	%		51	%
Export		48	%		50	%		49	%
Sales by product
Market Pulp		39	%		39	%		38	%
Paper		61	%		61	%		62	%

In 2006, we produced 1,444,480 tons of eucalyptus pulp compared to 1,372,197 tons in 2005 and 1,346,840 tons in 2004. In 2006, we sold 941,804 tons of this production as market pulp to third-party producers and we used the remainder to manufacture paper products. Our production and related U.S. dollar-based exports of pulp also increased during 2006. We sold US$385 million in 2004, US$439 million in 2005 and US$520 million in 2006. The increase in our market pulp revenues from 2004 to 2006 was mainly due to the debottlenecking of the new pulp line.

In 2006, our sales volume of paper products increased to 669,593 tons from 625,576 tons in 2005. This increase in sales is mainly explained by the additional volumes produced in the Americana mill that we resold in the market beginning September 1^st,2006 In 2005, our sales volume of paper products increased to 625,516 tons from 614,648 tons in 2004, mainly due to higher efficiency of production. Uncoated and coated printing and writing paper sales accounted for 72% of our total paper products revenues in 2006 and 73% of our total paper products revenues in 2005. The remainder of our revenues from paper products in 2006 and 2005 were made up of sales of special and chemical (thermal and carbonless) paper, accounting for 28% in 2006 and 27% in 2005 of paper sales. Our printing and writing papers are used for a variety of business supplies, including notebooks, books, continuous forms, labels, brochures and magazines. Our market share in Brazil in 2006, based on data from Bracelpa, was 31% (or 38% when adding 50% of Ripasa’s share) for coated papers, 23% (32% when including Ripasa’s share) for uncoated cut-size papers and 17% (22% when including Ripasa’s share) for uncoated offset papers. We sold 30% of our total printing and writing paper sales volume outside of Brazil in 2006 (32% in 2005).

Our Ownership Structure

We are part of the Votorantim group, one of the largest privately held Brazilian groups of companies. The Votorantim group was founded in 1918 by Senator José Ermírio de Moraes and is controlled by the Ermírio de Moraes family. The three core businesses of the Votorantim group are cement, aluminum and pulp and paper. The Votorantim group is also involved in other industries, including metallurgy, financial services, chemicals and agribusiness. In 2005, pulp and paper accounted for approximately 18% of the Votorantim group’s net revenues as measured under Brazilian GAAP. In 2006, the percentage was similar, the following chart shows our ownership structure and it principal subsidiaries as of December 31, 2006 (see Item 4.c. “-Organizational Structure” for the total economic structure of VCP):

Message

VCP’s immediate parent company is Votorantim Participações S.A., or VPAR, which in turn is ultimately controlled by Hejoassu Administração Ltda., which is controlled by the Ermírio de Moraes family. As of December 31, 2006, our total shares outstanding were 204,145,507 (105,702,452 voting and 98,443,055 preferred).

Our Business Strategy

We intend to be one of the leaders in the pulp and paper industry, building on our competitive strengths with the aid of the Votorantim Management System (SGV – Sistema de Gestão Votorantim) in order to create sustainable value to our shareholders. The principal components of our strategy are to:

	•	be an important player in the international pulp market, leveraging the structural competitive advantages in Brazil;

	•	have presence in the global reprographic paper market;

	•	consolidate our leadership position in the growing regional market for wood-free printing, writing, copying and specialty papers;

	•	expand our production capacity through both mill expansion and strategic acquisitions, alliances and joint ventures to meet increased demand in both the domestic and export markets; and

	•	achieve sales of 4 million tons per year of market pulp and 2 million tons per year of printing and writing papers by 2020.

Expand our presence in the international pulp market

We intend to take advantage of our competitive strengths to increase our market share in the international pulp market. In 2006, we sold approximately 88% of our market pulp tonnage outside of Brazil (91% in 2005), compared to 2% in 1996 when we began exporting. Our technology, productivity, sustainability of our forest operations and our use of cloning methods in addition to the high forest yields due to climate and soil conditions in Brazil and the short harvest cycle are important competitive advantages over producers in many other countries, and allow us to play an active and competitive role in the global pulp market. Investment in Aracruz and the Jacareí expansion reinforce our presence in the international pulp market investments in a new forest base in the South of Brazil and our asset exchange with International Paper are the sources for future organic growth in the pulp business.

Maintain our leadership position in the growing regional market for coated, thermal and carbonless papers

We are currently a market leader for value-added papers, such as coated papers, in Brazil. We are also one of the main players for uncoated printing and writing paper in Brazil. We expect domestic demand to grow along with the expected growth in the economy of Brazil over the next few years. In order to consolidate our market position, we focus on long-term relationships with our customers by seeking to increase our understanding of our customers and their industries and to tailor our products to their specific needs. Our investment in Ripasa strengthens our presence in the domestic coated and uncoated market.

Continue to shift our paper sales mix toward higher margin products

We believe that an improved product mix with more value-added products can increase operating margins even if average paper prices do not improve significantly. In addition, these products are subject to less cyclical price variations. Therefore, we seek to increase our production of value-added paper products, such as coated, thermal, carbonless and other specialty papers; our sales of these papers increased to approximately 48% of our net paper sales in 2006, from approximately 33% in 1997. We are producing higher margin products to replace products that Brazilian consumers previously had to import, such as labels for beer and soft drinks.

We have developed our production facilities for thermal and carbonless papers through a licensing arrangement with a leading producer in the area of chemical papers, Oji Paper, which allows us to benefit from Oji Paper’s technology. We expect to continue to benefit from an increase in domestic demand, as well as to gain market share from imports of coated and specialty papers, which had become less competitive due principally to the continuous devaluation of the real from January 1999 through 2002. Continuing a trend that initiated in 2003, we estimate that we have lost approximately 14% of our coated paper domestic market share mainly to imports, which became more competitive as the real appreciated against the U.S. dollar. We plan to take advantage of the opportunity to recover our market share when the real depreciates or stabilizes against the U.S. dollar. We also will continue to work closely with our customers to develop new products.

Increase operating efficiencies

We intend to remain a low-cost producer of pulp and paper by continuing our ongoing program to increase operating efficiencies and reduce operating costs per unit. We intend to continue to:

	•	focus on reducing wood costs through increased eucalyptus yields and reduced harvesting costs;

	•	focus on improving the efficiency of our operations through investment in harvesting equipment, production facilities and advanced information technology; and

	•	improve information flow to facilitate decision-making.

Continue to develop state-of-the-art technology in the forest area

Technological research and improvement has made it possible to attain productivity records, together with less impact on the environment. In the forest area, the gain in competitiveness is a result of the adoption of modern forestry practices and an intense research program. Currently, wood production per hectare has reached 45-50 cubic meters, compared to 30 cubic meters recorded in 1987. We use the most modern technology for planting, harvesting, storing and transporting with a completely mechanized system. The genetic improvement of eucalyptus trees allowed for the plantings of clones of selected trees, resulting in higher productivity. Today, 95% of planting is done with cloned seedlings. We have achieved speed, better seedling use and quality thanks to a pioneering procedure of multiplication of clones.

Expand our forest and mill production capacity through both expansion and strategic acquisitions to meet increased demand in both the domestic and export markets

We intend to further increase our production capacity through both the expansion of existing facilities and strategic acquisitions.

We are presently exchanging our existing Luiz Antonio pulp and paper facility for a pulp mill project, which has already been fully funded by International Paper, being built and expected to be completed in January 2009 and also acquiring land from a new forest base in the south of Brazil, preparing fiber supply for future growth. Between 1996 and 2006, the average annual rate of paper consumption in Brazil increased by 3.1%, reaching 7.7 million tons in 2006, as estimated by Bracelpa. In recent years, there has been a marked increase in paper consumption in Brazil. We believe that demand for pulp and paper in the domestic and export markets will continue to grow over time. We increased our pulp production capacity through our expansion project at our Jacareí mill to a production capacity of 1.46 million tons annually. We also closely monitor developments in the Brazilian and global pulp and paper industry. We continue to pursue growth opportunities to create value for our shareholders through strategic acquisitions, alliances and joint ventures and we intend to participate in the continuing consolidation among pulp and paper producers, both domestically and internationally.

Our Products

We produce a variety of pulp and paper products. We produce pulp both for sale (market pulp) and for use in our paper production. We sell hardwood bleached market pulp, both to the Brazilian domestic market and to the export market outside Brazil. We produce coated and uncoated printing and writing paper and other specialty/chemical papers. Within the printing and writing paper category, we produce cut-size, folio-size, and rolled products. The following table sets forth the breakdown by categories of our sales revenues for the periods indicated:

	Years ended December 31,

	2006			2005			2004

Market Pulp		39	%		39	%		38	%
Paper:
Uncoated (P&W/Cut Size)		31	%		31	%		33	%
Coated		13	%		14	%		12	%
Specialty / Chemical papers		17	%		16	%		17	%

Pulp

Production

The following table sets forth our total hardwood pulp production, total Brazilian hardwood pulp production, and our hardwood pulp production as a percentage of total Brazilian pulp production for the periods indicated:

	Years ended December 31,

	2006			2005			2004

VCP’s production (in tons)		1,444,480			1,372,197			1,346,840
Total Brazilian production (in tons)		10,090,264	*		8,093,529			7,612,426
VCP’s production as percentage of total Brazilian production		14.3	%		17.0	%		17.7	%

Sources: Bracelpa and VCP. Figures for Brazilian production changed due to updated reports released by Bracelpa.

(*) Bracelpa: figure through November 2006.

Sales

In 2006, we sold 941,804 tons of bleached pulp as market pulp to third parties in the domestic market and outside of Brazil. We had a 17% share of the Brazilian domestic market for bleached hardwood pulp in 2006. If we consider 50% of Ripasa’s sales volume, our market share would be 28%. In recent years, however, we have sought to increase our sales of market pulp outside of Brazil. In 2006, approximately 88% of our market pulp sales volume was to customers located outside of Brazil. The following table sets forth our net sales of pulp to the export market by geographic region for the periods indicated:

	Year ended December 31,

	2006				2005				2004

	Tons		% of Total		Tons		% of Total		Tons		% of Total

North America		77,075		9.3		75,987		9.7		85,544		11.2
Latin America		—		—		1,608		0.2		3,044		0.4
Europe		508,489		61.1		474,484		60.3		347,371		45.4
Asia/Middle East/Oceania/Africa		246,618		29.6		234,865		29.8		328,404		43.0

Total Exports		832,182		100.0		786,944		100.0		764,363		100.0

In 2006 Santher remained our largest domestic customer of pulp, followed by IBEMA and ARJO WIGGINS. UPM, Georgia Pacific, M-Real and PKS were our largest customers of pulp outside of Brazil.

Demand for our pulp has generally exceeded our production capacity even during cyclical downturns of the pulp industry, and, according to a study conducted in December 2006 by Hawkins Wright, an independent international consulting firm, the projected average demand growth in the world for bleached eucalyptus kraft pulp, or BEKP, is 7.9% per year from 2005 to 2010 (and 2.3% per year for the total white pulp demand), while the total white pulp capacity (including BEKP) projected average growth is 2.5% per year in the same period.

We have long-term sales contracts with substantially all of our customers in the domestic and the export markets. These contracts generally provide for the sale of our market pulp at prices we announce each month. These prices may vary among the different geographic areas where our customers are located. Usually the price arrangements under our long-term contracts are consistent with prices for our other sales within the same region and follow the established list price of BEKP announced by major global pulp producers. The sales contracts provide for early termination in the event of a material breach, the insolvency of one of the parties or force majeure events of extended duration.

Paper

	Our paper products can be divided into three major categories:

	•	uncoated printing and writing papers;

	•	coated printing and writing papers; and

	•	carbonless and thermal and other specialty papers.

The production and sale of uncoated printing and writing papers is our major line of paper business, accounting for approximately 50% of our total net paper sales and 90% of our paper exports in 2006. The following table provides a brief description of our principal paper products and lists the facilities where they are produced:

Product	Description	Facility

Coated printing and writing paper	Coated woodfree paper used for labels, self-adhesive, flexible packaging markets and publishing sector (magazine, book and catalogue) inserts brochures and other publications; pioneer line of coated cut-size paper for small/home office market designed for printing of high-resolution and high-quality images; coated paper to be used on labels for plastic PET soft drink packaging.	Jacareí Piracicaba Americana

Uncoated printing and writing paper	Uncoated woodfree paper in reels, sheets and cut-size designed for maximum performance in photocopying machines and laser and inkjet printers, and alkaline offset paper.	Luiz Antônio Jacareí Americana

Carbonless paper	Used to produce multi-copy forms for credit card receipts, invoices and other applications in place of traditional carbon paper.	Piracicaba

Thermal paper	Traditionally used in fax machines; new applications include supermarket receipts, bar code labels, toll tickets, water and gas bills and receipts for ATMs and credit card machines.	Piracicaba

Other specialty papers	Our specialty papers include art paper for catalogues, folders, letters, envelopes, etc.	Mogi das Cruzes

Source: VCP.

Production

Production of paper is a multi-stage process, which begins with the production of its principal raw material, pulp, from wood. Throughout the production process from wood to paper, various pulp and paper products are produced that may be converted by us into value-added products or sold.

We employ advanced, automated harvesting equipment in our forests. On easily accessible terrain, the harvesting process involves a feller-buncher that cuts and gathers a number of trees and lays them in bundles in the forest. Branches are removed by advanced equipment. A skidder then carries the trees to a track area, where a log cutter removes the tops, cuts the trees into logs and loads the logs on trucks for transportation to the mill. On difficult terrain, a harvester cuts, de-limbs and debarks the trees, then cuts them into logs and stacks them in bundles in the forest. A forwarder carries the bundles to a loading area, where a loader loads the logs on trucks for transportation to the mill. Recently, we acquired a simulator to train harvest equipment operators, which lowers the number of hours dedicated to employee training, in addition to reducing equipment-operating time.

The logs are transported by truck from the forests. The logs are then taken by conveyor belt to be debarked and chipped. The chips are sent to digesters, where they are mixed with chemicals and cooked under pressure. During this process, lignin and resins are removed from the wood. The removed lignin is used as fuel for the pulp mill.

In 2001, we introduced a new, more efficient production process whereby wood chips for the production of pulp are produced at plantation sites using portable chipping equipment. With these new chipping machines, we are able to carry out chipping in the forest and thereby improve tree utilization and reduce noise levels at the mill. In addition, forest residues are returned directly to the plantation soil, contributing to the recycling of nutrients. Approximately 30% of the wood required for the Jacareí mill is supplied in the form of chips directly from the forest.

The unbleached pulp is then sent through the oxygen delignification process and the chemical bleaching process. The cellulose fibers are screened, pressed and dried. The dried pulp is cut into sheets and baled, resulting in market pulp. In recent years, pulp customers, particularly in Europe, have preferred pulp that is bleached with little or no chlorine compounds due to environmental concerns relating to the bleaching process. All of the phases in the pulp production process that have reduced amounts of chlorine create effluents, which are sent to an effluent treatment station, where approximately 90% of the organic charge is removed.

To produce printing and writing paper, we use 100% short-fiber eucalyptus bleached pulp. Once in the paper mill, the pulp is sent to refiners, which increases the level of resistance of the fibers for the production of specific grades of paper. Certain materials are then added to the refined pulp to strengthen and improve the quality of the paper. These additives include synthetic sizing and precipitated calcium carbonate (the alkaline process). The mixture is pumped to the paper machine where the paper is pressed and dried. Finally, the resulting paper is sent to be finished in accordance with client specifications.

The following table sets forth our paper production, total Brazilian paper production, and our total paper production as a percentage of total Brazilian production for the periods indicated:

	Year ended December 31,

	2006			2005			2004

VCP’s production* (in tons)		611,044			602,214			596,551
Total Brazilian paper and paperboard production (in tons)		8,750,00	**		8,597,716			8,452,411
VCP’s production as percentage of total Brazilian production		7.0	%		7.0	%		7.1	%

Sources: Bracelpa and VCP.

(*) Consider total production paper and coater machines, excluding base paper production for coated paper.

(**)For 2006, estimated figure from Bracelpa.

Printing and Writing Paper. According to Bracelpa, in 2006, we were Brazil’s third largest producer of uncoated offset paper and second largest producer of uncoated cut-size paper, and we ranked first in coated paper production. During 2006, we produced 525,476 tons of printing and writing paper consisting of approximately 382,436 tons of uncoated and 143,040 tons of coated paper. Our coated paper is used for a variety of purposes, including labels, inserts, brochures and magazine covers. Uses for our uncoated paper include notebooks, books and continuous forms. We produce coated and uncoated paper in reels and sheets and in cut-size paper. We currently have estimated domestic market shares of 31%, 17% and 23% in the coated, uncoated (offset) and cut-size printing and writing markets, respectively.

The following table sets forth our printing and writing paper production, total Brazilian printing and writing paper production and our production as a percentage of Brazilian production of such products for the periods indicated:

	Year ended December 31,

	2006			2005			2004

VCP’s production* (in tons)		525,476			520,294			512,489
Uncoated paper (in tons)		382,436			376,211			379,845
Coated paper (in tons)		143,040			144,083			132,635
Total Brazilian production (in tons)		2,537,022	**		2,414,014			2,364,565
VCP’s percentage of Brazilian production		20.7	%		21.6	%		21.7	%

Sources: Bracelpa and VCP.

(*) Consider total production paper and coater machines excluding base paper production for coated paper.

(**)For 2006, estimated figure from Bracelpa.

Carbonless and Thermal Papers. In 2006, we manufactured 62,466 tons of carbonless and thermal paper at our Piracicaba production facility. We produce carbonless and thermal paper in reels and sheets for use as facsimile and medical paper as well as supermarket receipts, banking and commercial automation paper, bar code paper, toll tickets and commercial invoices.

In addition, we have a technology transfer agreement with Oji Paper pursuant to which Oji Paper agreed to share secret formulae, processes, technical information and know-how developed by it for thermal paper. The agreement also grants us an exclusive, non-assignable license to manufacture and sell certain thermal papers in Brazil and a non-exclusive, non-assignable license to sell such products in Latin America, Africa and the Middle East.

Other Specialty Papers. We are one of the largest producers of specialty papers in Latin America. In 2006, we produced 23,102 tons of other specialty papers from our Mogi das Cruzes facility, including art papers for catalogues, folders, letters and envelopes and finish foil for the furniture industry.

The following table sets forth our carbonless, thermal and other specialty paper production.

	Year ended December 31,

	2006		2005		2004

VCP’s carbonless and thermal paper production* (in tons)		62,466		59,386		61,798
VCP’s other specialty paper production* (in tons)		23,102		22,534		22,264

Total* (in tons)		85,568		81,920		84,062

Sources: VCP.

(*) Consider total production paper and coater machines excluding base paper production for coated paper.

Sales

We sell our paper products around the world. The following table sets forth our net sales of paper to the export market by geographic region for the periods indicated:

	2006					2005					2004

	Tons		% of Total			Tons		% of Total			Tons		% of Total

North America		59,822		31.8	%		66,551		33.3	%		62,726		34.9	%
Latin America⁽¹⁾		51,531		27.4			53,767		26.9			43,756		24.4
Europe		62,536		33.3			61,173		30.7			53,889		30.0
Middle East/Asia/Africa/Other		14,150		7.5			18,216		9.1			19,158		10.7

Total Exports		188,039		100.0	%		199,707		100.0	%		179,529		100.0	%

(1) Excluding Brazil.

The following table sets forth our domestic sales of specialty, carbonless and thermal paper, Brazilian specialty, carbonless and thermal paper sales, and our sales as a percentage of Brazilian sales for such products for the periods indicated:

	Year ended December 31,

	2006		2005		2004

VCP’s carbonless and thermal paper sales (in tons)		64,186		60,669		62,076
VCP’s other specialty paper sales⁽¹⁾ (in tons)		45,976		33,765		34,868

Total (in tons)		110,162		94,434		96,944


(1)	Includes sales of third-party products by KSR and sales of specialty papers produced at the Mogi das Cruzes mill.
Source: VCP

Printing and writing paper represents the largest category of paper exports from Brazil. In 2005 and 2006, we exported 199,424 tons and 187,644 tons, respectively, of printing and writing paper, which primarily consisted of uncoated paper.

The following table sets forth our exports and domestic sales of coated and uncoated papers for the periods indicated:

	Year ended December 31,

	2006			2005			2004

VCP’s exports (in tons)		187,644			199,424			179,438
Brazilian exports (in tons)		728,545	*		903,527			766,878
VCP’s percentage of Brazilian exports		25.8	%		22.1	%		23.4	%
VCP’s domestic sales (in tons)		371,393			331,434			338,175
Brazilian market (in tons)		1,476,245	*		1,496,003			1,568,887
VCP’s percentage of Brazilian market		25.2	%		22.2	%		21.6	%

Sources: Bracelpa and VCP.

(*) Bracelpa: figure through November 2006.

The customer base for our paper products is very diversified. None of our customers individually accounted for more than 10% of our domestic or international sales of paper products in 2006.

Raw Materials

Wood

Our pulp production is 100% based on bleached eucalyptus hardwood grown in sustainable forest plantations. We use modern technologies that enable us to obtain high product quality in producing ECF pulp and VCF pulp.

We rely exclusively on eucalyptus trees to meet our pulpwood requirements. Eucalyptus trees in Brazil are among the fastest growing trees in the world. High technology, climate and soil conditions in Brazil allow for eucalyptus tree harvest rotations of approximately seven years as compared to harvest rotations of approximately 10 to 12 years in Chile and up to 25 years in the United States. The optimal time to harvest our trees is approximately seven years from the time of planting.

Energy and chemicals

We use several sources to generate thermal and electrical energy for the pulp and paper production process, including biomass derived from wood debarking, chip screening rejects, fuel oil, natural gas and black liquor. By producing electricity internally, we realize substantial savings compared to purchasing electrical energy in the open market. In 2006, we generated approximately 66.2% (59% in 2005) of our energy requirements for the pulp and paper production process internally, of which 83.4% is from renewable fuels, such as biomass and black liquor, and 16.6% is from non-renewable fuels, such as fossil fuels (oil and gas). Recovery boilers recycle substantially all of the chemicals used in the pulp production process. We believe that our sources of supply will allow us to maintain a cost advantage in these areas for the foreseeable future.

In 2006 we purchased approximately 34% (41% in 2005) of our energy requirements from concessionaires, including CPFL—Companhia Paulista de Força e Luz (for the Luiz Antônio and Piracicaba facilities), Bandeirante (for the Jacareí and Mogi das Cruzes facilities) and Eletropaulo (for our headquarters), as well as from fuel oil and natural gas suppliers. In 2006, we started up a new combined cycle gas turbine and heat recovery boiler in the Jacareí mill, and, consequently, reduced the global percentage of our purchased electrical energy from 41% to 34%. The new gas turbine system improved our already low dependence on external supplies of energy. Our secure sources of supply allowed us to maintain a cost advantage in these areas for the foreseeable future.

The pulp production process traditionally involved the use of elementary chlorine. In recent years, demand for pulp that is bleached with little or no chlorine has grown significantly because of concerns over possible carcinogenic effects of chlorinated organic compounds released in water. This pulp, known as elementary chlorine-free pulp, or ECF, is produced without using elementary chlorine in its bleaching process. It uses chlorine dioxide instead. As a result, we only produce ECF pulp. Our bleaching sequences are based mostly on oxygen compounds, such as oxygen, ozone and hydrogen peroxide, which are more environmentally friendly. In addition, we have developed a bleaching process referred to as Votorantim chlorine-free, or VCF pulp, which utilizes a smaller amount of chlorine dioxide than the ECF process. In 2006, 100% of our pulp was produced without the use of elementary chlorine.

At December 31, 2006, we had long-term “take-or-pay” contracts with suppliers of chemical products for periods from 1 to 10 years. Our contractual obligations in connection with such contracts are US$38 million per year. See note 15(d) to our financial statements.

Water

We presently require about 40 cubic meters of water per ton of pulp. The costs of obtaining our water were not a significant component of our total cost of raw materials in 2006. We get our water from several rivers in the state of São Paulo, Brazil, including the Paraíba do Sul, Piracicaba, Mogi Guaçu and Tietê. We believe our average water supplies are currently adequate and that our water consumption per ton is very low; particular in the Jacareí mill (32 cubic meters per ton) because of that facility’s use of more modern technology.

Beginning in 2003, the Brazilian government imposed tariffs on the industrial use of river water. For the Paraíba do Sul River, which is located near the Jacareí mill, the levying of tariffs related to water consumption started in the beginning of 2003. From our experience to date, the imposition of such tariffs has not had a significant impact on our production costs. The levying of tariffs for water consumption from the Piracicaba River started in 2006. For the other rivers from which we use water, the imposition of tariffs is unlikely to start before 2007.

Transportation

We use trucks that are owned and operated by independent contractors to transport wood from our forests to our production facilities. Our forests are located an average distance of 287 kilometers from our pulp mills. We also use trucks owned and operated by third parties to transport finished pulp and paper products from our facilities to our customers in Brazil and other regions in Latin America or to the port of Santos. Santos is located on the coast of the state of São Paulo approximately 380 kilometers from the Luiz Antônio mill and 150 kilometers from the Jacareí mill.

In 1998, we obtained a concession from the state government of São Paulo to operate a terminal and a warehouse in Santos under a renewable ten-year operational lease agreement with CODESP, which is the government-owned corporation that owns and operates the port. This lease was non-cancelable during the initial period and set to expire in 2007. In September 2003, an amendment to the agreement renewed it for another ten years from September 2007 to September 2017. The terminal has facilitated the growth of our exports because it allows us to load vessels with pulp directly from our terminal, thereby significantly reducing freight and handling costs. Our yearly expense for this has been approximately US$0.1 million, and future annual lease payments under the CODESP lease will also be approximately US$0.1 million per year. There is no contingent rent under the contract. In addition, in 2001, we rented another warehouse at the terminal in Santos in anticipation of future increases of our pulp exports as a result of the Jacareí expansion. This expanded our total warehouse area in Santos to 12,520 square meters from 9,550 square meters, and our total warehouse volume capacity in Santos increased to 38,000 tons from 28,000 tons.

In December 2002, we signed a contract with MRS Logística S.A., or MRS, a private railway concession, in order to invest in a private railway from the Jacareí plant to the port of Santos to transport pulp to the port from the mill. In March 2005, we signed another contract with MRS to transport wood to our Jacareí mill and also approved an investment to construct a railway terminal to receive this wood in the Jacareí plant. The new wood terminal has been operational since October 2005 and has granted a relevant reduction on VCP’s wood transportation costs. As part of our agreement with MRS in 2002 MRS was responsible for the reconstruction of the 27-kilometer railway and the investment in dedicated railway wagons, while we were responsible for the construction of the building of terminals inside the Jacareí plant and at the port of Santos. Total investment was approximately US$9.4 million and we were responsible for 50% of the costs incurred, which has been disbursed. The pulp transportation agreement also requires the transportation of a minimum tonnage, equivalent to US$7.4 million per year, over a ten-year period. For the wood transportation agreement, the minimum tonnage requirement is equivalent to US$1.3 million per year, starting in 2006. In 2006, we shipped 811,000 tons of pulp and over 140,000 tons of wood through MRS and paid US$10.6 million to MRS.

In 2003, we outsourced our logistics operations for inbound and outbound products for the plants in Jacareí and Luiz Antônio to TNT Logistics and Wilson & Sons, two logistics operators. They were contracted to handle all the operational activities, from receiving the raw material to delivering the product to the final customer. This has resulted in lower costs, gains of scale, lower investment in infrastructure and greater specialization in providing services to clients. For the wood sector, a multi-model solution combines rail and road transport to deliver forestry products to the industrial units. Through an agreement with MRS Logística, the pulp is transported by train from the Jacareí unit to the port of Santos. This reduces logistical costs by 25% compared with road transport. We operate our own terminal in the port of Santos which also reduces costs and brings flexibility in exporting. For paper exports, a system of loading the products which are already in pallets ensures the integrity of the product, dispenses with the need for containers and makes the sales process more flexible since there is no need to wait for ships to become available or be completely loaded. Another logistical advantage comes from KSR, a paper distribution unit which is the leader in the sector in Brazil. KSR plays a strategic role by reaching all regions of Brazil and servicing clients in areas such as printing, editorial, stationery, copying, small business, converters (forms, notebooks), newspaper and public bodies. KSR has 27 affiliates and an automated storage system which results in a fast service, supported by a specialist fleet which can make deliveries throughout Brazil.

We are also developing multi-modal wood shipment projects (which include transportation by train and trucks), which we named Door to Door, in a partnership with América Latina Logística S.A., or ALL, which was implemented in September 2003 to bring wood from Guaíba (Rio Grande do Sul) to São Paulo. We invested US$0.3 million in this project to adapt railway wagons to load wood.

Marketing and distribution

We sell our pulp and paper products in both the domestic and export markets. In 2005 and 2006, approximately 92% and 88%, respectively, of our sales volume of market pulp and 32% and 28%, respectively, of our sales volume of paper products were made outside of Brazil. Our internal sales staff consists of 71 employees operating throughout Brazil. In addition, 261 employees (including 100 independent sales agents) are assigned to KSR, which is our paper distributor.

Through KSR and our internal sales staff, we focus on developing close, long-term customer relationships by meeting the customer’s specific requirements. We constantly seek to increase our understanding of our customers and their industries and to tailor our products to their specific needs. See “Item 5 – Operating and Financial Review and Prospects—Research and development, patents and licenses, etc.” for a detailed description of our technology upgrades in the area of customer relationships.

In 2002, we completed the implementation of a new management information technology system. This system uses an SAP database to monitor in real time our business performance in conjunction with certain external industry indicators. We believe that this system has enabled our management to identify financial risks and measure operational performance against our strategic objectives.

In addition, we have created several online portals for the distribution of our products and we participate in the industry portal, Pakprint, together with Indústrias Klabin de Celulose e Papel S.A., or Klabin, International Paper, Suzano/Bahia Sul and Ripasa, which allows customers to purchase our products and track their orders via an online marketplace.

Pulp

Our internal sales staff handles substantially all of our domestic market pulp sales. We sell pulp to other Brazilian paper producers, including Fábrica de Papel Santa Therezinha S.A. (a company specialized in production of tissue and special paper) and Arjo Wiggins Ltda. (the largest producer of security and fine papers). In addition, due to the expansion of the Jacareí facility, we are selling substantially more market pulp abroad. In order to distribute and market this additional market pulp, we operate our own terminal at the port of Santos, and we have contracted with local agents abroad to sell this market pulp in the international market. The delivery of pulp is done through proper equipment and logistics, providing high productivity in all stages of the process.

Currently, our pulp and paper products are distributed overseas through, the following wholly-owned subsidiaries: VCP Overseas; Newark Financial Inc., or Newark, a wholly owned subsidiary of VCP Exportadora; VCP North America and VCP Trading. Effective January 2006, VCP implemented a new international sales structure, intended to streamline and integrate its growing volume of export sales. This structure included the establishment by VCP overseas of a branch office, located in Switzerland, which is responsible for all export transactions. In April 2006, for administrative and economic reasons, we merged VCP Exportadora into VCP and assumed all of the assets and liabilities relating to its export operations.

Paper

In 2006, approximately 72% of paper sales volume and 79% of our net revenues derived from paper came from the domestic market compared to 68% and 76%, respectively, in 2005. We sell 15% of our paper products through KSR. Domestically, KSR’s distribution network consists of 21 branches, which are strategically located with warehouses used for storage purposes, and a workforce composed of 100 independent sales agents. In 2006, KSR was the segment leader in paper distribution in Brazil, with a market share of approximately 18% of the distribution sales. Through KSR, we sell our paper products to approximately 18,000 customers, including small printers, stationery stores and industrial companies throughout Brazil, as well as the Brazilian government. KSR also sells the products of other paper companies in areas where they do not compete with us, in both the export and domestic markets. As a result, we are able to offer a wide range of complementary products, with prompt delivery. In 2006, through KSR we had net revenues of US$131 million, representing 22% (US$112 million and 21%, respectively, in 2005) of our total consolidated paper sales in the domestic market.

Sales of our products to our domestic customers are for cash, credit or through a program called the vendor program. For purposes of this annual report, we have referred to our credit sales as the “non-vendor program.”

The vendor program is available to some of our domestic customers, and approximately 22% of our domestic sales in 2006 were made by this method. Under the vendor program, the customer agrees to pay the bank and the bank in turn pays us on behalf of the customer for the purchase price of the product. We, as the vendor, act as a guarantor under the arrangement with the bank so that the customer can take advantage of lower interest costs. The lower interest rate is a result of the bank typically looking to us, and not our individual customers, as the primary support for the credit risk. The vendor program is a means by which the bank essentially finances customers’ purchases.

A customer applying for the vendor program must first be approved by us. If we determine that the customer is creditworthy, the customer enters into a standard-form agreement with the bank that is providing the financing, which is guaranteed by us. The bank then forwards to us an amount of money equal to the purchase price of the products sold. The standard-form agreement into which the customer enters with a bank specifies loan repayment terms that are generally more favorable than prevailing market rates because the customer receives the benefit of our financial strength through our guarantee. We guarantee full repayment of the loan and, in the event of a customer default, the bank charges our cash account for the principal amount of the loan, plus interest, 15 days after the due date of the loan. We closely monitor the collection of these amounts and are advised by the bank once amounts have been settled. If we are called upon to settle the obligation with the bank, we pursue the customer through legal proceedings for final settlement of amounts due to us. The accounting and management controls exercised over these “receivables” are no different from our systems in place to monitor our direct receivables due from direct sales customers. We consider this vendor program to be an important component of our sales and marketing efforts and believe that the favorable credit terms we are able to offer our customers give us an additional competitive advantage.

Additional tax benefits arise under this facility because the interest charged by the bank to the customer is not subject to the sales taxes that would otherwise accrue had we incorporated the finance charges into the sales value and billed the amount directly to our customer.

Prior to October 1999, all of our customers that had good credit were allowed to purchase inventory on credit using either the vendor program or our payment terms. We reviewed the customers’ payment history to determine how much credit we would extend to each customer, but, generally, the program was available to any customer that had an available credit limit and a good payment history with us. Sales made under the vendor program were on the same terms as the cash price offered to that customer. It was typically up to the customer to decide whether to pay cash, use the vendor program, or agree to the payment terms established by us.

Under the terms of our vendor program, the maximum allowable term for payment is generally 180 days, though in the case of a few customers, we extend the term to 360 days. The terms of the vendor program depend on the customer’s credit rating, which is based on our own internal credit review.

Historically, amounts of guarantees we have paid, net of amounts recovered from customers, have been negligible. In 2006, 2005 and 2004, we recovered 100% of the amounts we paid under guarantees.

Our customers who make purchases using credit agree to payment terms that effectively include finance charges. The finance charge on each sale is the difference between the amount the customer agrees to pay at the due date and the cash sales price. The finance charges are recognized over the payment period and are included in financial income.

We retain the same risk of loss on customer accounts under the vendor program that we do under our own non-vendor program. To mitigate this risk, we continuously monitor the receivables under both programs and periodically update our assessment of each customer. In addition, we continuously evaluate both vendor program receivables and our receivables for collectibility.

We estimate that for 2004, 2005 and 2006, an average of approximately 3% of our total number of regular domestic customers (approximately 21%, 22% and 22%, respectively, of total domestic sales value) obtained our guarantee for their loans. At December 31, 2006, we had 24 active customers under the vendor program. Our vendor program exposure was US$71 million at December 31, 2004, US$57 million at December 31, 2005 and US$120 million at December 31, 2006.

Competition

The international markets for pulp and paper products are highly competitive and involve a large number of producers worldwide. As an integrated pulp and paper producer, we compete not only with other integrated pulp and paper producers but also with companies that produce only pulp or paper. Many of these producers have greater financial resources than we do. Our production levels have been, and will continue to be small by comparison to overall world pulp and paper production, and the prices for our products will depend on prevailing world prices and other factors.

According to Hawkins Wright (an “Outlook for Market Pulp” published in December 2006), based on preliminary information, at December 31, 2006, world market pulp capacity should reach 52.5 million tons out of which 44% is softwood, 42% is hardwood and the remaining percentage other pulp grades. During 2006, capacity increased by 615,000 million tons. The world market posted 1,500 additions and 945,000 capacity closures.

Based on 2006 preliminary figures from Bracelpa on net revenues of Brazilian pulp and/or paper producers, we were the second largest Brazilian producer, behind Aracruz. In the domestic market, with respect to market pulp, we had the third largest Brazilian market share in terms of volume, with 18%, behind Lwarcel Celulose e Papel S.A. and Ripasa. If we consider 50% of Ripasa’s sales, VCP’s market share would be 28%.

According to Bracelpa, with respect to writing and printing uncoated paper, we were the third largest Brazilian producer in 2006 in terms of volume, producing more than Ripasa, but less than International Paper and Suzano/Bahia Sul. In addition, in 2006, we were the leader in Brazil in the production of certain specialty papers and carbonless and thermal paper. We had a leadership position in 2006 in coated paper in Brazil with a 31% market share followed by Ripasa and Suzano. Our main competitors in carbonless and thermal paper are located outside Brazil.

On July 2, 2003, Aracruz announced the purchase of all shares of capital stock of Riocell S.A., or Riocell, from Klabin S.A. and Klabin do Paraná Produtos Florestais Ltda. The Riocell mill is located in the state of Rio Grande do Sul. Riocell produces bleached eucalyptus kraft pulp.

Aracruz and Stora Enso announced the start-up of their Veracel joint venture in May 2005 and full capacity was reached before year-end. Bahia Sul announced that it would build a new 950,000 tons per year BEKP line, which would begin in the second half of 2007.

In November 2004, we signed an agreement with Suzano Bahia Sul Papel e Celulose S.A., or Suzano, for the joint acquisition of all of the common and preferred stock of Ripasa. On March 31, 2005, we finalized the acquisition, through a 50% joint venture, of 77.59% (our interest – 38.795%) indirect interest in the voting capital and 46.06% (our interest – 23.03%) indirect interest in the total capital of Ripasa. We disbursed US$275 million for our 50% interest in the venture. A purchase and sale option was also signed for the sale of 37,449,084 common shares and 12,388,719 preferred shares, totaling 22.41% of the voting stock and 13.45% of the total stock, to be exercised up to 2010 for a total amount of US$160 million for VCP and Suzano interest at that date (our interest was US$80 million).

On July 20, 2005, VCP and Suzano announced a reestructuring plan for Ripasa, including a delisting of Ripasa through a share exchange by VCP’s and Suzano preferred shares. Each of Ripasa’s preferred shares would correspond to 0.0072 VCP preferred shares and to 0.0167 Suzano class “A” preferred shares. The reasons for the restructuring were: (i) to permit Ripasa’s current minority shareholders to hold VCP and Suzano shares, which were more liquid than those of Ripasa; and (ii) to allow future reorganization of Ripasa, which would permit cost reductions, operational gains, enhanced competitiveness and economies of scale for the companies. The restructuring plan was analyzed and approved by the CVM; however, certain minority shareholders filed a judicial action to suspended the process. On April 26, 2006, VCP and Suzano entered into a judicial agreement with a group of Ripasa’s preferred shareholders, with the aim of settling the claims challenging Ripasa’s corporate restructuring, and implementing the restructuring, once the conditions in the agreement were met.

Since the conditions of the agreement were met (including suspension of the ongoing legal procedures relating to the restructuring, and the absence of any decision, judicial or administrative, that prevented or hindered the restructuring, or rendered it inadvisable) the restructuring was concluded in July 2006, VCP and Suzano paid the group of minority shareholders R$1.0538 for each Ripasa preferred share held by them (corresponding to an additional US$36 million cash disbursement by VCP). VCP’s capital increased, in 2006, by R$573,629.83 from R$2,478,582,123.76 to R$3,052,211,393.59, upon the issuance of 12,532,009 preferred shares with no par value.

The acquisition of the share control in Ripasa and its future transformation into a production unit is still under analysis by the Brazilian antitrust authorities.

Following the corporate restructuring, the already mentioned call options and the put option of certain former minority shareholders of Ripasa, were modified to substitute the Ripasa shares for shares in VCP and Suzano as those former Ripasa minority shareholders had exchanged their shares for shares in VCP and Suzano. Accordingly, VCP has a call option to acquire 3,124,139 of its own non-redeemable preferred shares during a twelve-month period starting on March 31, 2010. At December 31, 2006, the total updated amount was US$266 million for VCP and Suzano interest. The former shareholders of Ripasa, now shareholders of VCP, who are party to the agreement, have a put option which may require VCP to acquire all their non-redeemable preferred shares during a period of five years through March 31, 2010. According to the agreement, as a required condition precedent, the put/call options can only be exercised if the underlying shares are free of liens and encumbrances.

For additional information on the Ripasa acquisition, see note 4 to our financial statements.

Environmental policies

As part of our commitment to sustainable development, we plan to develop one of the largest forested areas in the state of São Paulo with approximately 225,000 hectares located near our industrial plants, of which approximately 39% has been preserved as native forest and/or set aside for environmental recovery. In partnership with various universities, we conduct research and monitor the fauna and flora of the region. By the end of 2006, VCP controlled a forest area of 323,000 hectares (including the ones in the State of São Paulo), of which 43% are preserved as conservation areas with native vegetation. For conservation areas, environmental planning may adopt the following options: Planting and recovery of native species; recovery by means of natural regeneration; soil recomposition and others.

Considering the asset exchange between VCP and International Paper which will become effective as of February, 2007, the forest area in the State of São Paulo will be reduced by the approximately 58,000 hectares which supply the pulpwood production for Luiz Antonio pulp mill. However, approximately 134,500 hectares in the State of Mato Grosso do Sul will be added to VCP’s total area control. If we consider this addition, in the beginning of 2007, VCP will control approximately 400,000 hectares, of which 42% are preserved as conservation areas with native vegetation.

Since 2001, we have implemented a new integrated policy for quality of the environment, health and safety, based on the following principles:

	•	to fulfill the needs and expectations of investors, customers, suppliers, professionals, communities and other parties involved in our business;

	•	to operate responsibly and in compliance with laws, regulations and corporate commitments;

	•	to ensure the integrity, qualification and career development of our employees; and

	•	to provide continuous improvement in management systems and processes, including the prevention and reduction of wastes, accidents and adverse impacts on the environment.

We use technologies that process and bleach pulp and paper wood pulp with ozone, which minimizes water consumption and reduces effluents and organic chlorine compounds.

We have an electronic system that monitors and coordinates all our environmental activities to facilitate operational control, management of environmental risks and compliance with legal requirements at the Jacareí plant.

We obtained an ISO 14001 (environmental) certification for the forestry area and for the industrial area of the Jacareí mill in February 2004. The Luiz Antônio industrial unit was ISO 14001 certified for quality environmental management standards in 2005. All integrated industries, forestry areas in São Paulo and the port terminal of Santos are certified as conforming to international standards.

Brazilian environmental regulation and investments

The federal constitution assigns to the federal government, the states, the federal district and the municipalities the responsibility for environmental protection and preservation of the Brazilian fauna and flora. However, the authority to enact laws and issue regulations with respect to environmental protection is granted jointly to the legislative branches of the federal government, the states and the federal district. The municipalities may only issue regulations with respect to matters of local interest or to supplement federal and state laws. The state agency for pollution control in the state of São Paulo is CETESB—Companhia de Tecnologia de Saneamento Ambiental, or CETESB. Pursuant to the pollution control laws of the state of São Paulo, as enforced by CETESB, the installation, construction or expansion, as well as the operation, of industrial equipment likely to cause pollution must be licensed by CETESB.

A renewable licensing system was introduced in São Paulo in December 2002, according to which previously issued licenses shall be renewed upon CETESB’s convocation. The new licenses issued by CETESB under this system shall be valid for periods of up to six years for installation licenses and ten years for environmental licenses. The use of efficient environmental management systems and the practice of environmental auditing are taken into account by CETESB in granting longer validity terms for licenses. Our operations are subject to various environmental laws and regulations issued by these authorities, including those relating to air emissions, effluent discharges, solid waste disposal, odor and reforestation. During 2004, 2005 and 2006, our capital expenditures relating to environmental matters were approximately US$7 million, US$23 million and US$13 million, respectively. Capital expenditures were allocated to environmental projects and expenses. We cannot assure you, however, that the implementation of more stringent environmental regulations in the future will not require significant capital or other expenditures. For a description of certain legal matters relating to environment regulation, see “Item 8—Financial Information—Consolidated Statements and Other Financial Information—Legal Matters.”

In Brazil, individuals or legal entities that violate environmental laws can be punished by criminal sanctions that range from fines to imprisonment, in the case of individuals, or dissolution, in the case of legal entities. In addition, administrative sanctions that can be imposed include, among others:

	•	fines;

	•	partial or total suspension of activities;

	•	forfeiture or restriction of tax incentives or benefits; and

	•	forfeiture or suspension of participation in credit lines with official credit establishments.

In addition to criminal and administrative sanctions, pursuant to Brazilian environmental laws, the violator must also repair the damage that was caused to the environment and/or indemnify third parties, regardless of the existence of actual fault.

We have received a number of administrative warnings in the past five years for isolated violations of the maximum levels for emissions or effluents, including odors. The largest payment we have made individually was related to a solid residue release that occurred on September 10, 2005, when an industrial embankment burst at the Jacareí unit and non-dangerous residues (class 2A) covered part of a road and a stream, causing reversible damage to the environment. VCP took all necessary measures to reduce the damage to the environment and community. VCP acted in a transparent manner by immediately notifying CETESB and other government agencies of the incident, as well as issuing a press release. VCP was fined R$77,000 (or approximately US$32,000) by the government. In 2006 the administrative warnings received by the company were appealed and are still pending judgment. We developed a project to recover the industrial embankment and to reduce the damage to the environment, representing an investment cost of approximately US$9 million, of which US$3 million were disbursed in 2005 and US$6 million in 2006. In 2006, an additional US$2 million out of US$4 million were disbursed and the remaining amount will be disbursed in 2007. In view of continuing to invest in environmental projects, we also have a project aiming to provide alternatives to treat solid waste disposals. We expect a total investment cost of US$11.6 million, of which US$4.5 million will be disbursed in 2007 and US$7.1 million in 2008. This project will be divided into four phases: Composting (phase 1 and 2), lake cleaning and extend industrial embankment

Environmental indicators

Our operating and production processes utilize natural resources and generate liquid effluents, residual wastes and air emissions which may adversely affect the environment.

Liquid effluents

Water is critical to the process of manufacturing pulp and paper. We obtain water from the rivers that flow adjacent to our mills. After the water has been used in the manufacturing process, we pass the effluents through mechanical and biological treatments before returning them to the rivers. We also have emergency lagoons and tanks that enable us to avoid releasing untreated effluents into the rivers in the event of a problem with our effluent process. Effluent characteristics are monitored constantly through chemical, physical and biological analyses. We also have a spill control system to avoid disturbances in the wastewater treatment plant.

Each of our units uses a two-stage process to treat the effluents generated during the production process. During the first stage, solids such as fibers, clay and carbonates are removed from the effluents. During the second stage, these solids undergo a biological treatment in which suspended and dissolved materials are broken down through the action of microorganisms. We hired a third party to evaluate the quality of the effluents generated during the production process and with the results of these analyses, we implement actions to minimize the generation of effluents and maximize the reutilization in the process. Our industrial units are developing alternatives that seek to reduce the consumption of water and the generation of effluents by optimizing the production process and increasing the reuse and recirculation of water. In Jacareí mill, the closing circuit project reached a water reutilization rate of 85%. In 2001, we completed construction of a new effluent treatment system at the Jacareí mill and completed an upgrade of the effluent treatment system at the Luiz Antônio facility. For a description of the imposition of tariffs on river water use, see “—Raw materials—Water” above.

Solid wastes

We have identified productive uses for a portion of the solid waste generated during our pulp and paper production processes and have adopted the following programs for handling and disposal of such solid waste residue:

	•	co-processing with ceramic manufacturing companies (Piracicaba and Jacareí mills);

	•	licensed landfills (Jacareí and Mogi das Cruzes mills); and

	•	use in forests as soil correction agents (Luiz Antônio mill).

With respect to the co-processing activities at our Piracicaba and Jacareí facilities, we use industrial residue as the raw material to manufacture bricks. Currently, the facility’s solid waste residue is being recycled and used in ceramic factories around the city. We are presently reevaluating alternatives for the recycling of organic residue for energy purposes, and we are installing selective waste collection and recycling systems for the common areas at the Mogi das Cruzes mill. We started using these selective waste collections and recycling systems at the Jacareí facility in 2001 and the Piracicaba and Luiz Antônio facilities in 2002.

The remainder of solid waste is either sold to third parties for use in their production processes or disposed of in sanitary landfills. The small amount of hazardous waste generated at our facilities is collected, treated and disposed of in accordance with the requirements of Brazilian law.

Atmospheric emissions

As a byproduct of production, certain compounds and particulate emissions are released into the atmosphere. In order to control these emissions, the sources of these emissions are fitted with control equipment such as electrostatic precipitators, multi-cyclones and gas scrubbers, which minimize or remove certain particles and compounds from the emissions. In order to control odor emissions, our Jacareí and Luiz Antônio mills use an efficient system for collection and incineration of odoriferous, diluted and concentrated gases and are outfitted with an alternative gas scrubber removal system to be used when incineration is not possible. In addition, the auxiliary boilers, which previously burned fuel oil, were adapted to burn natural gas in 2001. The expansion of the Jacareí facility included similar equipment and processes to control emissions.

Forest preservation

All our wood comes from tree plantations rather than native forests. The land we manage is generally not of high enough quality to be used for other forms of agriculture. Our cultivation program seeks to preserve the health of our forests, and Brazilian law requires that at least 20% of our land either be covered with native forests or cultivated with indigenous species of trees rather than eucalyptus or pine.

Forestry Certification System

In October 2002, VCP received ISO 9001/2000 and ISO 14001 certifications for forests located in Capão Bonito and Jacareí regions. In February 2004, Luiz Antônio Mill received the ISO certification. The forestry areas controlled by VCP, which supply pulpwood to Jacareí pulp mill, are also certified by FSC (Forest Stewardship Council). Capão Bonito region was certified in September 2005 and Vale do Paraíba regions were certified in December 2006. CERFLOR Certifications (Brazilian Certifications) for the forest area which supplies Jacareí pulp mill are still in the process and should be concluded in early 2007. VCP will reach approximately 70% to 80% of certified pulpwood production for the Jacareí mill.

Natural resources

Since the 1990s, we have been harvesting eucalyptus through uniform micro-propagated seedlings from carefully selected trees. The characteristics of the seedlings we select are matched to different growing regions and our products. This method allows us to (1) greatly increase forestry productivity, (2) comply with environmental regulations, and (3) contribute to carbon reduction in the atmosphere.

Pursuant to the Brazilian Forestry Code (Law No. 4,771 of September 15, 1965), we set aside a portion of our forests for preservation, conservation and environmental recovery. These areas consist of either native forests or riparian buffer zones, or are maintained to satisfy specific ecological interests. We also invest in environmental studies, together with domestic and international universities, research centers and renowned consultants, in order to improve the environmental conditions of our plantations, and ensure that we protect the native fauna in the areas in which we operate. We created a program designed to protect and preserve the fauna of areas with distinctive environmental aspects. This program has been implemented at Fazenda São Sebastião do Ribeirão Grande, a large private native forest in the Vale do Paraíba region, and at Várzea do Jenipapo in the Ribeirão Preto region.

Insurance

We maintain insurance policies for our mills against fire, lightning and explosion by any cause up to US$182 million and electrical damages up to US$468,000 and windstorm (extended coverage) up to US$4.7 million. We renewed this insurance on December 1, 2006. However, we do not maintain insurance against fire, disease and other risks to our forests. We have taken steps to prevent fires from occurring at our forests, including the maintenance of fire observation towers, a fleet of fire engines and teams of fire-fighting personnel, which we believe are safe and cost-effective methods of fire prevention. In each of the past three years, forest fires have not resulted in material damages to our total planted area. Given the natural protection afforded by the dispersion of our forests, we do not believe that insuring our forests would be cost-effective. We do not make provisions for risks of loss from fire and other casualties. We expense for the necessary amount when the damage is incurred. We have not suffered a material loss from either fire or disease in the forests that we harvest.

Overview of the Pulp and Paper Industry

Pulp Industry Overview

Wood pulp is the principal ingredient in the manufacture of wood-containing paper. Pulp is classified according to (a) the type of wood or fiber from which it is made, (b) the manner in which the wood or fiber is processed, and (c) whether it is bleached.

There are two types of wood pulp that can be produced. Hardwood pulp is produced using hardwood trees, such as eucalyptus, aspen, birch and acacia. Pulp made from hardwood, such as eucalyptus, has short fibers and is generally better suited to manufacturing coated and uncoated printing and writing papers, tissue and coated packaging boards. Short fibers are the best type for the manufacture of wood-free paper with good printability, smoothness, brightness and uniformity. Softwood pulp is produced using softwood trees, such as pines and fir. Pulp made from softwoods has long fibers and is generally used in manufacturing papers that require durability and strength, such as kraftliner, and those requiring high opacity, such as newsprint and directory papers. We produce only hardwood pulp from planted eucalyptus trees.

The pulp manufacturing process may determine a pulp’s suitability for particular end uses. Mechanical pulp refers to pulp processed to leave in some lignin and other organic materials holding the wood fibers together. Chemical pulp refers to pulp made using chemical processes to dissolve the lignin. Among the various chemical processes for chemical pulp, the most common is the kraft process, which we use to produce our pulp. The kraft process helps to maintain the inherent strength of the wood fibers and thus produces a pulp that is especially well suited for manufacturing printing and writing papers, specialty papers and tissue.

Bleached pulp is used for a variety of purposes, including printing and writing papers, specialty papers and tissue. Unbleached pulp is brown in color and is used in the production of wrapping paper, corrugated containers and other paper and cardboard materials. Many companies, including us, have been using the ECF methods in their production of bleached pulp. ECF is a bleaching process that does not utilize elementary chlorine and chlorine chemical compounds, respectively. These two processes have been developed in part to eliminate any possible carcinogenic effects attributed to the dioxins that are produced during the bleaching process and released in the water.

As a result of the variety of wood types and processes used to produce pulp, the pulp market has become increasingly specialized in terms of technical characteristics. Hardwood and, particularly, eucalyptus pulp, exhibit many of the physical and chemical properties most valued by printing and writing paper manufacturers and other bleached pulp consumers, such as opacity, grade and printability. As a result of increasing specialization, many manufacturers developed their own customized mix of pulp inputs known as “furnish” for use in their paper manufacturing. In addition, as more paper manufacturers have come to appreciate the technical characteristics of hardwood pulp and rely upon a significant hardwood pulp component in their furnishings, the market for hardwood pulp has grown more rapidly than the market for softwood pulp.

Eucalyptus is one of many types of hardwood used to make pulp. We believe that for certain uses eucalyptus pulp is superior because of the greater consistency in the quality of its fibers and because it can improve paper’s opacity, formation and printability. Eucalyptus pulp has gained wide acceptance among producers of printing and writing papers in Europe and among producers of tissue papers in North America because of its softness and absorbency. In addition, eucalyptus trees generally grow straighter and have fewer branches than most other hardwood trees. This allows for dense growth, easy harvesting and decreased need for pruning.

Paper Industry Overview

	There are six major groups of paper products produced by the paper industry:

	•	newsprint paper, used to print newspaper;

	•	printing and writing papers, used for a broad range of purposes, including writing, photocopying, commercial printing, business and computer forms;

	•	tissue papers, used to produce tissue, toilet papers and paper towels;

	•	packaging papers encompassing kraft paper, containerboard (corrugated paper and linerboard) and liquid packaging board;

	•	cardboard; and

	•	specialty papers.

We produce printing and writing papers, specialty papers, and thermal and carbonless paper, a subcategory of specialty papers.

Printing and writing papers are classified according to whether they are coated or uncoated, and whether the pulp from which they are made is chemically processed to eliminate lignin, called wood-free paper, or contains some lignin, called mechanical or wood-containing. We make uncoated and coated wood-free printing and writing paper.

Printing and writing paper is sold either in reels or in packages of pre-cut sheets, called cut-size. We sell our paper in both reels and cut-size. Reels of paper are used by manufacturers of paper products such as business forms, writing pads, packaged sheets of pre-cut paper, books and envelopes. Customers require different size reels depending on the type of machines they use. Cut-size paper is used in offices for general commercial purposes, such as photocopying and writing. There has been a general trend in recent years toward the use of standardized pre-cut sheets rather than preprinted and continuous business forms and computer paper. This trend has led many paper producers, including us, to reduce sales of reels and to integrate cutting machines in their paper mills, increasing their production of cut-size papers.

The market for paper has a large number of producers and consumers and more product differentiation than the market for pulp. Prices for paper are cyclical but are less volatile than pulp prices. The prices for paper and paperboard have historically followed the trends of pulp prices.

The key factors that drive paper prices are overall economic activity, capacity expansion and fluctuations in current exchange rates. In the second half of 1994, the international paper market tightened dramatically as accelerated economic growth in the United States and end user inventory restocking pushed demand higher despite limited capacity expansion. This tightening in the international market eased over the last several months of 1995, particularly for the commodity grades. In 1996, paper became readily available and prices started to decrease, and continued to decrease through the first quarter of 1999. Thereafter, prices for our various grades of paper have improved, reaching a peak in the first half of 2001. Thereafter, international paper prices started to decrease again but not as strongly as pulp prices decreased, due to a more consolidated and less volatile market.

In 2003 and in 2005, Brazilian paper companies increased their export volumes in order to compensate the demand reduction in the domestic market. The scenario for 2004 was quite different. In 2004, the Brazilian economy presented a significant recovery, ending the year with an increase in GDP of 4.9%, causing the Brazilian paper sector to present an increase in sales. Regarding the international market, although the appreciation of the real of approximately 9% in 2004, 13% in 2005 and 9% in 2006 impacted our revenues, the volume sold increased due to a good economic environment, especially for the North American and European markets. After suffering some years at low price levels, international paper prices start a recovery in the first half of 2006, with price increases being announced in February, April and June 2006, in both North America and Europe. For uncoated woodfree papers, international prices rose 15% in the first six months of 2006 and fell about 5% in the last quarter of 2006.

The Brazilian pulp and paper industry

Brazil is predominantly a tropical country, with approximately 90% of its territory located north of the Tropic of Capricorn. As a result, in most regions of Brazil, the soil and climate are very favorable to forest growth. In Brazil, eucalyptus trees have short growing cycles of approximately seven years, compared to 10 to 12 years for eucalyptus trees in Chile and 25 years in the United States. The production of wood in Brazil, therefore, requires less time and a smaller growing area than in North America and Europe, which results in higher yields.

Brazil’s high technology and natural advantages in forestry make it one of the world’s lowest-cost producers of pulp, and in the last 20 years Brazil has become an important pulp exporter. As one of the world’s lowest-cost producers of pulp, Brazilian pulp producers are able to weather more favorably than other producers through periods of low pulp demand. This shorter maturing period also enables Brazilian producers to expedite the process of genetically improving the Eucalyptus species utilized. In this manner, the Brazilian Eucalyptus is one of the pulping trees species that have evolved more rapidly and consistently over recent years, resulting in significant improvements in its productivity.

Capitalizing on its advantages in pulp production, Brazil has developed a diversified paper industry with modern technology and a potential for growth in both the domestic and export markets. In recent years, there has been a marked increase in paper consumption in Brazil, which is an important indicator of the economic development of a country. Between 1996 and 2006, the average annual rate of paper consumption increased by approximately 3% per year, reaching 7.7 million tons in 2006, according to estimated figures from Bracelpa. We believe that there is growth potential for domestic consumption, because per capita consumption is still low in comparison with developed countries. Per capita consumption of paper is estimated at 39.5 kilos per year, according to PPI, a news and information provider for the pulp, paper, converting forest products and allied industries.

According to preliminary data from PPI, in 2006, Brazil was the eleventh largest paper producer and the sixth largest pulp producer in the world. Brazilian pulp and paper companies have made large investments over the last ten years in order to compete more effectively and on a larger scale with traditional pulp suppliers in the international market. In addition, technological development in the paper industry has been supported by the research efforts of major producers and by financing from BNDES.

Consolidation in the Brazilian pulp and paper industry is currently under way. The table below shows the market participation of the five largest producers in terms of sales for the years indicated:

	Year ended December 31,

	2006*		2005			2004			2003			2002			2001

	(in thousands tons)
Brazilian pulp production ⁽¹⁾		10,090.3		10,352.0			9,620.1			9,104.2			8,011.5			7,412.0
Brazilian paper production		7,995.3		8,597.0			8,452.4			7,811.1			7,661.2			7,437.8
Total pulp and paper production		18,085.6		18,949.0			18,072.5			16,915.3			15,672.7			14,743.8
Total five top producers		NA		11,461.9			10,987.2			10,547.0			9,810.7			9,125.0
% Top five		NA		60.5	%		60.8	%		62.4	%		62.6	%		61.9	%


(1) Pulp numbers represent pulp volume produced.
Source: Bracelpa.
NA: Not Available. At the time of the filing of this document, the updated information was not released by Bracelpa.
(*) For 2006 Bracelpa figures through November 2006..

Brazil produces both commodity grade paper, such as kraft linerboard, and more value-added paper products, such as thermal, carbonless and fiduciary paper. Brazil is self-sufficient in all types of paper, except newsprint, coated paper and certain specialty grades. The paper market is larger than the pulp market in terms of the numbers of producers, consumers and variety of products. Paper prices tend to be less volatile than prices for pulp.

Cyclical nature of world pulp prices

World pulp prices are cyclical because demand for paper depends heavily on general economic conditions and because production capacity adjusts slowly to changes in demand.

Over the last three years, bleached eucalyptus kraft pulp (BEKP) or market pulp prices in the United States, Europe and Asia, respectively, have fluctuated from lows of US$ 525, US$ 490, and US$ 440 per ton in the first quarter of 2004, to highs of US$ 715, US$ 680, and US$ 650 per ton at December 30, 2006 in these respective regions. Such price fluctuations occur not only year to year but also within a year as a result of global and regional economic conditions, and supply and demand. The price of paper products, although less volatile than the price of pulp, also experiences fluctuations in response to global demand and production and fluctuations in pulp prices. Capacity adjustments have also occurred on the paper side, and in the first half of 2006 we saw paper prices increasing for several grades in the United States and Europe. For uncoated woodfree papers, international prices climbed 15% in the first six months of 2006 but declined approximately 5% in the last quarter of the year.

The following table sets forth the estimated cash production costs per ton of bleached hardwood kraft market pulp pre-sold in Northern Europe, Brazil and the United States for the third quarter of 2005, for producers in the regions indicated. Cash production costs are total production costs less depreciation and depletion and does not include any transportation costs. Amounts have been expressed on a per ton basis in U.S. dollars, with local currencies translated at prevailing exchange rates. Particular producers may have production costs significantly above or below regional averages.

BHKP operating costs, Q3 2005	Cash production costs (per ton)

Indonesia		US$ 171*
Brazil		200
Chile		272
Portugal		340
Finland		347
Spain		351
Sweden		351
France/Belgium		365
Southern U.S.		369
Eastern Canada		410

Source: Hawkins Wright.

(*) Partial use of native forests.

Note: Updated information was not available at the time of the filing of this document.

C. Organizational Structure

The chart below shows our economic structure as of December 31, 2006 (% of total capital):

Message

Our operations are conducted by Votorantim Celulose e Papel S.A. as the controlling and principal operating company. We are a member of the Votorantim group, which has other interests in Brazil and abroad, principally in cement, metallurgy, agribusiness, chemicals and financial services. In 2005, consolidated net sales of the Votorantim group reached approximately US$ 7.8 billion (US$ 6.3 billion in 2004) based on the Consolidated Financial Statements in accordance with Brazilian GAAP, data translated to U.S. dollars at 2005 year end exchange rates, of which 18% (18% in 2004) represented pulp and paper activities. Net consolidated sales include the industrial units of the Votorantim group, as well as Votorantim Finanças, which includes Banco Votorantim. Our immediate parent company is VPAR, which in turn is controlled by Hejoassu Administração S.A. Hejoassu is the formed by the Board Members of the Votorantim Group. It is composed by family members, responsible for the main decisions and business strategies. Hejoassu is controlled by the Ermírio de Moraes family. See “Item 4—Information on VCP—Business Overview—Our Ownership Structure.”

On March 1, 2002, we incorporated VCP Overseas, our wholly owned subsidiary incorporated in Hungary.

As of December 31, 2002, we had a 50% stake in Voto-Votorantim Overseas Trading Operations N.V. and three wholly owned subsidiaries, VCP Terminais Portuários S.A., VCP Exportadora and VCP Florestal. In April 2001, we incorporated VCP Exportadora as a wholly owned subsidiary, and in the fall of 2001 we incorporated Newark, which was used to acquire our interest in Aracruz.

In order to facilitate access to our international customers and to the international financial markets, we have established two subsidiaries of Newark, VCP Trading and VCP North America, to manage our exports to clients in Europe and in North America, respectively, until 2005. As of January 2006 we have been performing the total export sales from VCP Overseas Holding Kft (Switzerland).

Since the conditions of the agreement were met (including suspension of the ongoing legal procedures relating to the restructuring, and the absence of any decision, judicial or administrative, that prevented or hindered the restructuring, or rendered it inadvisable) the restructuring was concluded in July 2006, VCP and Suzano paid the group of minority shareholders R$ 1.0538 for each Ripasa preferred share held by them (corresponding to an additional US$ 36 million cash disbursement by VCP). VCP’s capital increased, in 2006, by R$ 573,629.83 from R$ 2,478,582,123.76 to R$ 3,052,211,393.59, upon the issuance of 12,532,009 preferred shares with no par value.

The acquisition of the share control in Ripasa and its future transformation into a production unit is still under analysis by the Brazilian antitrust authorities.

On January 26, 2005, in an Extraordinary General Meeting, our shareholders decided that VCP Florestal would merge into us to achieve cost reductions and increased business synergies between the two companies. VCP Florestal was dissolved as a result of the merger and we succeeded it with respect to all rights and obligations thereof. There was no increase in our capital stock as a result of the merger, due to the fact that we owned all the shares of VCP Florestal.

On June 24, 2005 Voto-Votorantim IV, a wholly-owned subsidiary of VPAR, issued US$ 400 million, 7.75% Fixed Rate Notes due 2020 in the international capital market, under Rule 144A and Regulation S of the U.S. Securities Act of 1933. VCP is a guarantor of 50% of the debt issued by Voto-Votorantim IV and in turn received US$ 200 million of the proceeds, which is also 50% of the total loan. On September 6, 2005, we acquired a 50% interest in Voto-Votorantim IV and together with VPAR we are the guarantors for this operation. Of the proceeds of US$ 200 million, US$ 125 million was used by St. Helen III to repay the debt incurred with Voto-Votorantim II.

On July 20, 2005, Ripasa’s restructuring was concluded and, in September 2006, VCP and Suzano started to sell Americana’s unit products as a pre-consortium stage. We are still waiting for the Brazilian authorities’ approval to transform Ripasa’s unit of Americana in a consortium (Conpacel). Upon approval, VCP will sell 50% of the unit’s production (its interest) as if it were any other VCP’s unit.

In April 2006, for administrative and economic reasons, we merged VCP Exportadora e Participações S.A., VCP’s 100% subsidiary, into us and assumed all of the assets and liabilities relating to our export operations.

In September 2006, we announced a plan to divest our non integrated special paper mill located in the city of Mogi das Cruzes in the state of São Paulo. We have already declared that we intend to sell our 50% stake in the other three production mills of Ripasa (besides the Americana mill), which produce cardboard and special papers. This divestment plan is part of our strategy to focus and grow in the production of market pulp and printing & writing papers (coated and uncoated) in large scale.

Under the Exchange Agreement, International Paper is granted the right to construct, at its cost, up to two paper machines adjacent to, and integrated with, the Project Mill. If International Paper exercises its right to build one or both paper machines adjacent to the Project Mill, (1) certain parcels of real property will be retained by International Paper upon which the paper machines and ancillary facilities will be constructed and (2) the paper machines will be supported by long-term supply agreements under which VCP will provide International Paper pulp on competitive terms and utilities and other services at rates based on VCP’s actual operating costs. The companies foresee the conclusion of the exchange of assets to be on February 1, 2007. See Item 5A “Operating Results – Recent Developments” and Item 10.C “Additional Information – Material Contracts.”

D. Property, Plant and Equipment

All of our production facilities are located in the state of São Paulo. We have forests plantations in the State of São Paulo and timberland in the State of Rio Grande do Sul which have been acquired since 2004. The state of São Paulo accounts for more than 33% of Brazil’s gross domestic product, and is home to most of the domestic consumers of pulp and paper products. In 2006, our forests (including purchased wood) were located an average of 293 kilometers from our pulp mills, located an average of 200 kilometers from Santos, which is the port facility that we use for most of our exporting activities. The relatively short distance between our forests, our plants and most of our domestic customers results in relatively low transportation costs.

We own and operate two mills that produce both pulp and paper and two mills that produce only paper. At December 31, 2006, our aggregate nominal pulp production capacity was 1,480,000 tons per year and our nominal paper production capacity was 640,000 tons per year, not including Aracruz and Ripasa’s capacities. The following table sets forth the distance between our forests (including the transport of pulpwood purchased in the market) and our mills, the distance of these mills to the port of Santos, and the nominal capacity of each mill at December 31, 2006:

Facility	Pulp/Paper	Distance from forest (pulp) or pulp mill (paper)	Distance from port of Santos	Pulp/Paper capacity (tons/year)	Major products

Jacareí	Pulp/Paper	400 km	150 km	1,080,000/185,000	Uncoated printing and writing paper; coated printing and writing paper
Luiz Antônio	Pulp/Paper	58 km	380 km	400,000/355,000	Uncoated printing and writing paper; offset, copier, laser printing and inkjet paper
Piracicaba	Paper	150 km	200 km	170,000	Thermal and carbonless paper; coated printing and writing paper
Mogi das Cruzes	Paper	50 km	100 km	25,000	Label paper; finish foil; soap wrapping board; light cardboard and other specialty papers

Source: VCP.

For a discussion of our asset exchange with International Paper pursuant to which we are to exchange our Luiz Antonio facility for an already fully funded pulp project under construction in Tres Lagoas, see Item 4C “Organizational Structure” and Item 10C “Additional Information – Material Contracts”.

Eucalyptus forests

We obtain a majority of our wood from approximately 225,000 hectares of land located in the state of São Paulo. While we have enough wood to satisfy our requirements, from time to time and when the terms are attractive, we purchase wood from unrelated third parties for use in our paper and pulp mills. In the year ended December 31, 2006, we consumed approximately 74% of our own wood and 26% of our wood from those third parties.

At December 31, 2006, in state of São Paulo we owned or leased approximately 450 different tracts of forests for cultivation, making our wood supplies relatively dispersed. Our forests are located an average of 287 kilometers from our pulp mills. In order to reduce the average distance from our forests to our mills, we did not renew the leases of forests that were relatively far from our mills and, instead, have purchased forests that are closer to our mills. Brazilian law requires that at least 20% of the land we own either remains uncultivated or planted with indigenous species of vegetation. Of our own forests, approximately 62% consists of planted eucalyptus forest, approximately 34% is reserved for preservation and the remainder is used for other activities.

Our strategic goal to guarantee fiber supply and ensure VCP’s long-term growth also includes the raising of a new forest area in the state of Rio Grande do Sul, currently with 98,000 hectares. Growth in this region is driven by the availability of land at attractive costs, the proximity to Northern Uruguay (wood availability) and also the proximity to Rio Grande port, which will allow us the creation of an export platform. The forestry productivity in this new area is similar to São Paulo forests and some other qualities of the region are the qualified labor force, the inter-modal transportation options and the favorable political, social and environmental conditions.

While the dispersion of our woodland entails some additional costs, we believe that it significantly reduces the risks of fire and disease. We also seek to minimize fire risk by maintaining a system of fire observation towers and a fleet of 13 fire engines, all of which are manned by members of our fire-fighting teams. Given the natural protection afforded by the dispersion of our forests, we do not believe that insuring our forests would be cost-effective. We therefore assume all risks of loss from fire and other casualties. In addition, we annually treat certain of our forests to prevent tree destruction by ants. We have never suffered a material loss from either fire or disease in forests that we harvest.

As part of our reforestation efforts, in 2006, in the state of São Paulo we planted approximately 19,000 hectares of eucalyptus in order to supply our wood requirements to produce pulp and also energy to supply Luiz Antônio and Jacareí mills. The forests used to supply the Luiz Antônio mill typically yield between 40 and 45 cubic meters of pulpwood per hectare per year, while forests supplying the Jacareí mill generally yield between 45 and 50 cubic meters of pulpwood per hectare per year. At seven years old, the normal time to harvest, these trees normally have an average productivity of 280 to 315 cubic meters of woodchip per hectare per year in Luis Antônio and 315 to 350 cubic meters per hectare per year in Jacareí. These levels of productivity reflect the excellent climate conditions for growing eucalyptus trees in São Paulo State, with ample amounts of both sun and rain.

In 2006 we grew approximately 77 million rooted cuttings/seedlings at our nurseries, all of which were planted in our forests or supplied to the tree-farm project. To develop our eucalyptus forests, we select trees after strict testing, which are denominated as clones and enter into the production process. We operate three nurseries for cutting/seedling production. We produce both seedlings and rooted cuttings (a method also known as vegetative propagation) to carry out the planting of our eucalyptus trees. Vegetative propagation results in plantations of trees with the most favorable genetic characteristics for pulp production. These characteristics include fast growth rate, good quality of wood fibers, resistance to disease and “self-pruning” trees with fewer branches. Greater tree standardization provided by cloning also allows for increased mechanization in tree felling and transportation, and makes it easier to adjust equipment and machinery to topographical conditions. Currently, almost 100% of the VCP’s plantations are made with rooted cuttings obtained by vegetative propagation method.

We began to review concepts on community relations and the common good, as part of our contribution to social and economic development. For example, we invited our neighbors in the state of Rio Grande do Sul to participate in a project in which we have already planted approximately 40,000 hectares of eucalyptus. The Forestry Savings program, launched last year, an innovative way of cooperation and social inclusion involving our neighbors in the countryside, is running very well. In 2006 more than 6,000 hectares were planted in this program.

Expansion

We spent approximately US$ 78 million in debottlenecking projects of which US$ 32 million were disbursed in 2005 and US$ 46 million disbursed in 2006. This investment is expanding our annual pulp capacity by over 150,000 tons during the 2006-2007 period. Simultaneously, we have been investing in the acquisition of land and eucalyptus plantations in the state of São Paulo, in the region surrounding our plant, and in forest reserves in the south of the state of Rio Grande do Sul in order to reduce our dependence on raw materials from third parties. The project in the South also includes the construction of an industrial facility at the beginning of the next decade, for which socio-environmental licensing procedures have already begun.

Under the Exchange Agreement, International Paper is granted the right to construct, at its cost, up to two paper machines adjacent to, and integrated with, the Project Mill. If International Paper exercises its right to build one or both paper machines adjacent to the Project Mill, (1) certain parcels of real property will be retained by International Paper upon which the paper machines and ancillary facilities will be constructed and (2) the paper machines will be supported by long-term supply agreements under which VCP will provide International Paper pulp on competitive terms and utilities and other services at rates based on VCP’s actual operating costs. The companies foresee the conclusion of the exchange of assets to be on February 1, 2007. See Item 5A “Operating Results – Recent Developments” and Item 10.C “Additional Information – Material Contracts.”

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes and other financial information included elsewhere in this annual report, and in conjunction with the financial information included under “Item 3A—Key Information—Selected Financial Data.” This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Item 3D—Key Information—Risk Factors” and the matters set forth in this annual report generally.

Overview

We produce pulp and paper products in Brazil, including wood-free printing and writing papers and specialty papers.

Pulp. We produce bleached eucalyptus pulp, part of which we sell domestically and internationally and the remainder of which we use for our paper business.

Paper. We produce paper for the domestic and international markets. As part of our strategy for paper products, we have continued to increase the proportion of our sales of value-added products, such as coated, thermal and carbonless and other specialty papers, and to remain as a leading market share producer of these value-added paper products in the domestic market. The percentage of our net sales of these value-added products in relation to our total net sales for paper in the Brazilian market was 47% in 2004, 49% for 2005 and 50% for 2006. In 2004, with the recovery of the domestic economy, we directed our sales volume growth to the domestic market. In 2004 and 2006, the better scenario in the local market allowed us to increase our coated paper sales, but we lost market share due to the competition with imported products, as a consequence of the stronger foreign exchange rate. In 2005, we continued to increase exports of uncoated papers despite the appreciation of the real against the U.S. dollar because the weak domestic market conditions lowered domestic demand and shifted our sales to the export market. Our sales of paper outside Brazil as a percentage of our total sales of paper in terms of volume were 29% in 2004, 32% for 2005 and 28% for 2006. While we increased our sales of coated papers in the last three years, we lost market share to imports in the coated paper domestic market, as the real appreciated during that years. We intend to take advantage of the opportunity to recover our market share if the real depreciates or stabilizes against the U.S. dollar.

We have sought to increase the proportion of our production of value-added paper products, which have higher margins, using various strategies: (1) in the domestic market, we are focusing our efforts on the increase of the proportion of our product mix devoted to coated and chemical papers, targeting specific segments of the market; and (2) in the export market, we increased sales of uncoated papers, especially cut-size. We have increased our total volume of pulp sales due to the completion of the Jacareí expansion. And we will increase even more in 2007 period due to the additional volume from the debottlenecking of this new line. Since the new production line started up in December 2002, we have benefited from our ability to produce larger volumes of pulp at fixed costs that have not grown proportionally and from lower transportation costs relative to other producers. See “Item 4—Information on VCP—Business Overview—Our Business Strategy.” We have also responded to the increased demand in the international market by increasing our U.S. dollar-denominated pulp exports.

Asset Exchange Agreement with International Paper (“IP”)

The Asset Exchange Program will permit VCP to, beginning in January, 2009, use the Tres Lagoas Project Mill facility to expand its forest and mill production capacity to meet increased demand in the export market and, as a result, expand our presence in the international pulp market. These are components of our Business Strategy. See Items 4B-”Business Overview- Our Business Strategy” and Item 10C “Additional Information – Material Contracts”.

The exchange will result, on the other hand, effective February 1, 2007 in the loss of the 100,000 ton of market pulp and 355,000 ton paper production capacity of the Luiz Antonio mill from the Company’s total production facilities. See Item 4D-”Business Overview- Property, Plant and Equipment”. As a consequence, VCP’s ´production of both maket pulp and paper will decline effective with the above date, together with the resulting decline in revenue, EBITDA and net income attributable to the facility. VCP management has concluded that the long-tem benefits of the asset exchange transaction are greater than the short and medium term costs.

The following table shows a breakdown of our total exports in 2005 and in 2006 in terms of volume by geographic location:

	Year ended December 31, 2006										Year ended December 31, 2005

	Pulp					Paper					Pulp					Paper

	Thousands of Tons		% of Total			Thousands of Tons		% of Total			Thousands of Tons		% of Total			Thousands of Tons		% of Total

North America		77.1		9	%		59.8		32	%		76.0		10	%		66.5		33	%
Latin America (1)		—		—			51.5		27	%		1.6		—			53.8		27	%
Europe		508.5		61	%		62.5		33	%		474.5		60	%		61.2		31	%
Asia and Africa		246.6		30	%		14.2		8	%		234.9		30	%		18.2		9	%
Total Exports		832.2		100	%		188.0		100	%		787.0		100	%		199.7		100	%


(1)	Excluding Brazil.

Prices

All references to prices relate to average prices determined by dividing the net sales by the corresponding tonnage.

Pulp. Our pulp operations are affected by prevailing world market prices for pulp, the amount of pulp produced and sold worldwide, and the pulp requirements of our paper business. The prices that we are able to obtain for our pulp depend upon prevailing world market prices, which historically have been cyclical and subject to significant fluctuations over relatively short periods of time. The price of pulp is quoted in U.S. dollars. Domestic sales of pulp are denominated in reais; however, as export sales, they generally reflect the international price of pulp, which is denominated in U.S. dollars.

In the first quarter of 2003, severe weather conditions reduced harvesting in the United States and resulted in reduced pulp production. This factor, along with strong demand in China, reduced inventories and caused prices in the first quarter of 2003 to climb to US$ 570 per ton in the United States, US$ 540 per ton in Europe and US$ 510 per ton in Asia. Due to seasonal factors, pulp prices declined moderately in the second half of 2003 to US$ 550 per ton in the United States, US$ 510 per ton in Europe and US$ 470 per ton in Asia by December 2003. Pulp prices averaged US$ 507 per ton in 2003. In the beginning of 2004, international pulp consumption was greater than expected, especially from China, where pulp was needed for new plants, causing price increases throughout all regions during the first half of the year. At March 31, 2004, prices reached US$ 500 in Asia, US$ 520 in Europe and US$ 545 in the United States, and US$ 530, US$ 550 and US$ 585 respectively in June. In the second semester of the year, the trend of pulp prices changed. China took advantage of the combination of high initial inventories, accumulated in the first half of the year, and the seasonal low period to reduce its purchase volumes and resist rebuilding of inventories. Also, European markets resist to paper prices increases. The average price of pulp in 2004 was US$ 518 per ton. As demand improved, international pulp prices began to increase in November 2004 and in January, March and April 2005, reaching US$ 570 per ton in Asia, US$ 600 per ton in Europe and US$ 635 per ton in the United States. These prices remained stable during the second half of 2005, except in Asia where the price declined US$ 30 in August 2005. In 2006, prices began to increase again due to the healthy demand and capacity shutdown announcements in the northern hemisphere. Pulp prices increased in all regions during the year and in December 2006 they reached US$ 650 per ton in Asia, US$ 680 per ton in Europe and US$ 785 per ton in the United States.

The average C&F (Cost and Freight) price per ton for our export sales of bleached eucalyptus market pulp over the last several years was US$ 579 in 2000, US$ 382 in 2001, US$ 389 in 2002, US$ 456 in 2003, US$ 462 per ton in 2004, and US$ 511 per ton in 2005. In 2006, the average C&F price increased to US$ 559 per ton.

Paper. Our paper operations are affected primarily by demand for paper in Brazil and by Brazilian economic conditions and, to a lesser extent, international paper prices. Prices for printing and writing papers are generally linked to international prices. In the second half of 2002, the devaluation of the real and the resulting increase in export volumes, especially for cut-size paper, created a shortage of paper in the domestic market and average prices increased by approximately 35% in reais, which partially offset the significant devaluation of the real. In 2003, the real appreciated 22% against the U.S. dollar, but domestic paper prices remained fairly stable, resulting in higher prices in U.S. dollars. In 2004, the real appreciated 9% against the U.S. dollar and the domestic market improved with the expectation of lower interest rates in Brazil, combined with a better scenario in the international markets. As a result, domestic paper average prices increased an average of 8% in U.S. dollars, in 2004 compared to 2003. In 2005, the real appreciated 13% against the U.S. dollar but the domestic market was weaker than expected, and this was combined with a weaker scenario in the international markets. However, domestic average prices were almost stable in reais. As a result, domestic paper average prices increased an average of 13% in U.S. dollars in 2005, as compared to 2004. The price of paper products, although less volatile than the price of pulp, experiences fluctuations in response to global demand and production and fluctuations in pulp prices. During 2005 paper prices in the European and North American markets had not increased to match the increases in pulp prices, since the fourth quarter of 2004. Therefore, margins for paper prices have continued to be low in those markets. The first half of 2006 was marked by capacity adjustments and shutdowns, combined with a continuous expansion in global demand, which also improved the international scenario for paper. For uncoated woodfree papers, international prices climbed 15% in the first six months of 2006, but declined approximately 5% in the last quarter of the year. This improvement in international scenario for paper brought prospects of future new price increases.

In response to the cyclical nature of the paper market, we have increased our production of value-added paper products, such as coated, thermal and carbonless papers, which are less sensitive to cyclical price variations.

Costs and operating expenses

Our principal costs of production are incurred in reais and consist of raw materials (primarily wood and chemicals), labor and depreciation. In the last three years, our cost has increased significantly when expressed in U.S. dollars as a result of the appreciation of the real, pressuring our U.S. dollars margins. Our business is capital intensive and a portion of our costs is fixed. We seek to maintain high capacity utilization rates to benefit from economies of scale and production efficiencies resulting from the operation of large, efficient production facilities and machines. As a percentage of net sales, selling and marketing expenses were 12% in 2004, 12% in 2005 and 10% in 2006. The increase of 3% in the export volumes and higher freight costs in 2006 has not resulted in higher selling and marketing expenses because they were offset by other efforts related to our cost reduction program. We generally pay up to 10% of the FOB price to export and shipping agents, which varies by geographic region and responsibilities. General and administrative expenses as a percentage of net sales were 4% in 2004, 5% in 2005 and 2006.

Financial income

We derive financial income from several sources, including interest on cash and cash equivalents. Since January 1, 2001, we have derived financial income from accessing low-cost foreign-currency financing and investing the proceeds in higher-yielding Brazilian financial instruments. The unrealized gains from cross-currency interest-rate swap contracts are recorded at fair market value on our balance sheet as a liability and in our statement of income as “Foreign exchange gain (loss) and unrealized gain (loss) on swaps, net.” We enter into these arrangements to reduce our exposure resulting from a possible devaluation of the real in relation to the U.S. dollar because a high proportion of our debt is denominated in U.S. dollars. See “—Brazilian economic environment” and “—Liquidity and capital resources—Debt.”

Financial expenses

We incur financial expenses from several sources, including short-term debt and long-term debt. We principally seek long-term financing to fund our projects, which are generally of a long-term nature. Short-term debt is comprised of U.S. dollar-denominated working capital from commercial banks and short-term secured loans. Long-term debt consists of both U.S. dollar, mainly due to pre-payment export loans, and real-denominated debt, borrowed from BNDES. We have consistently derived profits from arbitrage when we borrow funds in U.S. dollar-denominated liabilities and invest amounts in real-denominated assets despite the hedging costs involved, but we do not incur such debt in order to gain from that arbitrage. Additionally we consider the natural hedging from the funds of exports when deciding to incur such arbitrage. We provide no assurance that such favorable results will be earned in the future or that we will continue with these arbitrage transactions. See “—Liquidity and capital resources.”

Discussion on critical accounting policies

Critical accounting policies are those that are important both to the portrayal of our financial condition and results and that require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increase, those judgments become even more subjective and complex. In order to provide an understanding about how our management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different circumstances, we have identified the following critical accounting policies:

	•	revenue recognition and accounts receivable;

	•	impairment of investments and intangible assets;

	•	forest development costs and impairment tests;

	•	deferred taxes;

	•	tax contingencies; and

	•	employee benefits and other related matters.

Revenue recognition and accounts receivable

We recognize revenue and associated costs of sales at the time our products are delivered to our customers or when title and associated risks pass to our customers. Revenue is recorded net of sales returns of US$ 10 million in 2006 (US$ 7 million in 2005 and US$ 6 million in 2004). Our customers that purchase on credit agree to payment terms that effectively include finance charges. The finance charge on each sale is the difference between the amount the customer agrees to pay at the due date and the cash sale price. The finance charges are recognized over the payment period and are included in financial income. Recognition of revenue for our two segments and for domestic and export sales is based on the following principles:

Paper - domestic market: Sales are either on cash or credit terms (normally 30, 60, 90 days) or through our vendor program. Credit sales receivables are discounted to present values as our price list is dependent on the length of credit granted. Revenue is recognized when the customer takes delivery of the product either upon delivery to the customer’s carrier (Incoterms FOB) or premises (Incoterms CIF). Sales through our vendor program are made to certain of our pre-qualifying domestic customers, and represented approximately 22% of our domestic sales in 2006 (2005 - 22%; 2004 - 21%). Under the vendor program, the customer agrees to pay the bank and the bank in turn pays us on behalf of the customer for the purchase price of the product. We guarantee full repayment of the loan for which the maximum allowable term for payment is generally 180 days, though in the case of a few customers, we extend the term to 360 days.

We estimate that for 2006, 2005 and 2004, an average of approximately 3% of our total number of regular domestic customers (approximately 22%, 22% and 21%, respectively, of total domestic sales value) obtained our guarantee for their loans.

Paper - export market: export orders are normally met by our own or third-party warehouses located close to strategic markets. These sales are recognized when products are delivered to the carrier and risks have passed to the customer, that is, the Company delivers the goods, cleared for export to the carrier nominated by the buyer at the named place. Incoterms CIF and Incoterms FOB terms determine timing of revenue recognition.

Pulp - domestic market: sales are primarily under credit terms which do not exceed 30 days. Revenue recognition is consistent with that applied to paper sales. In 2006 none of our customers qualified for sales through our vendor program (2005 - none; 2004 - none).

Pulp - export market: all export orders are normally satisfied by own or third party warehouses located close to strategic markets. These sales are recognized when products are delivered to the carrier and risks have passed to the customer. Exports to Asia are on a cost and freight basis with a named port of destination.

We recognize revenue and associated costs of sales at the time our products are delivered to our customers or when title and the associated risks pass to our customers.

Discounting of short-term receivables and interest income

Our customers that purchase on credit agree to payment terms that effectively include finance charges. The finance charge on each sale is the difference between the amount the customer agrees to pay at the due date and the cash sale price at date of sale. The finance charges are recognized over the payment period and are included in financial income, and accounts receivable from these transactions, including short-term receivables, are discounted to present value.

Vendor program

Some of the sales of our products to certain of our domestic customers are performed through a program called the “vendor program,” where the purchases from us are financed by a bank that has established a direct financing program.

Under the vendor program, (1) the bank finances the customers’ purchases (by making a payment to us on behalf of the customers in cash equal to the amount of the purchase price payable by the customers) and (2) we issue separate guarantees in which we guarantee payment to the bank in the event that the relevant customer fails to pay the bank. No separate fee is received by us for the guarantee. The risk of the vendor program is exactly the same as the direct sale.

Under the vendor program, a separate note agreement exists between the bank and the customer, and the customer is considered to be the primary obligor under that note agreement. Under our guarantee contract with the bank, we are considered a secondary obligor of a specified percentage of the amount (in some cases up to the full amount) that the bank finances for the customer. Although the “receivables” are payable by our customers directly to the banks under the vendor financing program, we closely monitor the collection of these amounts and are advised by the bank once amounts have been settled. In the event of a default by a customer under the vendor-financing program with the banks, the bank will charge, pursuant to the guarantee, our checking account established with the bank in the amount of the default. Accordingly, during the period of the guarantee, we assess any contingent liabilities that may arise from the guarantee.

Under the vendor program, we recognize revenue as the goods are delivered to our customers or when title and associated risks pass to our customers.

Allowance for doubtful accounts

The allowance for doubtful accounts is recorded in an amount we consider sufficient to cover any probable losses on realization of our accounts receivable from our customers and is included under selling expenses; no adjustment is made to net sales revenue. Our accounting policy for establishing the allowance for doubtful accounts reserve is summarized as follows:

	•	all overdue invoices over R$100,000 (equivalent to US$46,772 at the December 31, 2006 exchange rate) are individually analyzed by our accounting department, in connection with the legal, collection and credit departments, in order to measure the amount of the probable expected losses, and, consequently, to determine the allowance for doubtful accounts to be recorded; and

	•	overdue invoices of less than R$100,000 are reviewed by our collection and credit department in order to identify probable losses to be recorded based on our knowledge of the customer’s credit history and current situation.

Impairment of investments and intangible assets

We acquired 28.0% of the voting capital and 12.4% of the total capital of Aracruz on October 3, 2001, for US$ 370 million, generating goodwill on our portion of the underlying fair value of the net assets of US$ 155 million. Financial Accounting Standards Board Statement, or SFAS No. 142, “Goodwill and Other Intangible Assets,” was applied in connection with our acquisition, and no amortization of the goodwill generated as a result of this acquisition has been recorded.

Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investment in Common Stock,” requires us to determine if, among other factors, a decrease in market value is other than a temporary impairment. As the quoted market price of the investee’s publicly traded stock during 2002 was consistently quoted below book value, a one-off impairment provision was recorded in 2002 based on the market price of US$ 18.56 for the Aracruz ADRs on December 31, 2002. The impairment charge of US$ 136 million (gross of deferred income tax effects of US$ 46 million) was taken directly as a charge to income (“Equity loss of investee”). The deferred tax effect of US$ 34 million is included in “Deferred income tax benefit.” At December 29, 2006, the Aracruz ADR was quoted at US$ 61.24. Considering the market price for the Aracruz ADR today, there would be no impairment provision since it is above the acquisition price of approximately US$29 per ADR of Aracruz.

Forest development costs

Forest development costs, primarily project implementation costs (preparation of soil, planting, pest control and clearing, etc.) and similar ongoing development costs are capitalized as incurred. As a result of improvements in forest management techniques, including genetic improvement in trees, beginning on January 1, 2001, we now harvest and replant our forests approximately every seven years and capitalized costs are expensed at the time of each harvest.

Deferred taxes

We recognize deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. If we or one of our subsidiaries operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we evaluate the need to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in an increase in our effective tax rate. Due to our enrollment in the REFIS program (Programa de Recuperação Fiscal), a Brazilian tax recovery program, we could elect annually for each year from 2001 to 2004 to calculate and pay our income taxes either based on the provisions of REFIS (an estimated tax basis which is based on net sales for the year adjusted by financial income and other income) or actual pre-tax income. We opted to be taxed under the REFIS basis until 2004. From 2005 on, we have been taxed again on the basis of taxable income.

Tax contingencies

We are currently involved in certain tax proceedings and have filed claims to avoid payment of taxes that we do not believe are due. When tax obligations are clearly established by current legislation, even though we are contesting the tax and may not have settled amounts allegedly due, we fully provide for the obligation and related charges. As discussed in note 15 to our audited consolidated financial statements at and for the year ended December 31, 2006, in the case of tax assessments or other contingent liabilities, we have accrued our estimate of the costs for the resolution of these claims when we consider loss of our claim to be probable. The tax contingencies and obligations which are being disputed relate primarily to value-added sales and excise taxes, taxes on revenue, social security contributions, income tax and tax on bank account transactions. These estimates have been developed in consultation with outside legal counsel handling our defense in these matters and were based upon an analysis of potential results.

Employee benefits and other related matters

In March 2000 we launched a defined contribution plan which provides pension and post-retirement benefits. We also contribute to the Government pension, welfare and redundancy plans on behalf of our employees and these contributions are expensed as incurred. Most of our employees are members of unions, with which we enter into collective-bargaining arrangements annually. The liability for future compensation for employee vacations is accrued as earned.

We have adopted SFAS 106, “Employers’ Accounting for Post-retirement Benefits Other than Pensions,” which requires a provision for the costs of post-retirement benefits expected to be paid to current, former or inactive employees upon retirement. Expenses relating to benefits we provide to our current employees are expensed as incurred whereas those relating to retired employees (current as well as expected in the future) and their dependents are accounted for in accordance with SFAS 106.

Fair value of financial instrument - put option

Written put and call options were established in separate agreements (subsequently amended) at the time of the acquisition of the Ripasa shares, which originally provided a Ripasa minority shareholder, the Zarzur family with an option to require Ripasa (later amended to be VCP and Suzano) to repurchase their shares at any time, provided that the shares be free of any encumbrances by the exercise date, during the five year period ending March , for the reais equivalent, at that date, of US$ 80 million (our portion) plus interest from March 31, 2005 (on December 31, 2006, that amount, including interest, totaled US$ 133 million (our portion)).Thereafter, for a twelve-month period, VCP and Suzano will have a call option ending March 2011 which if exercised would require the shares to be redeemed for the same amount.

Following the corporate restructuring, the separate agreement dated November 10, 2004 which established the Suzano and VCP call options and the put option of certain former minority shareholders of Ripasa, were modified to substitute the Ripasa shares for shares in VCP and Suzano as those former Ripasa minority shareholders had exchanged their shares for shares in VCP and Suzano. Accordingly, VCP has a call option to acquire 3,124,139 of its own non-redeemable preferred shares during a twelve-month period starting on March 31, 2010, for the reais equivalent, at that date, of US$ 80 million (our portion) plus interest from March 31, 2005 (on December 31, 2006, that amount, including interest, totaled US$ 133 million (our portion)). The former shareholders of Ripasa, now shareholders of VCP, who are party to the agreement, have a put option which may require VCP to acquire all their non-redeemable preferred shares during a period of five years through March 31, 2010.

These instruments meet the derivative definition in FAS 133 and the put option and the call option should be initially recognized at fair value, with subsequent fair value changes recognized in the statement of income for the period.

The shares owned by the Zarzur family have been subject to encumbrances under a legal order filed by the Brazilian Central Bank as collateral in a bank liquidation process and cannot be sold. The rights to exercise the option cannot be transferred to a third party without the previous written consent of the other parties to the agreement. Therefore, the put option is not currently exercisable and based on management’s assessment (supported by a position of legal counsel) and it is not probable that the options will become exercisable prior to expiration.

In conclusion, VCP is recording the put option at fair value as a liability as of May 2006. The call option is deemed out of the money; therefore, it would not require the recognition of an asset at inception. As the VCP shares held by the former Ripasa minority shareholders party to the agreement are subject to liens and encumbrances under legal proceedings which are not expected to be released prior to the expiration of the put/call options, the fair value of the derivative instruments, is not material to company’s financial statements as of December 31, 2006. This legal determination will be re-evaluated at each balance sheet date and the financial instrument marked-to-market.

Brazilian economic environment

Our results of operations and financial condition, as reported in our financial statements, have been affected by the rate of Brazilian inflation and the rate of devaluation of the Brazilian currency against the U.S. dollar.

Effects of inflation and impact of the Real Plan. Since the introduction of the real as the Brazilian currency in July 1994, inflation was controlled until January 1999, when it increased due to the devaluation of the real. During periods of high inflation, such as those prior to the introduction of the real (when inflation rates reached approximately 80% a month in March 1990), real wages in Brazilian currency tended to fall because salaries typically did not increase at the same rate as inflation. The effect was a progressive decline in purchasing power of wage earners. The reduction and stabilization of inflation following the implementation of the Real Plan resulted in increased spending on consumer goods (including paper), higher real income growth, increased consumer confidence and the increased availability of credit. It also resulted in relatively higher labor costs.

The table below shows the Brazilian general price inflation (according to the IGP-DI), devaluation of the real against the U.S. dollar and the period-end exchange rate and average exchange rates for the periods shown:

	Year ended December 31,

	2006			2005			2004			2003			2002

Inflation (IGP-DI)		4	%		1	%		12	%		8	%		26	%
Devaluation (appreciation) of the real vs. U.S. dollar		(9	)%		(13	)%		(9	)%		(22	)%		34	%
Year/period-end exchange rate—US$1.00(1)	R$	2.14		R$	2.34		R$	2.65		R$	2.89		R$	3.53
Average (daily-weighted) exchange rate(1) US$1.00	R$	2.18		R$	2.44		R$	2.93		R$	3.08		R$	2.92


(1)	The average (daily) exchange rate is the sum of the closing exchange rates at the end of each business day divided by the number of business days in the period.

Effects of exchange rate variation and inflation on our financial condition and results of operations. The devaluation of the real has had and will continue to have multiple effects on our results of operations. Our statements of operations expressed in reais are translated to U.S. dollars at the average rate for the relevant period. The amount in U.S. dollars for the relevant period in the statements of operations will be reduced at the same rate as the real has devalued in relation to the U.S. dollar over the period to which it is being compared.

Although we present our financial statements in U.S. dollars, our functional currency is the real. The devaluation has had the following additional effects on our results of operations:

	•	the translation effects of our U.S. dollar transactions (cash, cash equivalents, held-to-maturity investments, loans and the unrealized gains and losses from cross-currency interest rate swap contracts, among others) are recorded in our statements of income. In 2004, we recorded a net foreign exchange gain of US$12 million. In 2005 and 2006, we recorded a net foreign exchange loss of US$5 million and US$4 million, respectively.

	•	our non-monetary assets, primarily inventories and property, plant and equipment, are translated to U.S. dollars at the period-end exchange rates. Any depreciation of the real against the U.S. dollar will be reflected as a charge directly to shareholders’ equity, including the decrease in book value of property, plant and equipment in reais when translated to U.S. dollars. These currency translation effects are beyond our management’s control. Accordingly, in our statement of changes in shareholders’ equity for 2004, we recorded a translation gain of US$114 million directly to shareholder’s equity, without affecting net income, reflecting the 9% appreciation of the real against the U.S. dollar. In 2005, we recorded a translation gain of US$180 million to reflect the 13% appreciation of the real against the U.S. dollar. In 2006, we recorded a translation gain of US$142 million to reflect the 9% appreciation of the real against U.S. dollar.

Additionally, inflation and exchange rate variations have had, and may continue to have, effects on our financial condition and results of operations. One significant effect of inflation and exchange rate variations on us concerns our costs and operating expenses. Our cash costs (i.e., costs other than depreciation and depletion) and operating expenses are substantially all in reais and tend to increase with Brazilian inflation because our suppliers and service providers generally increase prices to reflect Brazilian inflation. 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 costs and operating expenses may increase, and (assuming constant U.S. dollar sales prices) our profit margins decrease. If the rate of appreciation of the U.S. dollar exceeds the rate of Brazilian inflation, then, as expressed in U.S. dollars, our costs and operating expenses may decrease and (assuming constant U.S. dollar sales prices) our profit margins increase.

The exchange rate variations have had the following additional effects on our results of operations:

	•	In 2004, the Brazilian currency appreciated 9% in relation to the U.S. dollar, causing an increase in our production costs when expressed in U.S. dollars and also negatively impacted our exports, which represented 49% of our total net revenues in that year.

	•	In 2005, the Brazilian currency appreciated a further 13% in relation to the U.S. dollar, causing an additional increase in our production costs when expressed in U.S. dollars and also negatively impacted our exports, which represented 50% of our total net revenues in that year.

	•	In 2006, the Brazilian currency appreciated 9% in relation to the U.S. dollar, causing an increase in our production costs when expressed in U.S. dollars and also negatively impacted our exports, which represented 48% of our total revenues in that year.

	•	Because the price of pulp in Brazil traditionally has followed the international price of pulp in U.S. dollars, the price in reais increases for sales to the domestic market when the real devalues against the U.S. dollar, and decreases when the real appreciates against the U.S. dollar, reducing revenues.

	•	Because our costs and operating expenses are generally in reais, the devaluation had the effect of decreasing these costs when reported in U.S. dollars in 2001 and 2002, while in 2003, 2004, 2005 and in 2006 the appreciation of the real resulted in the increase of these costs when reported in U.S. dollars.

The devaluation of the real impacts the amount of dividends or interest on equity available for distribution to our shareholders when measured in U.S. dollars. Amounts of dividends or interest on equity reported as available for distribution in our statutory accounting records prepared under Brazilian GAAP will decrease or increase when measured in U.S. dollars as the real depreciates or appreciates, respectively, against the U.S. dollar. In addition, the devaluation of the real creates foreign exchange gains and losses, which are included in the results of operations determined under Brazilian GAAP and which affect the amount of unappropriated earnings available for distribution. In 2006 on a consolidated basis, we and our subsidiaries recorded under Brazilian GAAP foreign exchange and monetary gains (including gains from foreign currency swaps) of R$ 44 million (equivalent to US$ 20 million) compared to gains of R$ 327 million (equivalent to US$ 140 million) in 2005 and gains of R$ 190 million in 2004 (equivalent to US$ 65 million). On December 3, 2003 we changed our dividend policy. For further information on the new policy, see “—Dividend Policy.”

We have entered into financial instruments to mitigate the effects of foreign exchange variations on our U.S. dollar-denominated debt. We believe entering into these financial instruments partially protected our net assets from the significant devaluations of the real in 1999 and 2002. We entered into cross-currency interest rate swap contracts to offset losses generated by our U.S. dollar-denominated loans. These contracts have protected us from the significant losses that would otherwise have been charged to income at the time of the devaluation. In 2004, we recorded a net foreign exchange gain of US$ 12 million. In 2005, we recorded a net foreign exchange loss of US$ 5 million. In 2006, we recorded a net foreign exchange loss of US$ 4 million. See “—Liquidity and Capital Resources—Capital Expenditures.”

Effects of International Crises on the Brazilian Economy. International crises have adversely impacted the Brazilian economy from time to time. For example, the 1997 Asian crisis and the 1998 Russian crisis contributed to the need for the Central Bank to devalue the real in the beginning of 1999. In 2000, Brazilian financial markets were negatively affected by volatility on the U.S. Nasdaq markets and the decline in value in the technology sector. In 2001, the Brazilian economy was negatively affected by the country’s energy crisis, the Argentine political and economic crisis and the terrorist attacks in the United States on September 11, 2001. In 2002, the Brazilian economy was negatively affected by uncertainties caused by the country’s elections, the political and economic uncertainties in other emerging markets and the threat of war in Iraq. In 2003, due to the macroeconomic situation and political and economic measures of the new Brazilian government, the financial market has been more confident in Brazil’s economic performance, reflected by a considerable decline in Brazil’s sovereign risk and the appreciation of real against the U.S. dollar. In 2004, Brazil’s economic and political environment was more stable than in 2003, which lead to significant increase in the country’s GDP and a positive impact in the financial market. The appreciation of the euro against the U.S. dollar also benefited Brazilian paper producers in the European printing and writing paper markets. In 2005 and 2006, we faced a stable global economic environment and surplus of external accounts, which led to a positive impact in the financial market, reducing the country’s sovereign risk and strengthening the real against the U.S. dollar.

A. Operating Results

Recent Developments

On January 2, 2007, VCP created a new subsidiary LA Celulose e Papel Ltda. (“LA”) as part of the asset exchange agreement with International Paper. This wholly-owned subsidiary has no significant assets or liabilities.On January 2, 2007, VCP transferred to LA the assets of the Luiz Antonio mill and related forests. On February 1, 2007, VCP will transfer LA to International Paper and receive Chamflora (currently an International Paper subsidiary) in exchange. Chamflora has contracted an internationally recognized engineering and construction company, Poyry, on an EPC Engineering, Procurement and Construction, or EPC, basis to build the Três Lagoas mill as a turn-key project. Chamflora has already paid Poyry for the EPC, which has in turn transferred to a commercial bank acting as the Trustee Bank (“Trustee”) the corresponding funding of this project. These resources have been and will continue to be disbursed by the Trustee in accordance with the physical construction schedule of the project, which also contemplates the orders with third parties to supply equipment and services being rendered in Três Lagoas to Chamflora. Chamflora is accounting for these EPC disbursements as a “Construction in Progress”. Upon the completion of the construction and start-up of the mill, these costs will be transferred to the appropriate fixed assets accounts. See Item 4C “Organizational Structure” and Item 10.C “Additional Information – Material Contracts.”

Results of operations

The following table sets forth certain items derived from our statements of income for the periods indicated:

	Year ended December 31,

	2006			2005			2004

	(US$ in millions)
Net sales	US$	1,317		US$	1,130		US$	1,010
Cost of sales		(813	)		(654	)		(518	)

Gross profit		504			476			492
Selling and marketing expenses		(136	)		(138	)		(121	)
General and administrative expenses		(63	)		(55	)		(40	)
Other operating expenses, net		(20	)		(36	)		(6	)

Operating profit	US$	285		US$	247		US$	325

The following table sets forth certain items derived from our statements of income as a percentage of net sales for the years indicated (certain totals may not add due to rounding):

	Year ended December 31,

	2006			2005			2004

Net sales		100	%		100	%		100	%
Cost of sales		(62	)		(58	)		(51	)

Gross margin		38			42			49
Selling and marketing expenses		(10	)		(12	)		(12	)
General and administrative expenses and other operating expense, net		(6	)		(8	)		(5	)

Operating profit		22			22			32
Financial income		13			7			4
Financial expenses		(11	)		(11	)		(7	)
Foreign exchange gains (losses) and unrealized gains (losses) on swap, net		(4	)		—			1
Income tax benefit (expenses)		(4	)		1			(4	)
Equity in earnings of affiliates		6			5			3
Net income		28	%		23	%		30	%

We operate in two business segments: pulp and paper, which together account for 100% of our sales. The following table sets forth, by reportable segment, our net sales as determined in accordance with U.S. GAAP:

	Year ended December 31,

	2006		2005		2004

Pulp:
Volumes (in tons)
Domestic		109,683		80,007		80,068
Export		832,121		786,944		764,363
Total		941,804		866,951		844,431
Average prices (U.S. dollars per ton)
Domestic	US$	500	US$	464	US$	423
Export		559		511		462
Net sales (in thousands of US$)
Domestic		54,884		37,107		33,866
Export		465,033		402,372		353,143

Total	US$	519,916	US$	439,479	US$	387,009
Paper:
Volumes (in tons)
Domestic
Uncoated printing and writing		245,179		207,919		224,778
Coated printing and writing		126,213		123,515		113,397
Chemical / Special		110,162		94,434		96,944
Export
Uncoated printing and writing		169,806		179,563		166,163
Coated printing and writing		17,839		19,861		13,275
Chemical / Special		395		284

Total		669,594		625,576		614,648
Average prices (in US$ per ton)
Domestic		1,308		1,238		1,098
Export		888		818
Net sales (in thousands of US$)
Domestic	US$	629,950	US$	527,386	US$	477,767
Export		166,988		163,392		145,054
Total	US$	796,938	US$	690,778	US$	622,821
Combined:
Volumes (in tons)
Domestic		591,237		505,875		515,187
Export		1,020,161		986,652		943,892
Total		1,611,398		1,492,527		1,459,079
Average prices (in US$ per ton)
Domestic	US$	1,158	US$	1,116	US$	99
Export		619		573		528
Net sales (in thousands of US$)
Domestic		684,833		564,493		511,633
Export		632,021		565,764		498,197

Total	US$	1,316,854	US$	1,130,257	US$	1,009,830

Year ended December 31, 2006 compared to year ended December 31, 2005

Introduction

In 2006, we continued to face favorable conditions for pulp driven by reduced supply mainly in North America and by higher demand mainly from Asia. As a result pulp prices increased throughout the year above our initial expectations. On the paper side, international prices recovered mainly driven by supply discipline in North America allowing for better margins for the global producers. In Brazil the paper demand improved because of higher local consumption, increased orders from the educational program of the Federal government, better demand from notebooks’ exporters, elections and the World Cup. On the other hand the stronger exchange rate reduced export margins and forced local paper producers to shift exports to the local market increasing supply and competition in this market. The Real continued to appreciate averaging R$ 2.18 to US$ 1.00 in 2006 compared to R$ 2.44 to US$ 1.00 for 2005.

Net sales

Net sales increased by 17% to US$ 1,317 million in 2006 from US$ 1,130 million in 2005, with an increase in both sales and prices of all products, especially in the local market. This increase was attributable to higher efficiency in production mainly of pulp through the debottlenecking at the Jacareí unit and to higher paper sales derived from the volumes resold from the Americana unit (Ripasa) since September 1, 2006. On the price side international pulp and paper prices went up while local prices increased in U.S. dollars due to the exchange rate appreciation. Sales volume increased by 8% to 1,611,398 tons in 2006 from 1,492,527 tons in 2005. Approximately 52% of our net sales in 2006 were made in the domestic market compared to 50% in 2005. Our revenue mix in 2006 was 61% for paper and 39% for pulp compared to 61% and 39%, respectively, in 2005.

Pulp. In the pulp segment, sales volume increased by 9% to 941,804 tons in 2006 from 866,951 tons in 2005. The increase in volume was due to greater market pulp production as a result of the capacity debottlenecking at the Jacareí mill, new volumes from the resale of Americana mill products and also due to favorable market conditions. Net sales attributable to pulp increased by 18% to US$ 520 million in 2006 from US$ 439 million in 2005. This increase was due to the additional sales volume and to the 9% higher average prices of pulp.

Pulp exports constituted 89% and 88% of revenues and sales volume, respectively, of pulp in 2006 compared to 92% and 91% in 2005. In the domestic market, the volume of pulp sold increased 37% to 109,683 tons compared to the same period in 2005. Revenues from domestic pulp sales represented 11% of the total pulp net revenues in 2006 and increased by 48% in 2006 to US$ 55 million from US$ 37 million in 2005. This increase was mainly due to the additional volumes of the Americana mill and higher domestic prices in U.S. dollars in the local market, the prices of which follow international markets.

Paper. In the paper segment, total volumes increased by 7% in 2006, driven by higher sales volume in the local market that grew 13%. Export volumes decreased by 6% in 2006 compared to 2005, mainly due to the shift of uncoated printing and writing paper exports to the local market driven by the lower exchange rate and better local demand. Net sales attributable to paper increased by 15% to US$ 797 million in 2006, from US$ 691 million in 2005, boosted by an 8% increase in the average price of paper. The domestic market accounted for 79% of paper revenues in 2006 compared to 76% in 2005.

Cost of sales

Cost of sales increased by 24% to US$ 813 million in 2006 from US$ 654 million in 2005. This increase was mostly due to the negative impact of a stronger real on our costs denominated in reais, increase in the depreciation rate related to the revaluation of the estimated useful lives of our machinery, equipment and installations from 25 to 18 years and three months, increase in labor costs, higher production volumes and higher costs related to the purchase and resale of the products from the Americana mill. These variations were partially offset by productivity gains and cost savings. The increase in labor costs was due to wage increases under our collective bargaining agreements negotiated in October 2005 and October 2006. For the same reasons, the cost per unit sold increased by 15% in 2006 as compared to 2005.

Our gross margin decreased to 38% in 2006 compared to 42% in 2005 mainly due to the increase in the cost per unit sold, partially offset by higher average prices.

Selling and marketing expenses

Sales expenses decreased by 1% to US$ 136 million in 2006, equivalent to 10% of net revenue, compared to US$ 138 million in 2005, equivalent to 12% of net revenue. This decrease resulted mainly from the reduction of logistic expenses and a better sales mix in the domestic market.

General and administrative expenses

General and administrative expenses increased by 15% to US$ 63 million in 2006 from US$ 55 million in 2005. The increase was mainly attributable to the negative effect of the appreciation of the real on our expenses denominated in local currency, in addition to increases in wages and partially offsetting fixed cost reductions. As a percentage of net sales, general and administrative expenses remained stable at 5% in 2006 and 2005.

Operating profit

Operating profit increased by 15% to US$ 285 million in 2006 from US$ 247 million in 2005. This increase was primarily due to higher production volumes and sales prices, productivity gains, fixed and variable cost reductions and lower provisions which were partially offset by the negative effect of the stronger exchange rate on local denominated costs and by the higher depreciation rate.

Pulp (including intersegment transactions at market values). Operating profit attributable to pulp increased by 23% to US$ 181 million in 2006 from US$ 147 million in 2005. This increase was primarily due to higher production volumes which were 9% up compared to 2005 and higher sales prices which increased 9% over 2005.

Paper (including intersegment transactions at market values). Operating profit attributable to paper increased by 4% to US$ 104 million in 2006 from US$ 100 million in 2005. This increase was primarily due to 7% higher sales volume and 8% higher sales price, mainly in the domestic market.

Financial income

Financial income increased by 110% to US$ 166 million from US$ 79 million in 2005. The increase is primarily due to the reversal of US$ 43 million related to the PIS/COFINS tax provisions on financial income, higher investments in local currency derived from positive net cash generation and the positive effect of the appreciation of the real. The PIS/COFINS rate is a social contribution on revenues and the reversal of the provision was due to a favorable decision by the court on VCP’s claims that the tax should not be extended to revenues other than billings.

We use derivative instruments to mitigate the effects of volatility of interest rates on U.S. dollar-denominated borrowings (principally export credits) and local interest rates available on real-denominated investments and recorded an increased gain in 2006 on these transactions compared with 2005. The amount we earned from these transactions was recorded as financial income.

Financial expenses

Financial expenses increased to US$148 million in 2006 from US$ 119 million in 2005. The increase was primarily due to higher indebtedness and higher international interest rates (principally LIBOR). The increase was partially offset by the renegotiation of approximately US$ 1 billion debt with lower spread over LIBOR after the “investment grade” rating granted to VCP by Standard and Poor’s in the first quarter of 2006.

Foreign exchange gains (losses) and unrealized gains (losses) on swap, net

Foreign exchange losses amounted US$ 4 million in 2006 from US$ 5 million in 2005. This result was primarily due to the appreciation of the real against the U.S. dollar and the fair-value adjustments on swap contracts. The gains (losses) recorded on foreign-currency based transactions, which are mainly U.S. dollar-denominated debt or gains (losses) from cross-currency interest rate swap contracts, are translated to U.S. dollars and reported in our statement of income.

Income tax expense

In 2006, we recorded an income tax expense of US$ 4 million compared to an income tax benefit of US$ 8 million in 2005. The effective tax rate was (4)% in 2005 to 1% in 2006. This increase primarily arose from the higher pre-tax profit and was partially offset by the deductibility of a charge for interest attributed to capital (a tax deductible distribution similar to a dividend), difference in foreign income tax rates and higher depreciation expense.

Equity in earnings of affiliates

The equity in earnings of affiliates increased to US$ 77 million from US$ 54 million in 2005. This increase was due to our share in the higher earnings of our investees mainly in Ripasa Celulose e Papel S.A.which generated earnings of US$ 19 million.

Net income

As a result of the foregoing, net income increased by 41% to US$ 372 million in 2006 compared to US$ 264 million in 2005.

Year ended December 31, 2005 compared to year ended December 31, 2004

Introduction

The average exchange rate for 2005 was R$ 2.44 to US$ 1.00 compared to R$ 2.93 to US$ 1.00 for 2004. In 2005, we faced favorable market conditions for pulp because of non-recurring factors, such as a hurricane in Sweden, an environment-related shutdown in Chile and a strike in Finland combined with continuous global demand. These factors led to increasing international pulp prices, driven by low inventories. On the paper side, we have seen a weak domestic market and had to increase our exports even in a low exchange rate scenario combined with low international prices.

Net sales

Net sales increased by 12% to US$ 1,130 million in 2005 from US$ 1,010 million in 2004, with an increase in both sales and prices of all products, especially in the export market. This increase was primarily attributable to higher efficiency in production of both pulp and paper reflecting in higher sales volume. Sales volume increased by 2% to 1,492,527 tons in 2005 from 1,459,079 tons in 2004. Approximately 50% of our net sales in 2005 were made in the domestic market compared to 51% in the same period in 2004. This reduction is due to an increase of PIS/COFINS tax (from 3.65% on revenues to 9.25% on revenues net costs and expenses, on a value added basis) for sales in the local market, thus decreasing our net domestic revenues. This effect was partially offset by higher prices in local sales. Our revenue mix in 2005 was 61% for paper and 39% for pulp compared to 62% and 38%, respectively, in 2004.

Pulp. In the pulp segment, sales volume increased by 3% to 866,951 tons in 2005 from 844,431 tons in 2004. The increase in volume was due to greater market pulp production as a result of higher efficiency at the Jacareí mill and also due to good market conditions. Net sales attributable to pulp increased by 13% to US$ 439 million in 2005 from US$ 387 million in 2004. This increase was due to the additional production volume and to the 11% higher average prices of pulp in the international market. Pulp exports constituted 92% and 91% of revenues and sales volume, respectively, of pulp in 2005 compared to 91% in the same period in 2004, for both revenues and sales volume.

In the domestic market, the volume of pulp sold remained stable in 2005 (80,000 tons) compared to the same period in 2004. Revenues from domestic pulp sales as a percentage of total pulp net revenues increased by 9% in 2005 to US$ 37 million from US$ 34 million in 2004. This increase was mainly due to higher domestic prices in U.S. dollars in the local market, the prices of which follow international markets.

Paper. In the paper segment, total volumes increased by 2%, driven by higher export volumes that grew 11%. Domestic sales volumes decreased by 2% in 2005 compared to 2004, mainly due to lower market demand primarily of uncoated printing and writing papers, which was affected by a reduced demand from educational programs and lower exports from notebook producers. Net sales attributable to paper increased by 11% to US$ 691 million in 2005, from US$ 623 million in 2004, mainly due to a 9% increase in the average price of paper. The domestic market accounted for 76% of paper revenues in 2005 compared to 77% in 2004, also affected by the PIS/COFINS tax increase.

In 2005, we increased export volumes in order to offset the lower demand in the local markets for uncoated papers. In 2005, domestic prices in reais decreased by only 1% compared to 2004. When we exclude the negative effect of PIS/COFINS tax increase, domestic sales attributable to coated papers increased 20% in US dollar terms and 9% in volume. The increase of coated and special paper exports reflected higher demand from the Mercosur market..

Cost of sales

Cost of sales increased by 26% to US$ 654 million in 2005 from US$ 518 million in 2004. This increase was mostly due to the negative impact of a stronger real on our costs denominated in reais, increases in cost of some specific raw materials, labor and oil and higher production volumes. These variations were partially offset by productivity gains and some cost savings. The increase in labor costs was due to wage increases under our collective bargaining agreements negotiated in October 2004 and October 2005. For the same reasons, the cost per unit sold increased by 23% in 2005 as compared to 2004.

Our gross margin decreased to 42% in 2005 compared to 49% in 2004 mainly due to the increase in the cost per unit sold, partially offset by higher average prices.

Selling and marketing expenses

Sales expenses increased by 14% to US$ 138 million in 2005, equivalent to 12% of net revenue, compared to US$ 121 million in 2004, also equivalent to 12% of net revenue. This increase resulted mainly from higher volumes of exported products and an increase in our selling expenses denominated in local currency, negatively affected by the appreciation of the real.

General and administrative expenses

General and administrative expenses increased by 38% to US$ 55 million in 2005 from US$ 40 million in 2004. The increase was mainly attributable to the negative effect of the appreciation of the real on our expenses denominated in local currency, in addition to increases in wages and third-party contracts. As a percentage of net sales, general and administrative expenses increased from 4% in 2004 to 5% in 2005.

Operating profit

Operating profit decreased by 24% to US$ 247 million in 2005 from US$ 325 million in 2004. This decrease was primarily due to higher production costs in U.S. dollars and higher sales, general and administrative expenses, partially offset by higher average prices, productivity gains and cost reductions.

Pulp (including intersegment transactions at market values). Operating profit attributable to pulp decreased by 18% to US$ 147 million in 2005 from US$ 180 million in 2004. This decrease was primarily due to higher production costs in U.S. dollars, partially offset by an 11% increase in pulp average price and 3% higher volumes.

Paper (including intersegment transactions at market values). Operating profit attributable to paper decreased by 31% to US$ 100 million in 2005 from US$ 145 million in 2004. This decrease was primarily due to higher production costs in U.S. dollars, partially offset by a 9% increase in the average price of paper and 2% higher volumes.

Financial income

Financial income increased by 98% to US$ 79 million in 2005 from US$ 40 million in 2004. The increase is primarily due to treasury operations and the positive effect of the appreciation of the real on loans denominated in foreign currency. We use derivative instruments to mitigate the effects of volatility of interest rates on U.S. dollar-denominated borrowings (principally export credits) and local interest rates available on real-denominated investments and recorded an increased gain in 2005 on these transactions compared with 2004. The amount we earned from these transactions was recorded as financial income.

Financial expenses

Financial expenses increased to US$ 119 million in 2005 from US$ 69 million in 2004. The increase was primarily due to higher indebtedness derived from the funds raised for the acquisition of Ripasa and higher international interest rates (principally LIBOR). The increase was partially offset by new loans with lower spread over LIBOR.

Foreign exchange gains (losses) and unrealized gains (losses) on swap, net

Foreign exchange losses amounted US$ 5 million in 2005 from gains of US$ 12 million in 2004. This result was primarily due to the appreciation of the real against the U.S. dollar and the fair-value adjustments on swap contracts. The gains (losses) recorded on foreign-currency based transactions, which are mainly U.S. dollar-denominated debt or gains (losses) from cross-currency interest rate swap contracts, are translated to U.S. dollars and reported in our statement of income.

Income tax expense

In 2005, we recorded an income tax benefit of US$ 8 million compared to an income tax expense of US$ 36 million in 2004. The effective tax rate decreased from 12% in 2004 to (4)% in 2005. This decrease primarily arose from the deductibility of a charge for interest attributed to capital (a tax deductible distribution similar to a dividend) and difference in foreign income tax rates.

Equity in earnings of affiliates

The equity in earnings of affiliates increased to US$ 54 million in 2005 from US$ 31 million in 2004. This increase was primarily due to higher results on our investments in Aracruz Celulose S.A. and the acquisition of 23% stake in Ripasa Celulose e Papel S.A. on March 31, 2005.

Net income

As a result of the foregoing, net income decreased by 13% to US$ 264 million in 2005 compared to US$ 303 million in 2004.

B. Liquidity and Capital Resources

Liquidity

Our principal sources of liquidity have historically been represented by cash generated from operations and short-term and long-term borrowings. We believe these sources will continue to be adequate to meet our currently anticipated use of funds, which include working capital, investment in capital expenditures, debt repayment and dividend payments.

We have historically made capital investments in order to, among other things, increase our production and modernize our facilities. We also review acquisition and investment opportunities. We may fund these investments through internally generated funds, the issuance of debt or equity or a combination of these methods.

At December 31, 2006, our cash and cash equivalents (which exclude investments held to maturity, available for sale securities and unrealized gains from swaps) increased to US$ 405 million primarily due to the cash generated in our operation and the increase in long-term loans. These sources were partially offset by the additional payment to Ripasa’s minority preferred shareholders, capital investments made, particularly in forestry assets, as well as the increase in working capital due to higher level of sales in 2006. Cash and cash equivalents of US$ 261 million in 2005 was increased primarily due to the cash generated in our operations and the increase in long-term loans. These sources were partially offset by the payment for the acquisition of a 23% stake in Ripasa, capital investments made as well as the increase in working capital.

At December 31, 2006, we had approximately US$ 325 million (of a total of US$ 770 million) in deposits and investments with our affiliate, Banco Votorantim S.A., and US$ 91 million (of a total of US$ 93 million) in unrealized loss from cross-currency interest rate swap contracts with Banco Votorantim S.A. See “Item 7—Major Shareholders and Related Party Transactions—Related Party Transactions” and note 13 to our financial statements.

At December 31, 2005, our cash, cash equivalents and available for sale securities (current portion) were US$ 707 million, of which US$ 155 million were denominated in U.S. dollars and the remainder in reais. At December 31, 2006, our cash, cash equivalents and available for sale securities (current portion) were US$ 770 million, of which US$ 722 million were denominated in reais.

At December 31, 2005, our balance sheet presented a working capital balance of US$ 719 million. At December 31, 2006, our balance sheet presented a working capital balance of US$ 567 million. We do not expect to have any difficulty in meeting our short-term obligations.

Sources of funds

Operating activities provided net cash flows of US$ 382 million in 2006 compared to US$ 234 million in 2005 and US$277 million in 2004.

Financing activities, which include short-term and long-term secured and unsecured borrowings and debt repayments, generated negative net cash flow of US$ 107 million in 2006, net cash flows of US$ 505 million in 2005, compared to negative net cash flow of US$ 258 million generated in 2004.

At December 31, 2003, our debt was US$ 1,146 million (of which US$ 479 million had short-term maturities). At December 31, 2004 our debt was US$ 945 million. The long-term position amounted to 60% in 2004 compared to 58% in 2003. Approximately 83% of the debt was denominated in foreign currencies. At December 31, 2004, we had net debt (total long- and short-term financing less cash position and held-to-maturity investments) of US$ 469 million compared to net debt of US$ 502 million at December 31, 2003, as a result of strong cash generation during the period partially offset by disbursements for the expansion of the plant.

At December 31, 2005 our debt was US$ 1,496 million. The long-term position amounted to 86% in 2005 compared to 60% in 2004. Approximately 88% of the debt was denominated in foreign currencies. At December 31, 2005, we had net debt (total long- and short-term financing less cash position and held-to-maturity or available for sale investments) of US$ 866 million compared to net debt of US$ 469 million at December 31, 2004, as a result of the payment for the acquisition of a 23% stake in Ripasa, capital investments made, particularly in forestry assets, as well as the increase in working capital. These investments were partially offset by the cash generation during the period.

At December 31, 2006, our debt was US$ 1,541 million of this amount, long-term debt represented 73% (excluding current portion) in 2006 compared to 86% in 2005. Approximately 90% of the debt was denominated in foreign currencies. At December 31, 2006, we had net debt (total long- and short-term financing less cash position and held-to-maturity or available for sale investments) of US$864 million which basically remained flat compared to net debt of US$866 million posted at December 31, 2005.

In 2004, we continued to try to maintain a low exposure to U.S. dollar liabilities. At December 31, 2003, our net exposure to U.S. dollar liabilities was a negative amount of US$ 47 million. At December 31, 2004, our net exposure to U.S. dollar liabilities was US$ 8 million, which means that our assets in foreign currency were lower than our liabilities because we were underhedged. In 2005, taking advantage of the decreasing Brazil’s Sovereign Risk and exchange rate, we changed our hedge policy and increase our exposure limit to foreign currency liabilities up to 10 months of exports. At December 31, 2005, our net exposure to U.S. dollar liabilities was US$ 273 million. At December 31, 2006, we had increased our net exposure to U.S. dollar liabilities to US$833 million.

Uses of funds

Investing activities, including production capacity increases in Jacareí and Luiz Antônio mills, the development of forestry assets (land acquisition, planting and forest maintenance) and other capital expenditures represented a net cash used in investing activities of US$ 170 million in 2004, US$ 626 million in 2005 and US$ 113 million in 2006. The increase in 2005 is mainly explained by the acquisition of a 23% stake in Ripasa (US$ 275 million) and the purchase of available for sale securities (US$ 110 million). In 2006, we acquired an additional interest from the minority shareholders of Ripasa totaling US$ 36 million.

Our significant uses of cash included the repayment of our debt totaling US$ 588 million in 2004 and US$ 363 million in 2005. In 2006, repayment of debt totaled US$ 355 million.

Debt

At December 31, 2006, our total debt was US$ 1,541 million, consisting of US$ 412 million in short-term debt (27% of total debt), including the current portion of long-term debt and represented an increase of US$ 45 million on the debt recorded at December 31, 2005. At December 31, 2005, our total debt was US$ 1,496 million, consisting of US$ 211 million in short-term debt (14% of total debt), including the current portion of long-term debt and represented an increase of US$ 551 million on the debt recorded at December 31, 2004.

Most of our U.S. dollar-denominated borrowings are either advances made in respect of our export sales or international bank loans, which have lower interest rates compared to domestic financings. For our expansion projects, we also use long-term financing in reais from BNDES. In 2005 and 2006 our total financing with BNDES remained constant at US$ 185 million out of which US$ 140 million and US$ 145 million in 2006 and 2005, respectively represented the long-term financing, US$ 5 million lower than the amount at December 31, 2005.

On January 23, 2004, Voto-Votorantim Overseas Trading Operations III Limited, or Voto-Votorantim III, a Cayman Islands limited liability company and a wholly owned subsidiary of VPAR, issued US$ 300 of 7.875% Notes due 2014 in the international capital markets. Under the terms of the indenture, we are a guarantor of the notes for an amount of up to 15% of the outstanding amount of the notes, which corresponds to the total amount received by us under the indenture.

The indenture for the issue of notes by Voto-Votorantim III contains a number of covenants including, among others:

•

limitations on our ability to incur debt;

	•	limitations on the existence of liens on our properties; and

	•	limitations on transactions with related parties, which generally must be on terms no less favorable than those that could be obtained in comparable arm’s-length transactions.

We act as guarantor, together with other members of the Votorantim group, for up to US$ 150 million of obligations of Votorantrade N.V. under a US$ 300 million export finance agreement between VCP Exportadora and Votorantrade N.V., as borrower, dated as of November 29, 2001. As part of an amendment executed on April 26, 2004, VCP Trading N.V. assumed half of the US$ 300 million debt that was previously held by Votorantrade N.V. However, VCP Exportadora and VCP’s financial obligations under such agreement were not amended. This export financing matured in November 2006.

Our long-term debt also consists of export credits and import credits with a number of financial institutions. The lines of credit with respect to export credits generally mature within 24 to 60 months. Upon shipment, the export credits are associated with that specific, identifiable shipment. The export credits are repaid with the proceeds of the export receipts from the specific shipment. The total amount of outstanding export credits was US$ 873 million and US$ 936 million at December 31, 2006 and 2005, respectively. The export credits bear annual interest of LIBOR plus varying spread above LIBOR based upon individual pre-export borrowing agreements. The export credits bore annual interest of LIBOR plus 0.67% and LIBOR plus 1.49% at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, there was no outstanding amount of import credits. See notes 12(a) and 12(b) to our financial statements.

On June 24, 2005 Voto-Votorantim Overseas Trading Operations IV Limited, or Voto-Votorantim IV, a wholly owned subsidiary of Votorantim Participações, issued US$ 400 million of 7.75% Notes due 2020 that were placed with investors in North America, Europe, Asia and Latin America. VCP is a guarantor of 50% of the 7.75% Notes due 2020 and in turn received US$ 200 million of the proceeds.

The indenture for the issue of notes by Voto-Votorantim IV contains a number of covenants including, among others:

	•	limitations on our ability to incur debt;

	•	limitations on the existence of liens on our properties; and

	•	limitations on transactions with related parties, which generally must be on terms no less favorable than those that could be obtained in comparable arm’s-length transactions.

As of December 31, 2006, VCP’s outstanding guarantees from international capital markets issues by Voto-Votorantim III and Voto-Votorantim IV were as follows:

Primary obligor /
Issue date

Obligations

Outstanding
guarantee amount at
December 31, 2006

Date of Expiration
of guarantee

Beneficiary

Voto-Votorantim III /January 23, 2004

US$ 300 million notes issuance

US$ 45 million

January 23, 2014

Noteholders and the trustee

Voto-Votorantim IV / June 24, 2005

US$ 400 million notes issuance

US$ 200 million

June 24, 2020

Noteholders and the trustee

Total

US$ 245 million


	Note: The guarantees provided by us are in favor of VCP only

During the period of July through September 2006, VCP concluded the refinancing of significantly all of its outstanding export prepayment loans pursuant to a liability management program. See note 12(a) to our financial statements. As a result, the interest rate on the outstanding loans was reduced from an average of LIBOR plus 1.75% to LIBOR plus 0.57% p.a., thereby resulting in a prospective reduction in interest expense of about US$ 10.6 million per annum. Furthermore, the re-financing limited the maximum annual amortization on all loans to US$ 123 million during the remaining loan period..

BNDES, the parent of BNDESPAR, one of our principal shareholders, has been an important source of debt financing. At December 31, 2006, the BNDES loans totaled US$ 185 million related to the capacity increase projects, all of which are denominated in reais. The BNDES loans are secured by liens on property, plant and equipment, and a lien on certain land, and by personal guarantees of an owner of Hejoassu, the ultimate parent of the Votorantim group. The majority of our loans with BNDES bear interest at 3.0% to 4.5% per annum on the principal amount and are indexed using either the Taxa de Juros de Longo Prazo, or TJLP, a nominal long-term interest rate that includes an inflation factor. The remaining BNDES loans are indexed by the UMBNDES which is a weighted average exchange variation on a basket of currencies, predominantly U.S. dollars, held by BNDES. At December 31, 2006, the TJLP was fixed at 6.85% per year, and during 2006 averaged 7.88% per year. In the first quarter of 2007 the TJLP was reduced to 6.50% per year.

At December 31, 2006, the amount of our short-term debt (including current portion of our long-term debt) was US$ 412 million. At December 31, 2006, the amount of maturities of our long-term debt excluding current portion was as follows:

Year	Amount

		(US$ in millions)
2007		81
2008		83
2009		92
2010		295
2011		201
2012 and thereafter		377

Total		1,129

At December 31, 2006, all of our short-term debt related to trade financing was secured. At December 31, 2006, the outstanding amount of that short-term debt was US$ 242 million, with a weighted average interest rate of 5.5%, compared to US$ 132 million at December 31, 2005, with a weighted average interest rate of 4.6%.

Capital expenditures

During 2006, we invested US$ 248 million in capital expenditures, representing an increase of 0.4% from the US$ 247 million invested in 2005, and 13.8% higher than the amount invested in 2004 of US$ 218 million. Of this amount, US$ 116 million was spent on forestry assets (land acquisition, planting and forest maintenance), and the remaining US$ 132 million was invested in the expansion, modernization and sustaining of our plants.

Commitments and contingencies

We are subject to numerous commitments and contingencies with respect to tax, labor and other claims. See “Item 8—Financial Information—Consolidated Statements and Other Financial Information—Legal Matters,” and note 15 to our audited consolidated financial statements and discussions on our critical accounting policies.

The significant contractual obligations and commitments that affect our liquidity are short-term debt, long-term debt, take-or-pay contracts, leases and capital expenditures.

At December 31, 2006, we had made provisions in the amount of US$ 152 million, for civil, labor and tax legal proceedings, in long-term liabilities, compared to US$ 172 million in 2005. We have made judicial escrow deposits under the custodianship of a court held under our name (included in “Other assets—other” in our balance sheet) in the amount of US$ 97 million at December 31, 2006 for certain proceedings. The position of such provisions for tax and other litigation and deposits is as follows:

	2006				2005

	Deposits		Provisions		Deposits		Provisions

Tax-related		92		133		83		157
Civil-related		—		6		—		4
Labor-related		5		13		4		11
Total		97		152		87		172

We are one of the guarantors, together with other companies of the Votorantim group, of the US$ 300 million notes issued by Voto-Votorantim III and the US$ 400 million issued by Voto-Votorantim IV. At December 31, 2006, we had loans outstanding totaling US$ 245 million. For additional information on our commitments and contingencies, see “Item 7—Major Shareholders and Related Party Transactions—Related Party Transactions” and note 15 (d)to our audited consolidated financial statements.

The following is a summary of the guarantees provided by us in favor of other companies of the Votorantim group:

Primary obligor

Obligations

Outstanding
guarantee amount at
December 31, 2006

Date of Expiration
of guarantee

Beneficiary

Voto-Votorantim III

US$ 300 million notes issuance

US$ 45 million

January 23, 2014

Noteholders and the trustee

Voto-Votorantim IV

US$ 400 million notes issuance

US$ 200 million

June 24, 2020

Noteholders and the trustee

Total

US$ 245 million


	Note: The guarantees provided by us are in favor of VCP only

We estimate that, for 2004, 2005 and 2006, an average of approximately 3% of our total number of regular domestic customers (approximately 22%, 22% and 21% respectively, of total domestic sales value) obtained our guarantee for their loans under our vendor program. At December 31, 2004, 2005 and 2006 we had 11, 15 and 24 active customers, respectively, under the vendor program. Our vendor program exposure was US$ 71 million at December 31, 2004, US$ 57 million at December 31, 2005 and US$ 120 million at December 31, 2006. See “Item 4—Information on VCP—Marketing and Distribution—Paper.”

Buyback programs

We carried over 1,177,000 preferred shares bought from the 2000 buyback program up to February 2002, when we began selling these shares. We sold 1,177,000 preferred shares in 2002 and 2003 at the weighted average selling price of R$ 25.28 per share. The minimum price was R$ 17.35 per share and the maximum price was R$ 32.24 per share. At December 31, 2002, treasury shares totaled 721,500 preferred shares, respectively. From September 30, 2003, we sold most of our treasury shares and at December 31, 2003, treasury shares totaled 7,900 preferred shares. At December 31, 2004, treasury shares totaled 157,200 preferred shares.

On May 13, 2004, our board of directors authorized a buyback program of our shares in the open market, which, after purchase, would be held in treasury to be sold and/or cancelled. The maximum amount of shares to be purchased was 1,716,000. This buyback program terminated on May 13, 2005.

On May 17, 2005, our board of directors authorized a buyback program of our shares in the open market, which, after purchase, would be held in treasury to be sold and/or cancelled. The maximum amount of shares to be purchased was 8,000,000, an amount below the legal limit of 10% of the total outstanding shares. This buyback program terminated on May 16, 2006. We have not renewed the program; however, our board of directors could authorize a new buyback program whenever they believe it is necessary. In this last program, VCP purchased 1,050,700 shares from the market with an average price of R$ 28.21 per share or approximately US$ 13 per share. During 2006 we sold 1,051,302 shares and on December 31, 2006, we held 31,999 shares in treasury.

In December 2004, VCP did a reverse split in order to bring the unit value of each share to a more appropriate level from the market’s perspective, as well as to facilitate any transactions involving such Shares. Previously only blocks of 1,000 shares were negotiable on the São Paulo Stock Exchange (Bovespa). The reverse split also adjusted the ADR ratio to 1:1, i.e. one ADR is now equivalent to one preferred share.

Reverse Stock Split

On October 18, 2004, the extraordinary general meeting approved the reverse stock split of our shares, under the terms of article 12 of Law nº 6,404/76, at the ratio of 200 shares for one share of the respective type.

In December 2004 the reverse stock split converted our 38,322,699,553 shares, with no par value, representing our entire subscribed capital into 191,613,498 shares, of which 105,702,452 are shares of common stock and 85,911,046 are shares of preferred stock.

Our ADSs traded at the New York Stock Exchange, within the period stipulated for the adjustment of holdings, split at the ratio of one ADS to 2.5 ADSs; and the ratio of the ADS changed to one ADR to one preferred share.

Financial Instruments are discussed in Item 11 – “Quantitative and Qualitative Disclosures about Market Risk”.

For additional information on our debt, see notes 11 and 13 to our financial statements.

C. Research and development, patents and licenses, etc.

Apart from Genomics Studies Projects, discussed below, our total investment, direct and indirect, in Research & Development was approximately US$ 7 million, US$ 6 million and US$ 7 million, during 2006, 2005 and 2004, respectively. We direct research and development activities towards increasing eucalyptus wood and quality yields, making our production more efficient, developing new products and improving the quality of our products. We maintain close links with various universities and private research institutes. As an integrated producer of pulp and paper, we have sought to gain an even better understanding of the whole production process. We attempt to identify the characteristics of both wood and pulp that are essential for the production of high quality paper.

Within our internal facilities, Genomics studies directed to increase the forest productivity as well as improve wood quality via the tree improvement program have resulted in expenditures in excess of US$ 7 million. A modern Molecular Markers Laboratory which studies possible paternity tests for plants is in operation. The nursery facilities, the largest in South America with production capacity of 77 million rooted cuttings/seedlings allows the continued development of laboratory findings, the acceleration of plant development for introduction to the forestry areas, and the utilization of the innovations obtained by Research and Development. VCP participates as a consortium member in two Brazilian Genomics Projects related to Brazilian eucalyptus (FOREST and GENOLYPTUS) and also develops its own genomic project in partnership with Alellyx Applied Genomics (a Votorantim Group Company) to improve tree quality via biotechnology. Field trials with selected plants are expected to begin in the near future.

The FOREST project is a pre-competitive consortium between forest companies within the state of São Paulo and includes financial support from FAPESP (the state of São Paulo Research Foundation). This project includes the development of the largest available eucalyptus gene bank (130,000 ESTs – Expressed Sequence Tags, which has more than 30,000 genes). The project’s studies should result in an evolution to the “functional genomics” phase.

The GENOLYPTUS is a national project involving several major forest-based companies, seven universities, three EMBRAPA centers (The Federal Agency for Agricultural Research), and with the financial support of the Brazilian Ministry of Science and Technology. The project is jointly funded by the government (70%) and by the consortium of forestry-based companies (30%). Its focus is the generation of a suite of experimental resources and genomic tools to discover, map, validate and further investigate gains of economic importance in species of eucalyptus. The project’s principal objective is to translate this acquired scientific knowledge into improved forest tree breeding and production technologies. It includes the installation of the world’s largest tree genomic trial network (more than 40,000 trees resulting from 31 crosses) to evaluate wood quality. The project, now in its third stage, is presently concentrating on the mapping of the eucalyptus gene.

D. Trend Information

The primary trends which influence our sales and production and inventory levels are: the patterns and cycles of pulp purchases by paper producers, pulp and paper prices, the level of pulp inventory in the hands of pulp producers in the global market, global economic conditions and the effect of currency fluctuations.

We continue to pursue growth opportunities to create value for our shareholders through business expansion, strong operational performance and profitability and/or technological and product improvements, always in the context of a long-term strategic focus.

For additional information regarding trends in our business, see “Item 4B. Business—Our Business Strategy” and “Item 5A - Operating Results.” For risks affecting our business, see “Item 3D - Risk Factors.”

E. Off-Balance Sheet Arrangements

We participate in a number of off-balance sheet arrangements, principally relating to guarantees and take or pay contracts. We also have a number of swap transactions that are described in “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” All of these transactions are further described elsewhere in this annual report.

F. Tabular Disclosure of Contractual Obligations

The following table and discussion provide additional disclosure regarding our material contractual obligations and commercial commitments as of December 31, 2006.

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

	(in millions of U.S. dollars)
Total debt commitments (1)		1,520		391		164		388		577
Interest payable		21		21		—		—		—
Capital lease obligations (2)		17		17		—		—		—
Operating leases (3)		37		0.1		0.4		0.1		36
Purchase obligations (4)		410		77		113		116		104
Pension contribution		18		2		7		7		2
Total		2,023		509		284		511		719


(1)	Includes loans and financings shown in our financial statements, less interest payable.

(2)	Includes any agreements with suppliers of our assets (including for the Jacareí project). Excludes Três Lagoas Project.

(3)	Includes land leases and wood supply.

(4)	Includes take-or-pay contracts.

The above table does not reflect contractual commitments discussed in “Item 5E - Off-Balance Sheet Arrangements” above.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

We are managed by our Conselho de Administração, or board of directors, composed of at least three and at most ten members, and our Diretoria, or board of officers, composed of at least three and at most ten members (each an executive officer). From our general shareholders’ meeting at April 20, 2005 we had a permanent Conselho Fiscal, or fiscal committee, which is composed of at least three and at most five members.

Board of Directors

According to our by-laws, our board of directors is required to meet at least three times a year and when called by the chairman or by the majority of members of the board of directors. Our board of directors met twelve times during 2006 (three ordinary and nine extraordinary meetings). Our board of directors is responsible for, among other things, establishing our general business policies and for electing our executive officers and supervising their management. The board of executive officers meets periodically to review production, commercial and financial operations.

According to our by-laws, the members of the board of directors are elected by the holders of our common shares at the general meeting of shareholders. Members of the board of directors serve two-year terms. The terms of the current members, elected at our shareholders’ general meeting on April 20, 2005, expire in 2007.

Pursuant to Brazilian corporate law, shareholders of publicly traded companies such as us that together hold preferred shares representing at least 10% of our total share capital for at least three months are entitled to appoint one member of our board of directors as long as no multiple voting procedure has been requested. Until 2005, the board members that may be elected by holders of preferred shares shall be chosen from a list of three names drawn up by our controlling shareholder. Since 2006, the holders of our preferred shares have not yet elected any member of our board of directors.

Set forth below are the name, age and position of each member of our board of directors elected at our shareholders’ general meeting on April 28, 2006:

Name	Age	Position

José Roberto Ermírio de Moraes⁽¹⁾	49	Chairman
Fábio Ermírio de Moraes⁽²⁾	45	Vice-Chairman
Carlos Ermírio de Moraes⁽³⁾	51	Member
Clóvis Ermírio de Moraes Scripilliti⁽⁴⁾	48	Member
José Luciano Duarte Penido	58	Member


(1)	José Roberto Ermírio de Moraes is the son of José Ermírio de Moraes Filho, who passed away in 2001.

(2)	Fábio Ermírio de Moraes is the son of Ermírio Pereira de Moraes, who was once a board member. He is also the cousin of José Roberto Ermírio de Moraes.

(3)	Carlos Ermírio de Moraes is the son of Antonio Ermírio de Moraes, who was once a board member. He is also the cousin of José Roberto Ermírio de Moraes.

(4)	Clóvis Ermírio de Moraes Scripilliti is the son of Clovis Scripilliti, who passed away in 2000. He is also the cousin of José Roberto Ermírio de Moraes.

Board of Executive Officers

Our executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities established by our by-laws and by the board of directors and are independent from the Ermírio de Moraes family, our ultimate controlling shareholders. The executive officers are elected by the board of directors for one-year terms, although any executive officer may be removed by the board of directors before the expiration of his term. The current term of all our executive officers ends on April 30, 2007.

Set forth below are the name, age and position of each of our executive officers elected on April 28, 2006:

Name	Age	Position

José Luciano Duarte Penido	58	President & Chief Executive Officer
Francisco Fernandes Campos Valério	59	Technical & Industrial Officer
Luiz Carlos Ganzerli	58	Human Resource & Organizational Development Officer
Sérgio Marnio Gandra Vaz	62	Paper Business Officer
Valdir Roque	56	Chief Financial Officer & Investor Relations Officer
José Maria de Arruda Mendes Filho	52	Forest Operations Officer
Antonio Sergio Pinzan de Almeida	45	Pulp Business Officer

On December 1, 2006, two new executive officers were elected to take office immediately, Mr. Marcelo Strufaldi Castelli in the position of Chief Operating Officer and Mr. Carlos Roberto Paiva Monteiro in the position of Engineering Director. Mr. Luiz Carlos Ganzerli left on January 1, 2007 and Mr. Sérgio Marino Gandra Vaz will be leaving on February 1, 2007.

Biographical Information

Set forth below is certain biographical information on our directors and executive officers.

José Roberto Ermírio de Moraes. Mr. José Roberto Ermírio de Moraes has been the chairman of our board of directors since 1992 and was our president from 1992 to April 26, 2002. He is the Chief Executive Officer of Votorantim Industrial and member of Executive Committee of Votorantim Group, and he has a B.A. in Metallurgy Engineering from the Armando Alvares Penteado Foundation College in São Paulo, Brazil.

Fábio Ermírio de Moraes. Mr. Fábio Ermírio de Moraes is a mechanical engineer and has been working for the Votorantim Group since 1985. Chairman of the Board of Directors of Votorantim Cimentos, Director Vice-President of Votorantim Industrial and Member of the Executive Committee of Votorantim Group.

Carlos Ermírio de Moraes. Mr. Carlos Ermírio de Moraes has been working for the Votorantim Group since 1983. He is the President of the Board of Directors of CPFL (Cia. Paulista de Força e Luz) and a member of the Board of Directors of VBC Energia S/A (Votorantim, Bradesco and Camargo Energia).

Clóvis Ermírio de Moraes Scripilliti. Mr. Scripilliti has served as a member of our board of directors since 2000. He is the President of Family Council and a member of the Executive Committee of Votorantim Group. He studied Metallurgy Engineering at Mackenzie University in São Paulo, Brazil.

José Luciano Duarte Penido. Mr. Penido has served as our chief executive officer since January 5, 2004. Prior to that, he was the president of Samarco Mineração S.A. for eleven years. He is also the vice-president of the Minas Gerais Industry Federation, where he directs the Enterprise Citizenship Council. He has a degree in mining engineering from the Federal University of Minas Gerais.

Francisco Fernandes Campos Valério. Mr. Valério joined us in January 1998. He previously worked in senior positions at Bahia Sul, Aracruz, Suzano, Braskraft Florestal e Industrial and Olinkraft Celulose e Papel. He holds a B.A. in Mechanical Engineering from the Universidade Federal de Santa Catarina, Brazil.

Luiz Carlos Ganzerli. Mr. Ganzerli was first elected an executive officer in February 2000. He previously held positions in the human resources and organizational development departments at Roche Químicos e Farmacêuticos from 1999 to 2000 and Alpargatas Santista Textil S.A. from 1994 to 1999. He holds a B.A. in Business Administration from Mogi das Cruzes University, Brazil.

Sérgio Marnio Gandra Vaz. Mr. Vaz has been our business director since 1992. He previously held positions in the sales and marketing areas of Unilever Brasil from 1970 to 1988. In 1988, he was the commercial director at Indústrias de Papel Simão S.A. and KSR Comércio e Indústria de Papel S.A., both bought by VCP in 1992. He holds a B.A. in Business Administration from FEA, the Administration and Economics College of the University of São Paulo, Brazil, and has taken specialization courses in Managing Marketing at IMD International, Switzerland and at Dynamic Global Market at the Kellogg School/Northwestern University, United States.

Antonio Sérgio Pinzan de Almeida. Mr. Almeida joined the company in 1990, as a Sales Manager in the paper division. In 1996 Mr. Almeida has structured the pulp business, and has been responding for this business since the beginning of its activities. He has been working in Trading Companies and Industries for more than twenty years, always focused in the international markets and holds a B.A. in Business Administration from FASP, Brazil and Master Business Administration from FEA/USP, Universidade de São Paulo, Brazil.

Valdir Roque. Mr. Roque has been our chief financial officer and our Investor Relations director since 1994. He previously worked at Monsanto do Brasil S.A. as Treasurer, and at General Electric and Ford. He has completed postgraduate courses in Business Administration at the Getúlio Vargas Foundation in São Paulo, Brazil, holds a B.A. in Economics from the Catholic Pontifice University in São Paulo, Brazil and has taken specialized courses in financial management at the Stanford Business School, California in the United States and IMD in Lausanne, Switzerland.

José Maria de Arruda Mendes Filho. Mr. Mendes is a forest engineer and has been working for the Votorantim Group since 1982, when he started at Companhia de Cimento Portland Itaú. He joined VCP in 1988 to develop the forest area of the company and to supply the pulp mills. He has a degree in forest engineering from ESALQ/USP, Universidade de São Paulo, Brazil, and also a master degree from USP. He has been VCP’s forest operations’ director since August 2004.

Carlos Roberto Paiva Monteiro. Mr. Carlos Monteiro joined the Company in 1990. He previously worked in senior positions at Klabin Group, Aracruz Celulose and Simão Group. He has a degree in Industrial Mechanical Engineering from FURG/RS, Master Business Administration from BSP - Business School São Paulo, and he teaches in a graduate course in Pulp and Paper by USP – University of São Paulo.

Marcelo Strufaldi Castelli. Mr. Castelli is a mechanical engineer and joined us in 1997 when he held positions as Recovery, Utilities & Environment Manager, General Manger of the Jacareí mill and Associate Director of Operations. Recently, he became the Chief Operating Officer of VCP. Prior to that he worked at Suzano Bahia Sul and Aracruz Celulose.

Certain of our executive officers are also Board Members. See “Board of Directors”.

Fiscal Committee

Under the Brazilian Corporate Law, the Conselho Fiscal (Fiscal Committee) is a corporate body independent of management and a company’s external auditors. In the past, a Conselho Fiscal was not typically equivalent to or comparable with a U.S. audit committee; its primary responsibility had been to monitor management’s activities, review the financial statements, and report its findings to the shareholders. However, pursuant to an exemption under the SEC rules regarding the audit committees of listed companies, a foreign private issuer is not required to have a separate audit committee composed of independent directors if it has a board of auditors established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a board and such board meets certain requirements. Pursuant to this exemption, our Conselho Fiscal exercises the required duties and responsibilities of a U.S. audit committee to the extent permissible under Brazilian Corporate Law.

To comply with the SEC rules, the board of auditors meets the following standards: it is separate from the full board, its members are not elected by management, no executive officer is a member, and Brazilian law sets forth standards for the independence of the members. In addition, in order to qualify for the exemption, the board of auditors, to the extent permitted by Brazilian law (as discussed further below):

	a.	is responsible for the appointment, retention, compensation and oversight of the external auditors (including the resolution of disagreements between management and the external auditors regarding financial reporting);

	b.	is responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;

	c.	has the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties; and

	d.	receives appropriate funding from the company for payment of compensation to the external auditors, for any advisors and ordinary administrative expenses.

As a foreign private issuer, we decided to modify our Conselho Fiscal to comply with the exemption requirements. Our Board of Directors approved the delegation to the Conselho Fiscal of certain additional responsibilities and the Conselho Fiscal and the Board of Directors adopted an additional charter that delegates to the Conselho Fiscal the duties and responsibilities of a U.S. audit committee to the extent permitted under Brazilian Corporate Law. Because Brazilian Corporate Law does not permit the Board of Directors to delegate responsibility for the appointment, retention and compensation of the external auditors and does not provide the board or the Conselho Fiscal with the authority to resolve disagreements between management and the external auditors regarding financial reporting, the Conselho Fiscal cannot fulfill these functions. Therefore, in addition to its oversight responsibilities, the Conselho Fiscal may only make recommendations to the Board of Directors with respect to the appointment, retention and compensation of the external auditors, and with regard to resolution of disagreements between management and the external auditors, the Conselho Fiscal may only make recommendations to management and the board.

Under the Brazilian Corporate Law, the Conselho Fiscal may not contain members who are members of the Board of Directors or the executive committee, or who are employees of VCP or the Votorantim group, or a spouse or relative of any member of our management. In addition, the Brazilian Corporate Law requires that Conselho Fiscal members receive a remuneration at least 10% of the average amount paid to each executive officer. The Brazilian Corporate Law requires a Conselho Fiscal to be composed of a minimum of three and a maximum of five members and their respective alternates.

Our Conselho Fiscal is composed of three members who are elected at the annual shareholders’ meeting, with terms lasting until the next annual shareholders’ meeting after their election. Under the Brazilian Corporate Law, holders of preferred shares have the right to elect separately one member of the Conselho Fiscal. Also, under the Brazilian Corporate Law, minority groups of shareholders that hold at least 10% of the voting shares also have the right to elect separately one member of the Conselho Fiscal. In any event, however, the common shareholders have the right to elect the majority of the members of the Conselho Fiscal. Set forth below are the names, ages and positions of the members of our Conselho Fiscal and their respective alternates, as of April 28, 2006, the date of the last annual shareholders’ meeting.

Name	Age	Length of Term	Year First Elected	Position

João Carlos Hopp	77	one year	2001	Member
Geraldo Gianini	56	one year	2006	Alternate
Miguel Roberto Gherrize ⁽¹⁾	68	one year	2005	Member
Sérgio Seidiyu Yatabe	51	one year	2005	Alternate
José Carlos de Brito	68	one year	2005	Member
Antonio Arena Neto	65	one year	2005	Alternate


(1)	Miguel Roberto Gherrize is the audit committee financial expert.

B. Compensation

According to our by-laws, our directors do not receive any compensation. As of the year ended December 31, 2006, the aggregate compensation, including cash and benefits-in-kind, paid to our executive officers (a total of nine persons at the time) was approximately R$ 8.7 million (corresponding to US$4 million).

C. Board Practices

Our board of directors generally meets three times a year and when called by the chairman or by the majority of the members of the board of directors. Our board of directors met twelve times during 2006. Our board of directors is responsible for, among other things, establishing our general business policies and for electing our executive officers and supervising their management. The board of executive officers meets periodically to review production, commercial and financial operations.

D. Employees

As of December 31, 2006, we employed 3,498 persons. We use subcontractors for many of our forestry operations and for substantially all of the transportation of wood, pulp and other raw materials. These subcontractors employed 4,750 persons for our business as of December 31, 2006. Approximately 80% of the workers in our forests are employed by third parties, predominantly in areas such as maintenance and security. See “Item 4—Information on VCP—Business Overview—Raw Materials—Wood” and “Item 4—Information on VCP—Business Overview—Transportation.” We are in compliance with all local, state and federal worker health and safety regulations.

Several unions represent our employees and we consider the unions to be well organized. Collective bargaining agreements relating to forest workers were expired in 2006 and most of them were renewed and expire in November 2007. Collective bargaining agreements relating to other employees that expired in September 2006 were renewed for another year, with the employees receiving a 4% pay increase and an R$ 750.00 advance for employees hired before September 30, 2006. We are currently engaged in negotiations to renew the agreements for another year. Since 1989, we have experienced four labor strikes, all of which affected the pulp and paper industry generally and lasted an average of three days. We believe we have good relationships with our employees.

In March 2000, we began to participate in a Votorantim group pension plan, which was made available to all of our employees. For more detailed information, see “—Defined Contribution Pension Plan” below.

In December 2005 we provisioned for the costs of post-retirement benefits expected to be paid to current, former or inactive employees upon retirement. For more detailed information, see “—Post-retirement Benefit Plan” below.

Defined Contribution Pension Plan

In March 2000 we began co-sponsoring a multi-employer defined contribution plan of the Votorantim Group which is available to all of our employees. For employees below a certain income level we match the employee’s contribution limited to 1.5% of the employee’s compensation. For employees above that income level we match the employee’s contribution up to 6% of the employee’s compensation. At our option we may also make additional contributions. Our contributions vest in varying percentages depending on the employee’s years of service and will fully vest upon the employee’s retirement, death or disability, provided the employee has at least one year of service. Our contributions were US$ 2.06 million in 2006.

Profit Sharing Plan

Pursuant to Brazilian federal law, companies operating in Brazil are required to share profits with employees beginning from fiscal year 1996. In 1996, we instituted a profit sharing plan for our employees in addition to providing health and life insurance, transportation, meals and training. Pursuant to the program, each employee’s share of profits is linked to our operational and financial results. Employees are eligible to receive payment of up to one month’s salary payable in February of each year. Part of the profit sharing payment relating to the income for that year is advanced in August. Payment is granted if defined goals set by management are achieved by the process or industrial unit in which the employee works and based on the individual performance of the employee. Several unions that represent our employees have agreed to this profit sharing plan.

Post-retirement Benefit Plan

The Company has an actuarial liability that relates to its proportion of the costs of a hospital facility we share with co-sponsors. Although the not-for-profit hospital is funded by multiple-employers, it has no separate assets and its costs are apportioned among the sponsors based on usage. Contributions paid to the hospital in the year ended December 31, 2006 and 2005 amounted to US$ 1 million each year and the accumulated post-retirement benefit obligation and accrued benefit cost (no plan assets) was US$ 24 million at December 31, 2006 and US$ 21 million at December 31, 2005.

Measurement of obligations for the post-retirement benefits plan is calculated as of December 31, 2006. The discount rates used to determine the actuarial present value of projected benefit obligations under such plans were 8.5% as of December 31, 2006. The assumed weighted annual average rate of increase in health care cost trend on covered changes was 3.0% as of December 31, 2006.

Based on the report of our independent actuary, the accumulated post-retirement benefit obligation and accrued benefit cost (no plan assets) was US$ 24 million.

	2006 Percentage		2005 Percentage

Weighted-average assumptions as of December 31, 2006
Discount rate		8.5		8.5
Health care cost trend on covered changes		3.0		3.0
	US$		US$

Components of net periodic benefit cost for 2007
Interest cost		3 million		2 million
Total net periodic benefit cost (benefit)		3 million		2 million

It has been assumed, for measurement purposes, that health care cost trends for 2007 will not be considerably different from 2006. Our actuaries are unable to project the direction and pattern of changes in the assumed trend rates, the ultimate trend rates, nor can they estimate when the rates are expected to be achieved. A one-percentage-point change in assumed health care cost trend rates would have the following effects in 2006 (all other assumptions have been held constant):

	One-percentage- point increase		One-percentage- point decrease

Sensitivity of retiree welfare results
On total service and interest cost components		0.3		(0.3	)
On post-retirement benefit obligation		2.7		(2.5	)

E. Share Ownership

As of December 31, 2006, the members of our board of directors and our officers, on an individual basis and as a group, directly own less than 1% of our preferred shares and none of our common shares. For information on the beneficial ownership by the Ermírio de Moraes family, see “Item 7—Major Shareholders and Related Party Transactions—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 December 31, 2006:

	Common					Preferred

	Number of Shares		Percentage of the Total Outstanding Shares			Number of Shares		Percentage of the Total Outstanding Shares

Board of Directors
José Roberto Ermírio de Moraes		0		0	%		1		0	%
Fábio Ermírio de Moraes		0		0	%		1		0	%
Clóvis Ermírio de Moraes Scripilliti		0		0	%		1		0	%
Carlos Ermírio de Moraes		0		0	%		1		0	%
José Luciano Penido (*)		0		0	%		1(*)		0	%
Executive Officers
José Luciano Penido(*)		0		0	%		1(*)		0	%
Francisco Fernandes Campos Valério		0		0	%		3,000		0	%
Luiz Carlos Ganzerli		0		0	%		0		0	%
Sérgio Marnio Gandra Vaz		0		0	%		18		0	%
Valdir Roque		0		0	%		0		0	%
José Maria de Arruda Mendes Filho		0		0	%		15		0	%
Antônio Sérgio Pinzan de Almeida		0		0	%		0		0	%
Total		0		0	%		3,038		0	%

Source: Itaú Custódia.

(*) Mr. José Luciano Penido is part of both the Board of Directors and Executive Officers and he owns only 1 preferred share of VCP.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

The following table sets forth the principal holders of common and preferred shares and their respective shareholdings as of December 31, 2006:

	Common				Preferred				Total

Shareholders	Shares		(%)		Shares		(%)		Shares		(%)

Votorantim Participações S.A.		94,022,846		88.95		677		0		94,023,523		46.06
Nova HPI Participações Ltda.		11,679,604		11.05		0		0		11,679,604		5.72
Total Votorantim group		105,702,450		100.00		677		0		105,703,127		51.78
BNDES Participações S.A.		0		0		7,555,369		7.67		7,555,369		3.70
Treasury Stock		1		0		31,998		0.03		31,999		0.02
Board, Directors and Fiscal Council		0		0		3,038		0		3,038		0
Public (Free Float)		1		0		90,851,973		92.29		90,851,974		44.50
Total		105,702,452		100.00		98,443,055		100.00		204,145,507		100.00

The ultimate beneficial owner, in each case, of more than 5% of our common shares through intermediate holdings companies is the Ermírio de Moraes family who, in the aggregate, beneficially owns 100% of our voting common shares. The Ermírio de Moraes family does not own any of our preferred shares. All holders of our voting common shares have the same voting rights. Each of our directors, other than José Luciano Duarte Penido has material beneficial interests in trust holdings.

B. Related-Party Transactions

We have engaged in a number of transactions with related parties.

Distributions and Sales Outside of Brazil

In 2002 and 2003, we sold approximately 56% and 17%, respectively, of our exports through Votorantrade, a member of the Votorantim group engaged in the sale and distribution of certain of the Votorantim group’s products, with offices in various locations throughout the world. In 2004 and 2005, all of our exports were sold through VCP Overseas Holding KfT by VCP Trading and VCP North America. From 2006 on, all of our exports are sold through VCP Overseas Holding KfT by VCP Overseas Holding Limited, Budapest, the Switzerland branch of our international subsidiary.

Banco Votorantim S.A.

We have entered into a number of financial transactions with or through Banco Votorantim S.A., or Banco Votorantim, a financial institution controlled by the Votorantim group and its affiliates. At December 31, 2006 we had approximately US$ 325 million (of a total of US$ 770 million) in deposits and available-for-sale securities with Banco Votorantim and US$ 91 million in unrealized losses from cross-currency interest rate swap contracts with Banco Votorantim.

Guarantees

At December 31, 2006, we guaranteed US$ 245 million of debt of other members of the Votorantim group which pertains to the aggregate amount of debt issued in the international capital markets. In each case, the outstanding guarantee amount at December 31, 2006 pertains to the amount of proceeds that were received by us and/or our subsidiaries on the issue date. The remaining debt raised was received and also guaranteed by other members of the Votorantim group. The US$ 245 million corresponding to VCP is made up of the following:

Primary obligor	Obligations	Issue Date	Outstanding guarantee amount at December 31, 2006	Date of Expiration of guarantee	Beneficiary

Voto-Votorantim Overseas Trading Operations III Limited	US$ 300 million notes issuance	January 23, 2004	US$ 45 million	January 23, 2014	Noteholders and the trustee
Voto-Votorantim Overseas Trading Operations IV Limited	US$ 400 million notes issuance	June 24, 2005	US$ 200 million	June 24, 2020	Noteholders and the trustee
Total			US$ 245 million

Note: The guarantees provided by us are in favor of VCP only

Each of the primary obligors listed above are special purpose companies established with the sole purpose of issuing debt. As such, upon maturity of the debt issued, which is also the date of expiration of the guarantee, we will either repay lenders or seek to refinance the maturing debt.

The BNDES loans are secured by property, plant and equipment and a lien on certain land and personal guarantees of an owner of Hejoassu, our ultimate parent company.

We believe the other companies of the Votorantim group, whose debt we guarantee, are creditworthy and we do not expect to be called on to make payments on our guarantees. In addition, given our ability to obtain short-term financing, we do not believe that there is substantial risk of illiquidity even if we are called upon to make payments under our guarantees, individually or in the aggregate. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Commitments and Contingencies” for a summary of the guarantees we provided in favor of other companies of the Votorantim group. For additional information on our commitments and contingencies, see note 15 to our audited consolidated financial statements.

Leases of Forest Land

At December 31, 2006, we leased approximately 79,000 hectares of forestland, out of approximately 57,400 hectares of planted area, or approximately 32% of the land devoted to our forestry plantations. The leases, most of which commenced in 1991, are typically for a term of 21 years, which covers approximately three harvest cycles. The lease payments are equivalent to 30% of the market prices of the wood produced on the property and are payable after each harvest, based on market prices.

BNDESPAR

A shareholder of our preferred shares, BNDESPAR is a wholly owned subsidiary of BNDES, the Brazilian economic development bank owned by the Brazilian federal government. We have entered into a number of financing transactions with BNDES. At December 31, 2006, we had an aggregate of US$ 160 million in outstanding loans to BNDES denominated in reais that we borrowed to fund expansion and modernization projects. The BNDES loans are secured by liens on land, equipment and property (including the Jacareí mill), and by personal guarantees of an owner of Hejoassu, the ultimate parent of the Votorantim group. Our loans with BNDES bear interest at 3% per annum on the principal amount and are indexed using the TJLP, a nominal long-term interest rate that includes an inflation factor. At December 31, 2006, we had an additional aggregate amount of US$ 25 million in loans to BNDES denominated in reais and bearing an interest rate of 10% per year as adjusted by the UMBNDES Index. The UMBNDES Index is a weighted average rate based on the exchange rate of a basket of currencies, predominantly the U.S. dollar, held by BNDES and during 2006, the Index’s average rate was 6.4% per annum and the average spread over the index was 3.6%. At December 31, 2006, the TJLP was fixed at 6.85%, and during 2006 averaged 7.88% per year. See notes 11 and 12 to our consolidated financial statements.

For additional information regarding related-party transactions, see “Item 5 – Operating and Financial Review and Prospects – Liquidity and Capital Resources” and note 12 to our consolidated financial statements.

C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

Our consolidated financial statements include the accounts of VCP and our directly and indirectly controlled subsidiaries: VCP Exportadora e Participações S.A. (“VEP”) which was merged into VCP on April 1, 2006, Normus Emprendimentos e Participações Ltda., Newark Financial Inc. (“Newark”), VCP North America Inc., VCP Trading N.V. and VCP Overseas Holding KFT, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in the consolidation. The 12.35% owned equity investee, Aracruz Celulose S.A. (“Aracruz”), in which we acquired our interest during 2001 and our 50% owned equity investees, Ripasa Participações S.A. (“Ripar”) and Voto - Votorantim Overseas Trading Operations IV Limited. (“VOTO IV”) are accounted for using the equity method.

On March 31, 2005, Ripar a 50% owned joint venture, acquired a 46.06% interest in the total capital and 77.59% interest in the voting capital of Ripasa S.A. Celulose e Papel (“Ripasa”), a Brazilian pulp and paper producer. On May 24, 2006, Ripasa’s minority preferred non-voting shareholders exchanged their interests in Ripasa for shares in the joint venture partners of Ripar (Note 4(a)). On July 4, 2006, the joint venture partners paid US$ 71million to a group of Ripasa’s minority preferred non-voting shareholders. We account for our interest in Ripasa following the equity method of accounting using financial information with a one-month lag.

A. Consolidated Statements and Other Financial Information

See “Item 3—Key Information—Selected Financial Data” and “Item 18—Financial Statements.”

Legal Matters

We are party to administrative proceedings and lawsuits that are incidental to the normal course of our business. These include general civil, tax and employee litigation and administrative proceedings. At December 31, 2006, we were defendants in 1,200 labor lawsuits filed by our former employees and former employees of our subcontractors and 449 civil proceedings. We believe that we will prevail in the majority of these lawsuits, and do not consider that, if decided against us, these proceedings individually or in the aggregate will have a material adverse effect on us or on our financial condition. At December 31, 2006, our provisions for legal proceedings were US$ 152 million, of which US$ 133 million related to tax disputes and approximately US$ 19 million related to civil and labor proceedings. We believe that our provisions for legal proceedings are sufficient to meet probable and reasonably estimable losses in the event of unfavorable court decisions and that the ultimate outcome of these matters will not have a material effect on our financial condition or results of operations. We cannot estimate the amount of all potential costs that we may incur or penalties that may be imposed on us other than those amounts for which we have provisions.

On May 22, 2002, we (along with many other Brazilian companies) received a notice from the Central Bank requesting that we provide information regarding our remittances abroad to certain exporters of equipment imported by us. We responded to the Central Bank within the 30-day period with the information that was requested. In spite of this, the Central Bank issued a fine in the amount of US$ 14 million. We presented our defense to the Central Bank to refute the payment of the fine, and we succeeded in the first hearing in 2005, but this lawsuit remains subject to appeal. We believe that our chances of success are high because we have the documents necessary to prove the transactions.

We have instituted a number of legal proceedings in which we are seeking a refund or contesting the imposition of certain taxes. The more significant legal proceedings within this category are summarized in the succeeding paragraphs.

In 1999, we filed a lawsuit challenging the 1% increase in the COFINS tax rate (from 2% to 3%), a tax on revenues. Although we have obtained a legal injunction, based on advice from our legal counsel and reflecting rulings by the Federal Supreme Court, we accrued US$ 55 million relating to this claim, from 2002 through 2004. In December 2005 we made a judicial deposit of US$ 55 million following an unfavorable decision of the Supreme Court.

During 2002, we filed a lawsuit challenging the inclusion of the ICMS (Value-added sales tax) in the computation basis for the COFINS tax, relating to the period from 1996 to 2003, as well as our deductibility of recoverable ICMS originated from raw material used for tax exempt paper products. We have accrued and deposited US$ 26 million relating to this claim.

In 1996, we filed a judicial claim to assure our right to the deductibility of inflation-indexed depreciation (an increase of 70%) arising from a government economic stabilization program in January 1989. We obtained a favorable decision enabling the partial deduction of an increase of 43%. Based on advice from our legal counsel, we have accrued US$ 7 million relating to this claim.

In 1998, Brazilian Law 9718/98 was enacted which increased the base for both PIS and COFINS for 1999 (applying to other revenue lines and not only billings), while at the same time, increasing the rate for COFINS. On June 23, 2006 and August 29, 2006, we received unappealable favorable rulings for separate legal cases related to our challenge that the payment of Social Contributions on Revenues (PIS and COFINS) on other revenues (primarily on financial income) was inappropriate. As a result, in 2006 we reversed US$ 47 million in the statement of income as “financial income”.

In addition, we are party to certain lawsuits and administrative proceedings before various courts and governmental agencies with respect to certain other tax liabilities arising in the ordinary course of our business. We cannot assure you that we will be successful in obtaining the right to these tax credits or in contesting the imposition of these taxes.

For more information on our lawsuits, see note 15 to our audited consolidated financial statements.

Dividend Policy and Dividends

General

In order to determine the amounts available for dividend distribution, we are subject to the following procedures, established by the Brazilian corporate law. We must allocate 5% of our annual net income, determined in accordance with the requirements of the Brazilian corporate law, to a legal reserve until the legal reserve equals 20% of our share capital as of the end of the most recent fiscal year. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which such reserve, when added to our other capital reserves, exceeds 30% of our capital. The legal reserve may be used only to offset any accumulated deficit or to increase our share capital and may not be distributed. At December 31, 2006, the legal reserve outstanding balance was R$ 206 million, equivalent to US$ 96 million at the December 31, 2006 exchange rate.

According to the Brazilian corporate law, after allocation of any amounts to the legal reserve, we may, subject to shareholders’ approval, make allocations from the remaining balance to a contingency reserve against future losses.

At the end of each fiscal year, all shareholders are entitled to receive a mandatory dividend, also known as the mandatory distribution. For the mandatory distribution, we must distribute at least 25% of the net income after taxes, after deducting the accumulated losses and after deducting any amounts allocated to employee’s and management participation, and as reduced or increased, as the case may be, by the following amounts:

	•	the amount allocated to the legal reserve; and

	•	the amount allocated to the contingency reserve and any amount written off in respect of the contingency reserve accumulated in previous fiscal years.

Under the Brazilian corporate law, the amount by which the mandatory distribution exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized income reserve and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which “net income” exceeds the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain affiliates, and (2) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.

The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the requirements of the Brazilian corporate law. In addition, amounts arising from tax incentive benefits or rebates are appropriated to a separate capital reserve in accordance with the Brazilian corporate law. This investment incentive reserve is not normally available for distribution, although it can be used to absorb losses under certain circumstances, or be capitalized. Amounts appropriated to this reserve are not available for distribution as dividends.

The Brazilian corporate law permits a company to pay interim dividends out of preexisting and accumulated profits for the preceding fiscal year or semester, based on financial statements approved by its shareholders. The dividends we paid in 2006 relate to profits accounted up to December 31, 2005.

Unappropriated retained earnings, as reported in our U.S. GAAP financial statements, represent retained earnings after appropriations specified in the Brazilian corporate law as described in the fourth paragraph under “—General.” Unappropriated retained earnings in U.S. GAAP have no relevant impact on U.S. investors since the distributable earnings are those recorded in our books in accordance with Brazilian GAAP. The appropriated reserve balances in the U.S. GAAP financial statements at the balance sheet dates reflect the underlying Brazilian statutory accounts translated at historical exchange rates. The unappropriated retained earnings balance in the U.S. GAAP financial statements does not reflect amounts available for distribution. At December 31, 2006, in our legal books prepared in accordance with Brazilian GAAP, we had unappropriated retained earnings (sum of the accounts Reserve for Accumulated Financial Results (Reserva de Resultados Acumulados) and Reserve for Retained Earnings (Reserva de Lucros)) of R$ 1,761 million, equivalent to US$ 824 million at the exchange rate at December 31, 2006. We had unappropriated retained earnings of US$ 628 million at December 31, 2005 and US$ 461 million at December 31, 2004 at the exchange rate at the referred dates. Unappropriated retained earnings as reported in accordance with Brazilian GAAP may be used to make additional discretionary dividend payments, but we cannot assure you that we will make dividend payments out of these unappropriated retained earnings in the foreseeable future. No dividend distribution can be made if an accumulated deficit is reported in accordance with Brazilian GAAP, unless the negative balance is reversed by releasing other reserves.

The devaluation of the real impacts the amount available for distribution when measured in U.S. dollars. Amounts reported as available for distribution in our statutory accounting records prepared under Brazilian GAAP will decrease or increase when measured in U.S. dollars as the real depreciates or appreciates, respectively, against the U.S. dollar. In addition, the devaluation of the real creates foreign exchange gains and losses that are included in the results of operations determined under Brazilian GAAP and which affect the amount of unappropriated earnings available for distribution. At December 31, 2006, on a consolidated basis, we and our subsidiaries recorded under Brazilian GAAP foreign exchange losses and monetary variation (including gains from foreign currency swap contracts and excluding Aracruz’s foreign exchange gain on equity) of R$ 15,611 million (equivalent to US$ 7 million at the average exchange rate for 2006).

Mandatory distribution

Under our by-laws, at least 25% of our adjusted net income for the preceding fiscal year must be distributed as a mandatory annual dividend. The dividend must be distributed within 60 days of the annual shareholders’ meeting at which the distribution is approved, unless a shareholders’ resolution determines another date for distribution, which may not be later than the end of the fiscal year in which such dividend was declared. Pursuant to our by-laws, holders of preferred shares are not entitled to a fixed or minimum dividend, but have the right to receive dividend payments per share that are 10% greater than those paid to holders of common shares. The mandatory distribution is based on a percentage of adjusted net income, which may not be lower than 25%, rather than a fixed monetary amount per share. The Brazilian corporate law permits, however, a public company to suspend the mandatory distribution of dividends if the board of directors reports to the shareholders’ meeting that the distribution would be incompatible with the financial condition of the company, subject to approval by the shareholders’ meeting and review by the Conselho Fiscal. The board of directors must file a justification for a dividend suspension with the CVM within five days of the date of the shareholders’ meeting. Profits not distributed by virtue of the suspension mentioned above must be attributed to a special reserve and, if not absorbed by subsequent losses, must be paid as dividends as soon as the financial situation of the company permits such payments. The rules regarding suspension apply to the holders of preferred shares and, consequently, to the holders of ADSs. The mandatory distribution may also be limited to the “realized” portion of net income, as described under “—General.” On December 3, 2003 we changed our dividend policy. For further information on the new policy, see “Dividend Policy.”

Payment of dividends

We are required by the Brazilian corporate law to hold an annual shareholders’ meeting by April 30 of each year at which, among other things, the shareholders have to decide on the payment of our annual dividend. Under the Brazilian corporate law, dividends are required to be paid within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which must occur prior to the end of the fiscal year in which such dividend was declared. A shareholder has a three-year period from the dividend payment date to claim dividends (or interest payments as described under “—Additional payments on shareholders’ equity”) in respect of its shares, after which we will have no liability for such payments.

We may prepare financial statements semiannually or for shorter periods. Our board of directors may declare a distribution of dividends based on the profits reported in semiannual financial statements. The board of directors may also declare a distribution of interim dividends based on profits previously accumulated or in profits reserve which are reported in such financial statements or in the last annual financial statement approved by resolution taken at a shareholders’ meeting.

In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The preferred shares underlying the ADSs are held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, which is the registered owner on the records of the registrar for our shares. The current registrar is Banco Itaú S.A. The depositary registers the preferred shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to the preferred shares remitted outside Brazil.

Payments of cash dividends and distributions, if any, are made in Brazilian reais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. In the event that the custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by devaluations of the Brazilian currency that occur before the dividends are converted. Under the current Brazilian corporate law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which will be subject to Brazilian withholding income tax at varying tax rates. See “Item 10—Additional Information—Taxation—Certain Brazilian tax consequences.”

Dividend policy

The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of the majority of the holders of our common stock and will depend on many factors. These factors include our results of operations, financial condition, cash requirements, future prospects, our credit ratings, macroeconomic conditions and other factors deemed relevant by our shareholders. Our shareholders have historically acted on these matters at the recommendation of our board of directors. Within the context of our tax planning, we may in the future determine that it is to our benefit to distribute interest attributed to shareholders’ equity.

On December 3, 2003, our board of directors approved a change in our dividend policy. Under the new policy, we intend to pay dividends and/or interest on equity based on 60% of “free cash flow.” “Free cash flow” is expected to be an amount equal to “EBITDA” minus “changes in working capital,” minus “income taxes” and minus “capital expenditures” and will be based upon our financial statements prepared in accordance with the Brazilian corporate law, Brazilian GAAP and the rules and regulations of the CVM and Bovespa. “EBITDA” means operating profit before financial expenses (income) and gains (losses) from certain investments accounted for by the equity method plus depreciation, amortization and depletion; “changes in working capital” means the net cash provided by (or used in) the decrease (increase) of current assets and the increase (decrease) of current liabilities; “income tax” means the income tax and social contribution effectively paid by us and “capital expenditures” means the net cash used in our capital expenditures, in each case as such items appear in the income statement and/or the statement of cash flows contained in our year-end financial statements prepared in accordance with the requirements of the Brazilian corporate law.

The new policy went into effect in 2004 and will apply to any future distribution of dividends and/or interest on equity, as well as to any distribution related to the 2003 fiscal year. It is anticipated that, given the cyclical nature of our pulp and paper business, distributions of dividends and/or interest on equity will be made once a year.

The declaration of annual dividends, including dividends in excess of the mandatory distribution, will continue to require approval by the majority of our common stockholders and will continue to depend on many factors, including our results of operations, financial condition, cash requirements, future prospects, credit ratings, macroeconomic conditions and other factors deemed relevant by our shareholders and board of directors. We may change or rescind our dividend policy at any time.

Dividends

The following table sets forth the dividends paid to holders of our capital stock since fiscal year 2001. The amounts in the table below relate to cash dividends declared, which differ from the dividends reported in U.S. dollars in the statement of changes in shareholders’ equity in our consolidated financial statements due to translation effects recorded through to the date of dividend payment.

First payment date	Fiscal year		Common shares		Preferred shares		Common shares⁽¹⁾		Preferred shares⁽¹⁾

			(in R$ per share)				(in US$ per share)
June 21, 2002		2001		0.4614		0.5075		0.1621		0.1783
June 20, 2003		2002		0.5711		0.6282		0.1977		0.2174
May 10, 2004		2003		1.1928		1.3121		0.3798		0.4177
November 5, 2004		2004		0.3999		0.4399		0.1419		0.1561
May 13, 2005		2004		0.2080		0.2280		0.0842		0.0923
May 10, 2006 ⁽²⁾		2005		1.4069		1.5476		0.6834		0.7518


(1)	Based on declared cash amount in R$translated to U.S. dollars at the exchange rate on the first payment date.
(2)	Dividends distributed as Interest on Equity (ISE). Amounts are gross of the 15% withholding tax.

The dividends we paid amounted to US$ 40 million in 2003, US$ 104 million in 2004 and US$ 88 million in 2005. On December 18, 2006, we declared dividends (as interest on capital) related to 2006 fiscal year, amounting to R$ 320 million (approximately US$ 156 million), to be paid in 2007, after our next annual shareholders’ meeting (to be held until April 30, 2007), which will confirm the final approval. This amount represents approximately 40% of our net earnings for the year 2006 and 4% yield. Holders of our preferred shares have the right to receive a dividend per share of 10% more than that paid to the common shares.

B. Significant Changes

No significant changes or events have occurred after the close of the balance sheet date at December 31, 2006, other than the events already described in this annual report

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

The ADSs are listed on the New York Stock Exchange under the trading symbol “VCP.” Our preferred shares trade on the São Paulo Stock Exchange under the symbol “VCPA4” (prior to December 3, 1999 we traded under the symbol “PSIM4”). At December 31, 2006, we had approximately 6,400 shareholders of record.

Market Price Information

The table below sets forth, for the periods indicated, the reported high and low closing sale prices in nominal reais for each preferred shares on the São Paulo Stock Exchange. The table also sets forth, for the periods indicated, the reported high and low sales prices per ADS at the last day of each respective quarter. See “Item 3—Key Information—Selected Financial Data—Exchange Rates” for information with respect to exchange rates applicable during the periods set forth below:

		*Reais* per Preferred Share				U.S. dollars per ADS

		High		Low		High		Low

2002:
	Annual		24.44		15.00		8.45		5.00
2003:
	Annual		36.78		19.20		12.82		6.40
2004:
	Annual		44.00		33.00		16.55		10.72
2005:	First Quarter		39.37		31.55		15.69		12.72
	Second Quarter		32.28		25.38		13.30		10.61
	Third Quarter		28.54		24.71		13.40		11.10
	Fourth Quarter		29.00		23.39		13.55		11.40
	Annual		39.37		23.39		15.69		10.61
2006:	First Quarter		35.01		27.20		16.18		12.22
	Second Quarter		36.56		29.95		17.58		12.65
	Third Quarter		38.50		32.60		17.78		14.78
	Fourth Quarter		44.30		36.40		20.04		17.11
	Annual		44.30		27.20		20.04		12.22
Share Price for the most recent six months:
	July, 2006		33.38		31.36		16.26		14.78
	August,2006		34.78		34.78		16.73		15.14
	September, 2006		37.04		32.13		17.78		15.55
	October, 2006		37.97		37.97		18.36		17.11
	November, 2006		42.62		37.29		20.04		20.04
	December, 2006		42.49		39.73		20.00		19.25

B. Plan of Distribution

Not applicable.

C. Markets

Trading on the São Paulo Stock Exchange

Settlement of transactions conducted on the São Paulo Stock Exchange is effected three business days after the trade date. Delivery of, and payment for, shares is made through the facilities of separate clearinghouses for each exchange, which maintain accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the clearinghouse on the second business day following the trade date. The clearinghouse for the São Paulo Stock Exchange is Companhia Brasileira de Liquidação e Custódia, or CBLC.

In order to better control volatility, the São Paulo Stock Exchange has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of these stock exchanges fall below the limits of 10% and 15%, respectively, in relation to the index registered in the previous trading session.

The São Paulo Stock Exchange is less liquid than the New York Stock Exchange or other major exchanges in the world. At December 31, 2006, the aggregate market capitalization of the 350 companies listed on the São Paulo Stock Exchange was equivalent to approximately US$ 723 billion, and the ten largest companies listed on the São Paulo Stock Exchange represented approximately 51% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer 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. On December 31, 2006, we accounted for approximately 0.5% of the market capitalization of all listed companies on the São Paulo Stock Exchange.

Trading on the São Paulo Stock Exchange by non-residents of Brazil is subject to certain limitations under Brazilian foreign investment and tax legislation. See “Item 10—Additional Information—Memorandum and Articles of Association” and “Item 10—Additional Information—Exchange Controls.”

Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, by the Conselho Monetário Nacional, the National Monetary Council, and by the Central Bank, which has, among others, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.

Under the Brazilian corporate law, a corporation is either public (companhia aberta), such as we are, or closely held (companhia fechada). All publicly held companies, including us, are registered with the CVM and are subject to reporting requirements, in order to be allowed to have their securities offered to the public and to be listed in a Brazilian stock exchange. Our preferred shares are traded on the São Paulo Stock Exchange but may be traded privately subject to certain limitations or on the Brazilian over-the-counter market. The Brazilian over-the-counter market consists of direct trades in which a financial institution registered with the CVM serves as intermediary.

We have the option to ask that trading in securities on the São Paulo Stock Exchange be suspended in anticipation of a material announcement. Trading may also be suspended at the initiative of the São Paulo Stock Exchange or the CVM 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 by the CVM or the São Paulo Stock Exchange, among other reasons.

The Brazilian securities law, the Brazilian corporate law and the regulations issued by the CVM, the National Monetary Council and the Central Bank provide, among other things, disclosure requirements and restrictions on insider trading, 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 markets in some other jurisdictions.

Differentiated Levels of Corporate Governance

On November 14, 2001, we agreed to comply with heightened corporate governance and disclosure requirements established by the São Paulo Stock Exchange in order to qualify for a differentiated listing qualification as a company admitted to the “Level 1 of Corporate Governance Requirements.”

To become a Level 1 company, an issuer must agree to (i) ensure that shares of the issuer representing 25% of its total capital are effectively available for trading; (ii) adopt offering procedures that favor widespread ownership of shares whenever making a public offering; (iii) comply with minimum quarterly disclosure standards; (iv) follow stricter disclosure policies with respect to transactions made by controlling shareholders, directors and officers involving securities issued by the issuer; (v) disclose any existing shareholders’ agreements and stock option plans; and (vi) make a schedule of corporate events available to the shareholders.

Significant Differences between our Corporate Governance Practices and NYSE Corporate Governance Standards

We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules, and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.

Majority of Independent Directors

The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. Brazilian law does not have a similar requirement. Under Brazilian law, neither our board of directors nor our management is required to test the independence of directors before their election to the board. However, both the Brazilian Corporate Law and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as well as the restrictions applicable to, a company’s executive officers and directors. While our directors meet the qualification requirements of the Brazilian Corporate Law and the CVM, we do not believe that our directors would be considered independent under the NYSE test for director independence.

The Brazilian Corporate Law and our bylaws require that our directors be elected by our shareholders at a general shareholders’ meeting. All of our directors are elected by, and represent, our controlling shareholders.

Executive Sessions

NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management. The Brazilian Corporate Law does not have a similar provision. According to the Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected from management. No member of our executive committee serves as a director. The directors are not expressly empowered to serve as check on management and there is no requirement that our directors meet regularly without management. As a result, our directors do not typically meet in executive sessions.

Nominating/Corporate Governance Committee

NYSE rules require that listed companies have a Nominating/Corporate Governance Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. We are not required under applicable Brazilian law to have a Nominating Committee/Corporate Governance Committee, and accordingly, to date, have not established such a committee. The directors are elected by our shareholders at a general shareholders’ meeting. Our corporate governance practices are adopted by the entire board.

Compensation Committee

NYSE rules require that listed companies have a Compensation Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, reviewing corporate goals relevant to CEO compensation, evaluating CEO performance and approving CEO compensation levels and recommending to the board non-CEO compensation, incentive-compensation and equity-based plans. We are not required under applicable Brazilian law to have a Compensation Committee. Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at the annual general meeting. The board of directors is then responsible for determining the individual compensation and profit-sharing of each executive officer, as well as the compensation of our board and committee members. In making such determination, the board reviews the performance of each executive officer and each of the goals they were supposed to achieve during the year.

Audit Committee

NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit committee, or audit board in our case, meet the SEC rules regarding audit committees for listed companies. The Brazilian Corporate Law requires companies to have a non-permanent Conselho Fiscal composed of three to five members who are elected at the general shareholders’ meeting. The Conselho Fiscal operates independently from management and from a company’s external auditors. Its main function is to monitor the activities of management, examine the financial statements of each fiscal year and provide a formal report to our shareholders.

We have a permanent Conselho Fiscal that consists of three members and three alternates. The members of our Conselho Fiscal are all financially literate and one member has accounting expertise that qualifies him as an audit committee financial expert. In order to comply with the exemption requirements that allow our Conselho Fiscal to act as an audit committee pursuant to SEC rules, our Board of Directors approved the delegation to the Conselho Fiscal of certain additional responsibilities and the Conselho Fiscal and the Board of Directors adopted an additional charter that delegates to the Conselho Fiscal the duties and responsibilities of a U.S. audit committee to the extent permitted under Brazilian Corporate Law. For a further discussion of our Conselho Fiscal, see “Item 6C. Board Practices—Conselho Fiscal.”

Shareholder Approval of Equity Compensation Plans

NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval. We have no equity compensation plans.

Corporate Governance Guidelines

NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We have not adopted any formal corporate governance guidelines beyond those required by applicable Brazilian law. We believe that the corporate governance guidelines applicable to us under Brazilian corporate law are consistent with the guidelines established by the NYSE.

Code of Business Conduct and Ethics

NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. However, we have recently amended our code of ethics to comply with the requirements of the Sarbanes-Oxley Act and the NYSE rules. We believe our code, as amended, substantially addresses the matters required to be addressed by the NYSE rules. A copy of our Code of Ethics has been filed as Exhibit 11.1 to this annual report. For a further discussion of our Code of Ethics, see “Item 16B – Code of Ethics.”

Internal Audit Function

NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Brazilian law does not require that companies maintain an internal audit function. However, as a best practice, we maintain an internal audit function, which is co-assisted by Deloitte Touche Tohmatsu in an outsourced partnership. Our internal audit function is under the supervision of the Chief Executive Officer, assuring the necessary independence and competence to assess the design of our internal control over financial reporting, as well as to test its effectiveness as required by Section 404 of the Sarbanes-Oxley Act of 2002.

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

Our by-laws are filed as Exhibit 1 to this annual report.

C. Material Contracts

Shareholders’ Agreement of Aracruz Celulose S.A.

A subsidiary of ours became a party to the Aracruz shareholders’ agreement, along with BNDESPAR, the Lorentzen Group and the Safra Group. Under the shareholders’ agreement, our subsidiary will be entitled to appoint three directors to the Aracruz’s board, which currently consists of ten directors. The shareholders’ agreement, which expires in 2008, provides that the maximum number of shares of voting stock of Aracruz to be held by any party to the shareholders’ agreement may not exceed 28% of the total outstanding shares of voting stock. In addition, the shareholders’ agreement requires that each person or entity who acquires shares of voting stock of Aracruz from any of the parties to the shareholders’ agreement become a party to such agreement.

On February 7, 2003, the Lorentzen Group and the Safra Group announced the signing of an agreement in which the Lorentzen Group and the Safra Group agreed that, until the termination of the existing Aracruz shareholders’ agreement, a sale by either party of its voting interest in Aracruz must be approved by the other party. This new agreement provides that (i) neither party may take any action or omit to take any action which results in the extension or renewal of the existing shareholders’ agreement, and (ii) after May 11, 2008 (the date of termination of the existing shareholders’ agreement), (A) the sale by either party shall be subject to rights of first refusal by the other party and to “tag-along” rights (the right of a party to the agreement to sell on a pro rata basis its shares if another party is selling shares) and (B) in the event of a sale by either of them to a third party, the purchaser must adhere to the provisions of the new agreement.

Technology Transfer Agreements

We have had a technology transfer agreement with Oji Paper since 1991 pursuant to which Oji Paper agreed to share secret formulae, processes, technical information and know-how developed by it for thermal and carbonless paper. The agreement also granted us an exclusive, non-assignable license to manufacture and sell certain carbonless and thermal papers in Brazil and a non-exclusive, non-assignable license to sell such products in Latin America, Africa and the Middle East. Oji Paper receives quarterly royalties based on net sales. The sum of the quarterly royalties in the year ended December 31, 2004 was approximately US$ 1.3 million. In 2005 and 2006 this amount was reduced to less than US$ 1.0 million because the technology transfer agreement for both carbonless and thermal paper, expired in October 2004 and we have renewed it only for thermal papers.

Exchange Agreement with International Paper

On September 19, 2006, International Paper Investments (Holland) B.V. (“International Paper”), a wholly owned subsidiary of International Paper Company, and VCP entered into an Exchange Agreement (the “Exchange Agreement”). Pursuant to the terms of the Exchange Agreement, International Paper will exchange its pulp mill project (the “Project Mill”) being developed in Tres Lagoas, state of Mato Grosso do Sul, Brazil (together with approximately 100,000 hectares of surrounding forestlands) for VCP’s Luiz Antonio pulp and uncoated paper mill and approximately 60,000 hectares of forestlands located in the state of São Paulo, Brazil. International Paper has already fully funded the project mill in the amount of US $1.15 billion.

Pursuant to the Exchange Agreement, each of International Paper and VCP agreed to provide indemnification following closing to the other party for certain matters, including for certain environmental liabilities and breaches of representations, warranties or covenants.

Consummation of the transaction is subject to customary conditions and is expected to close by February 1, 2007.

The foregoing description of the Exchange Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Exchange Agreement, which has been filed with the Commission as an exhibit to this report.

Agreements filed as Exhibits

The representations, warranties and covenants made by us in any agreement that is filed as an exhibit to this report were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to others. Moreover, such representations, warranties or covenants were accurate only as of the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.

For additional information on our material contracts, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

D. Exchange Controls

There are no restrictions on ownership of our common shares or preferred shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of common shares or preferred shares into foreign currency and to remit such amounts outside Brazil are subject to exchange control restrictions and foreign investment legislation which generally require, among other things, obtaining an electronic registration with the Central Bank.

Under Resolution No. 2,689, 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. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities that are domiciled or headquartered abroad.

Investors under Resolution No. 2,689 who do not reside in a “tax haven,” or a country that does not impose income tax or in which the maximum income tax rate is lower than 20%, are entitled to favorable tax treatment. See “—Taxation—Certain Brazilian Tax Consequences.”

Resolution No. 1,927 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 by the Central Bank and the CVM under Annex V, and we received final approval before the ADS Offering.

An electronic registration, which replaced the amended Certificate of Registration, was issued in the name of the depositary with respect to the ADSs and is maintained by the Custodian on behalf of the Depositary. This electronic registration was carried on through the SISBACEN. Pursuant to the electronic registration, the Custodian and the Depositary are able to convert dividends and other distributions with respect to the preferred shares represented by the ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges the ADSs for preferred shares, the holder will be entitled to continue to rely on the Depositary’s electronic registration for only five business days after the exchange. Thereafter, a holder must seek to obtain its own electronic registration. Unless the preferred shares are held pursuant to Resolution No. 2,689 by a duly registered investor or a holder of preferred shares who applies for and obtains a new electronic registration, that holder may not be able to obtain and remit abroad U.S. dollars or other foreign currencies upon the disposition of the preferred shares, or distributions with respect thereto. In addition, if the foreign investor resides in a tax haven jurisdiction or is not an investor registered pursuant to Resolution No. 2,689, the investor will also be subject to less favorable tax treatment.

Preemptive Rights

Each of our shareholders has a general preemptive right to subscribe for shares or convertible securities in any capital increase, in proportion to its shareholding, except in the event of the grant and exercise of any option to acquire shares of our capital stock. A minimum period of 30 days following the publication of notice of the issuance of shares or convertible securities is allowed for exercise of the right, and the right is negotiable. However, according to our by-laws, our board of directors can eliminate this preemptive right or reduce the 30-day period in case we issue debentures that are convertible into shares or shares within the limits authorized by the by-laws: (i) through a stock exchange or through a public offering or (ii) through an exchange of shares in a public offering to acquire control of another company.

In the event of a capital increase that would maintain or increase the proportion of capital represented by preferred shares, the holders of preferred shares, except as described above, would have preemptive rights to subscribe to our newly issued preferred shares. You may not be able to exercise the preemptive rights relating to the preferred shares underlying your ADSs unless a registration statement under the Securities Act is effective with respect to the shares to which the rights relate or an exemption from the registration requirements of the Securities Act is available and the ADS depositary determines to make the rights available to you. In the event of a capital increase that would reduce the proportion of capital represented by preferred shares, the holders of the preferred shares, except as described above, would have preemptive rights to subscribe for preferred shares in proportion to their shareholdings, and for common shares, only to the extent necessary to prevent dilution of their interest in their shares. See “Item 3—Key Information—Risk Factors—Risks Relating to Our Preferred Shares and ADSs—You may not be able to exercise preemptive rights with respect to our preferred shares.”

Right of Withdrawal

The Brazilian corporate law provides that, under certain circumstances, a shareholder has the right to withdraw its equity interest from the company and to receive payment for the portion of shareholders’ equity attributable to its equity interest. Such right of withdrawal may be exercised by a dissenting or non-voting shareholder, including any holder of preferred shares, if a vote of at least 50% of voting shares authorizes us:

	•	to establish new classes of preferred shares or to disproportionately increase an existing class of preferred shares relative to the other classes of shares, unless such action is provided for or authorized by the by-laws (our by-laws currently authorize such action);

	•	to modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or to create a new class with greater privileges than the existing classes of preferred shares;

	•	to reduce the mandatory distribution of dividends;

	•	to change our corporate purpose;

	•	to merge with another company (including if we are merged into one of our controlling companies) or to consolidate;

	•	to transfer all of our shares to another company or in order to make us a wholly owned subsidiary of such company, known as an incorporação de ações;

	•	to approve the acquisition of control of another company at a price which exceeds certain limits set forth in the Brazilian corporate law;

	•	to approve our participation in a centralized group of companies, as defined under the Brazilian corporate law, and subject to the conditions set forth therein; or

	•	to conduct a spin-off that results in (a) a change of our corporate purposes, except if the assets and liabilities of the spun-off company are contributed to a company that is engaged in substantially the same activities, (b) a reduction in the mandatory dividend or (c) any participation in a centralized group of companies, as defined under Brazilian corporate law.

In addition, in the event that the entity resulting from a merger, or incorporação de ações, a consolidation or a spin-off of a listed company fails to become a listed company within 120 days of the shareholders’ meeting at which such decision was taken, the dissenting or non-voting shareholders may also exercise their withdrawal.

Only holders of shares adversely affected by the changes mentioned in the first and second items above may withdraw their shares. The right of withdrawal lapses 30 days after publication of the minutes of the relevant shareholders’ meeting. In the first two cases mentioned above, however, the resolution is subject to confirmation by the preferred shareholders, which must be obtained at a special meeting held within one year. In those cases, the 30-day term is counted from the date the minutes of the special meeting are published. We would be entitled to reconsider any action giving rise to withdrawal rights within 10 days following the expiration of such rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial stability.

The Brazilian corporate law allows companies to redeem their shares at their economic value as set forth in the Brazilian corporate law, subject to certain requirements. Because our by-laws currently do not provide that our shares be subject to withdrawal at their economic value, our shares would be subject to withdrawal at their book value, determined on the basis of the last balance sheet approved by the shareholders. If the shareholders’ meeting giving rise to withdrawal rights occurs more than 60 days after the date of the last approved balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet that is of a date within 60 days of such shareholders’ meeting.

According to the Brazilian corporate law, in events of consolidation, merger, incorporação de ações, participation in a group of companies, and acquisition of control of another company, the right to withdraw does not apply if the shares meet certain tests relating to liquidity and dispersal of the type or class of shares in question on the market. In these cases, shareholders will not be entitled to withdraw their shares if the shares are a component of a general stock index in Brazil or abroad, as defined by the Brazilian securities commission, and the shares held by persons unaffiliated with the controlling shareholder represent more than half of the outstanding shares of the relevant type or class.

E. Taxation

The following discussion contains a description of the material Brazilian and United States federal income tax consequences of the purchase, ownership and disposition of preferred shares or ADSs but does not purport to be a comprehensive description of all the tax considerations that may be relevant to these matters based upon the particular circumstances of a holder.

This summary is based upon tax laws of Brazil and the federal income tax laws of the United States as in effect on the date of this prospectus, which are subject to change, possibly with retroactive effect, and to differing interpretations. You should consult your own tax advisors as to the Brazilian, United States or other tax consequences of the purchase, ownership and disposition of preferred shares or ADSs, including, in particular, the effect of any U.S. federal estate, gift, or alternative minimum taxes, and non-U.S., state or local tax laws.

Although there is presently 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 preferred shares or ADSs.

Certain Brazilian tax consequences

The following discussion, subject to the limitations therein, summarizes certain Brazilian tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs, as the case may be, by a holder that is not domiciled in Brazil for purposes of Brazilian taxation, or by a holder of preferred shares with an investment in preferred shares registered with the Central Bank as a U.S. dollar investment (in each case, a “non-Brazilian holder”). It is based on Brazilian law as currently in effect, and, therefore, any change in such law may change the consequences described below. Each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in preferred shares or ADSs.

Taxation of dividends

As a result of tax legislation adopted on December 26, 1995, dividends based on profits generated after January 1, 1996, including dividends paid in kind, payable by us in respect of preferred shares, are exempt from withholding income tax. Stock dividends with respect to profits generated before January 1, 1996 are not subject to Brazilian tax, provided that the stock is not redeemed by us or sold in Brazil within five years after distribution of such stock dividends. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding income tax at varying rates, depending on the year the profits were generated.

Taxation of gains

Gains realized outside Brazil by a non-Brazilian holder on the disposition of ADSs to another non-Brazilian holder are not subject to Brazilian tax. According to Provisional Measure No. 135 Enacted on October 30, 2003, which came into force on January 1, 2004, the disposition of assets located in Brazil by a non-Brazilian holder may become subject to taxation in Brazil. Although we believe that the ADSs do not fall within the definition of assets located in Brazil for the purposes of Provisional Measure No. 135, considering the general and unclear scope of Provisional Measure No. 135 and the lack of a judicial court ruling in respect thereto we are unable to predict whether our belief will ultimately prevail in the Brazilian courts.

The withdrawal of ADSs in exchange for preferred shares is not subject to Brazilian tax. The deposit of preferred shares in exchange for ADSs may be subject to Brazilian capital gain tax at the rate of 15%, if the amount previously registered with the Central Bank as a foreign investment in the preferred shares is lower than (1) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or (2) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the 15 trading sessions immediately preceding such deposit. In this case, the difference between the amount previously registered and the average price of the preferred shares, calculated as above, shall be considered a capital gain. On receipt of the underlying preferred shares, the non-Brazilian holder registered under Resolution No. 2,689 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described below in “— Registered Capital.” However, if this non-Brazilian holder does not register under Resolution No. 2,689, it will be subject to the less favorable tax treatment described below.

Non-Brazilian holders are generally subject to income tax imposed at a rate of 15% on gains realized on sales or exchanges of preferred shares if the transaction is carried out outside any Brazilian stock, future or commodities exchange. Gains realized by a non-Brazilian holder upon the redemption of preferred shares will be treated as gain from the disposition of such preferred shares occurring outside of a stock exchange and will accordingly be subject to tax at a rate of 15%.

Non-Brazilian holders are subject to income tax, at a rate of 20%, on gains realized on sales or exchanges in Brazil of preferred shares that occur on the Brazilian stock exchanges, unless such a sale is made by a non-Brazilian holder who is not a resident in a “tax haven” (as described below) and (1) such sale is made within five business days of the withdrawal of the preferred shares in exchange for ADSs and the proceeds thereof are remitted abroad within such five-day period, or (2) such sale is made under Resolution No. 2,689 by registered non-Brazilian holders who obtain registration with the CVM. In these two last cases, the gains realized are exempt from income tax. The gain realized from transactions on the Bovespa is the difference between the amount in Brazilian currency realized on the sale or exchange and the acquisition cost, measured in Brazilian currency, without any correction for inflation, of the shares sold. The gain realized as a result of a transaction that occurs other than on the Bovespa is the positive difference between the amount realized on the sale or exchange and the acquisition cost of the preferred shares, both values in reais; there are grounds, however, to hold that the gain realized should be calculated based on the foreign currency amount registered with the Central Bank, such foreign currency amount to be translated into Brazilian currency at the commercial market rate. There is no assurance that the current preferential treatment for holders of ADSs and non-Brazilian holders of preferred shares under Resolution No. 2,689 will continue in the future or that it will not be changed in the future.

Any exercise of preemptive rights relating to the preferred shares will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to the preferred shares by a holder of preferred shares, or by the depositary on behalf of holders of the ADSs, will be subject to Brazilian taxation at the same rate applicable to the sale or disposition of preferred shares.

Capital gains on disposition of ADSs involving non-residents in Brazil

Article 26 of Law 10,833, enacted on December 29, 2003, states that the capital gain upon the disposition of “assets located in Brazil” by a non-resident to another non-resident in Brazil is subject to Brazilian withholding income usually at the rate of 15%. Such tax rate, however, increases to 25% in case the beneficiary of the capital gain is domiciled in a “tax haven” jurisdiction (i.e., a country or location that does not impose any taxation on income or that taxes the income up to the maximum rate of 20%).

In our opinion, the expression “assets located in Brazil” in principle does not encompass ADSs as they are issued outside Brazil. Consequently, the referred legal provision is not applicable to the disposition of ADSs by a non-resident to another non-resident. However, considering that such legal provision is quite recent and as far as we know there is no judicial or administrative precedent related to this matter, we can not guarantee that our understanding will ultimately prevail in the Brazilian courts.

Interest attributed to shareholders’ equity

Distribution of a notional interest charge attributed to shareholders’ equity in respect of the preferred or common shares as an alternative form of payment to shareholders who are either Brazilian residents or non-Brazilian residents, including holders of ADSs, is subject to Brazilian withholding income tax at the rate of 15%. Such payments, subject to certain limitations, are deductible for Brazilian income tax and for social contribution purposes as long as the payment of a distribution of interest is credited to a shareholder’s account and approved at our general meeting of shareholders. Current Brazilian corporate law establishes that a notional interest charge attributed to shareholders’ equity can either be accounted for as part of the mandatory dividend or not. In case the payment of such interest is accounted for as part of the mandatory dividend, we would be required to pay an additional amount to ensure that the net amount received by the shareholders, after the income tax, is at least equal to the mandatory dividend. The distribution of interest attributed to shareholders’ equity would be proposed by our board of directors and subject to subsequent declaration by the shareholders at a general meeting.

Beneficiaries resident or domiciled in tax havens or low tax jurisdictions

Law No. 9,779/99, in effect as of January 1, 1999, states that, with the exception of certain prescribed circumstances, income derived from operations by a beneficiary, resident or domiciled in a country considered as a tax haven, is subject to withholding income tax at a rate of 25%. Accordingly, if the distribution of interest attributed to shareholders’ equity is made to a beneficiary resident or domiciled in a tax haven, the income tax rate applicable will be 25% instead of 15%. Capital gains for gains realized are not subject to this 25% tax even if the beneficiary is a resident in a tax haven. A tax haven jurisdiction is considered to be any country or location, (i) which does not impose income tax or imposes income tax at a maximum rate lower than 20% or (ii) where internal legislation imposes restrictions on the disclosure of the shareholding composition or ownership of investments.

Other Brazilian taxes

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a non-Brazilian holder. However, some Brazilian states may impose gift and estate taxes on gifts made or inheritances bestowed by individuals or entities not resident or domiciled within such state to individuals or entities residing or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.

Tax on bank account transactions (CPMF)

As a general rule, financial transactions tax or CPMF tax is imposed on any removal of funds from accounts at banks. Transactions by the depositary or by holders of preferred shares that involve the transfer of Brazilian currency through Brazilian financial institutions will be subject to the CPMF tax. When non-Brazilian holders transfer the proceeds from the sale or assignment of preferred shares by an exchange transaction, the CPMF tax is imposed on the amount to be remitted abroad in Brazilian reais. The responsibility for the collection of the CPMF tax is borne by the financial institution that carries out the relevant financial transaction. The CPMF tax is generally imposed on bank account debits at a current rate of 0.38%. According to the Constitutional Amendment nº. 42 of 2003, the assessment of CPMF will exist until December 31, 2007 at the referred rate. In the event we perform any exchange transaction in connection with ADRs or preferred shares, we will have an economic CPMF tax burden.

Taxation of foreign exchange transactions (IOF/Câmbio)

Pursuant to Decree No. 2,219 of May 2, 1997, IOF/Câmbio may be imposed upon the conversion of Brazilian currency into a foreign currency (e.g., for purposes of paying dividends and interest) and on the conversion of foreign currency into Brazilian currency. Except under specific circumstances, there is no current IOF tax on such conversions, but the Minister of Finance has the legal power to increase the rate to a maximum of 25% at any time, but only in relation to future transactions.

Tax on bonds and securities transactions (IOF/Títulos)

Law No. 8,894/94 created the Tax on Bonds and Securities Transactions (the IOF/Títulos), which may be imposed on any transactions involving bonds and securities, even if these transactions are performed on Brazilian stock, futures or commodities exchanges. The applicable rate for these transactions is currently 0%, although the executive branch may increase the rate up to 1.5% per day, but only with respect to futures transactions.

Social Contribution Tax (COFINS and PIS)

The Federal government enacted law No. 10,833/03, which created the non-cumulative COFINS, which came into effect in February 2004. The COFINS tax previously charged at a flat rate of 3.0% on revenues was increased to 7.6% on revenues less certain costs and expenses on a value-added basis. Similarly, the PIS tax was increased from a flat rate of 0.65% on revenues to 1.65% on revenues less certain costs and expenses on a value-added. These new value-added taxes allowed for certain credits in the basis of calculation such as raw materials, services and certain finance expenses. Sales of investments (shares and fixed assets) are not considered in the calculation of these taxes.

Registered capital

The amount of an investment in preferred shares held by a non-Brazilian holder who qualifies under Resolution No. 2,689 and obtains registration with the CVM, or by the depositary representing such holder, is eligible for registration with the Central Bank; such registration (the amount registered is referred to as registered capital) allows the remittance of foreign currency outside Brazil, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized with respect to dispositions of, such preferred shares. The registered capital for each preferred share purchased as part of the international offering, or purchased in Brazil after that date, and deposited with the Depositary will be equal to its purchase price in U.S. dollars. The registered capital for a preferred share that is withdrawn upon surrender of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the greatest number of such shares was sold on the day of withdrawal, or (ii) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares was sold in the 15th trading session immediately preceding such withdrawal. The U.S. dollar value of the preferred shares is determined on the basis of the average commercial market rates quoted by the Central Bank on such date (or, if the average price of preferred shares is determined under clause (ii) above, the average of such quoted rates on the same 15 dates used to determine the average price of the preferred shares).

A non-Brazilian holder of preferred shares may experience delays in effecting such registration, which may delay remittances abroad. Such a delay may adversely affect the amount in U.S. dollars received by the non-Brazilian holder.

U.S. federal income tax considerations

The following discussion summarizes the principal U.S. federal income tax considerations relating to the purchase, ownership and disposition of preferred shares or ADSs by a U.S. holder (as defined below) holding such preferred shares or ADSs as capital assets (generally, property held for investment). This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”) and judicial decisions, all as in effect on the date hereof, and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. This summary does not describe any implications under state, local or non-U.S. tax law, or any aspect of U.S. federal tax law other than income taxation.

This summary does not purport to address all the material federal income tax consequences that may be relevant to the U.S. holders of the preferred shares or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks or other financial institutions, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, U.S. expatriates, investors liable for the alternative minimum tax, partnerships and other pass-through entities, investors that own or are treated as owning 10% or more of our voting stock, investors that hold the preferred shares or ADSs as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction and U.S. holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules.

As used below, a “U.S. holder” is a beneficial owner of preferred shares or ADSs that is, for U.S. federal income tax purposes:

	(i)	an individual citizen or resident of the United States;

	(ii)	a corporation (or entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

	(iii)	an estate the income of which is subject to U.S. federal income tax regardless of its source; or

	(iv)	a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust or (B) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

If a partnership or other entity taxable as a partnership holds preferred shares or ADSs, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partners of partnerships holding preferred shares or ADSs should consult their tax advisors.

In general, for U.S. federal income tax purposes, holders of American Depositary Receipts evidencing ADSs will be treated as the beneficial owners of the preferred shares represented by those ADSs.

Taxation of Distributions

In general, distributions with respect to the preferred shares or ADSs (which likely would include distributions of interest on shareholders’ equity, as described above under “– Certain Brazilian tax consequences – Interest attributed to shareholders’ equity”) will, to the extent made from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, constitute dividends for U.S. federal income tax purposes.

If a distribution exceeds the amount of our current and accumulated earnings and profits, as so determined, under U.S. federal income tax principles, it will be treated as a non-taxable return of capital to the extent of the U.S. holder’s tax basis in the preferred shares or ADSs, and thereafter as capital gain. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes.

The gross amount of any dividends (including amounts withheld in respect of Brazilian taxes) paid with respect to the preferred shares or ADSs generally will be subject to U.S. federal income taxation as ordinary income and will not be eligible for the dividends received deduction allowed to corporations. Dividends paid in Brazilian currency will be included in the gross income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date the dividends are received by the U.S. holder, or in the case of dividends received in respect of ADSs, on the date the dividends are received by the depositary or its agent, whether or not converted into U.S. dollars. A U.S. holder will have a tax basis in any distributed Brazilian currency equal to its U.S. dollar amount on the date of receipt, and any gain or loss recognized upon a subsequent disposition of such Brazilian currency generally will be foreign currency gain or loss that is treated as U.S. source ordinary income or loss. If dividends paid in Brazilian currency are converted into U.S. dollars on the day they are received by the U.S. holder or the depositary or its agent, as the case may be, U.S. holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss if any Brazilian currency received by the U.S. holder or the depositary or its agent is not converted into U.S. dollars on the date of receipt.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at a maximum rate of 15% if the dividends represent “qualified dividend income.” Dividends paid on the ADSs will be treated as qualified dividend income if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not in the year prior to the year in which the dividend was paid, and are not in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The ADSs are listed on the New York Stock Exchange, and should qualify as readily tradable on an established securities market in the United States so long as they are so listed. However, no assurances can be given that the ADSs will be or remain readily tradable. Based on our audited financial statements as well as relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2006 taxable year. In addition, based on the our audited financial statements and current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2007 taxable year. Because these determinations are based on the nature of our income and assets from time to time, and involve the application of complex tax rules, no assurances can be provided that we will not be considered a PFIC for the current (or any past or future tax year).

Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares (to the extent not represented by ADSs) will be treated as qualified dividend income, because the preferred shares are not themselves listed on a U.S. exchange. In addition, the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which holders of ADSs or preferred stock and intermediaries though whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs and preferred shares should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

Dividends paid by us generally will constitute income from non-U.S. sources and will be subject to various classification and other limitations for U.S. foreign tax credit purposes. Subject to generally applicable limitations under U.S. federal income tax law, Brazilian withholding tax imposed on such dividends, if any, will be treated as a foreign income tax eligible for credit against a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’s election if it does not elect to claim a foreign tax credit for any foreign taxes paid during the taxable year, all foreign income taxes paid may instead be deducted in computing such U.S. holder’s taxable income). In general, special rules will apply to the calculation of foreign tax credits in respect of dividend income that is subject to preferential rates of U.S. federal income tax. U.S. holders should be aware that the IRS has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of ADSs. 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 IRS.

Taxation of Capital Gain

Deposits and withdrawals of preferred shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

In general, gain or loss, if any, realized by a U.S. holder upon a sale or other taxable disposition of preferred shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and such U.S. holder’s adjusted tax basis in the preferred shares or ADSs. Such capital gain or loss will be long-term capital gain or loss if at the time of sale or other taxable disposition the preferred shares or ADSs have been held for more than one year. Under current U.S. federal income tax law, net long-term capital gain of certain U.S. holders (including individuals) is eligible for taxation at preferential rates. The deductibility of capital losses is subject to certain limitations under the Code. Gain, if any, realized by a U.S. holder on the sale or other disposition of preferred shares or ADSs generally will be treated as U.S. source gain for U.S. foreign tax credit purposes. Consequently, if a Brazilian withholding tax is imposed on the sale or disposition of preferred shares, a U.S. holder that does not receive sufficient foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of such Brazilian withholding tax. Alternatively, a U.S. holder may take a deduction for all foreign income taxes paid during the taxable year if it does not elect to claim a foreign tax credit for any foreign taxes paid during the taxable year. 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, preferred shares or ADSs.

Passive Foreign Investment Company Rules

Based upon our current and projected income, assets and activities, we do not expect the preferred shares or ADSs to be considered shares of a PFIC for our current fiscal year or for future fiscal years. However, because the determination of whether the preferred shares or ADSs constitute shares of a PFIC will be based upon the composition of our income and assets, and entities in which we hold at least a 25% interest, from time to time, and because there are uncertainties in the application of the relevant rules, there can be no assurance that the preferred shares or ADSs will not be considered shares of a PFIC for any fiscal year. If the preferred shares or ADSs were shares of a PFIC for any fiscal year, U.S. holders (including certain indirect U.S. holders) may be subject to adverse tax consequences, including the possible imposition of an interest charge on gains or “excess distributions” allocable to prior years in the U.S. holder’s holding period during which we were determined to be a PFIC. If we are deemed to be a PFIC for a taxable year, dividends on our ADSs would not be “qualified dividend income” subject to preferential rates of U.S. federal income taxation. U.S. holders should consult their own tax advisors regarding the application of the PFIC rules to the preferred shares or ADSs.

U.S. Backup Withholding and Information Reporting

A U.S. holder of preferred shares or ADSs may, under certain circumstances, be subjected to information reporting and “backup withholding” with respect to certain payments to such U.S. holder, such as dividends paid by our company or the proceeds of a sale of preferred shares or ADSs, unless such U.S. holder (i) is a corporation or comes within certain other exempt categories, and demonstrates this fact when so required, or (ii), in the case of backup withholding, provides a correct taxpayer identification number, certifies that it is a U.S. person and that it is not subject to backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amount withheld under these rules will be creditable against a U.S. holder’s U.S. federal income tax liability, provided the requisite information is timely furnished to the IRS.

F. Dividends and Paying Agents

Not applicable.

G. Statements by Experts

Not applicable.

H. Documents on Display

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, pursuant to which we file reports and other information with the Commission. These materials, including this annual report and the accompanying exhibits, may be inspected and copied at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, material we filed can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005, on which our ADSs are listed.

We also file electronically financial statements and other periodic reports with the CVM. The CVM website is www.cvm.gov.br.

Copies of our annual reports on Form 20-F and accompanying documents and our by-laws will be available for inspection at our headquarters or our website at www.vcp.com.br. The information on our website is not part of this annual report.

I. Subsidiary Information

Not required.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates and interest rates.

General

We use cross-currency interest rate swap contracts in the market to reduce our foreign currency exposure and also take into account the natural hedge provided by our exports in determining our hedging needs. We establish strict internal policies with respect to our currency exposure positions and revise these policies from time to time in response to new economic information on the macroeconomic environment in Brazil. The exposure to foreign currency risk is guided by closely monitored policies. We also invest in instruments linked to exchange variations.

We also use cross-currency interest rate swap contracts to mitigate the volatility of foreign exchange rate fluctuations on our U.S. dollar-denominated debt. The unrealized gains and losses on these contracts are recorded on our balance sheet as assets or liabilities and in our statement of income in “Foreign exchange gains (losses) and unrealized gains (losses) on swaps, net.”

These financial instruments have been used extensively as part of a defined financial strategy designed to optimize opportunities in the Brazilian foreign exchange and interest rate markets. Like many other Brazilian exporters, we have had access to U.S. dollar-denominated sources of long-term financing in the form of export prepayments or credits. Opportunities arise between the lower interest rates payable on the U.S. dollar-denominated export credits and borrowings, the proceeds of which are invested in real-denominated cash, cash equivalents and held-to-maturity investments, which provide higher yields.

At present, we, along with other Brazilian companies, have limited sources of long-term financing denominated in reais. We believe we have access to a sufficient number of foreign-currency financing sources to meet our needs without resorting to more expensive real-denominated financing.

Our foreign currency debt reflects a strategy to continue borrowing funds in U.S. dollars, and to invest the proceeds in investments bearing higher interest rates in the Brazilian market. We succeeded in lengthening the average maturity of our debt over time. The percentage of our short-term debt (i.e., the debt, including the current portion of long-term debt, maturing within 12 months) compared to our total debt was 14% at December 31, 2005 and 26.8% at December 31, 2006.

Foreign currency risk

Our foreign currency exposure gives rise to market risks associated with exchange rate movements against the U.S. dollar. Foreign currency-denominated liabilities include borrowings denominated mainly in U.S. dollars. Our sales outside of Brazil are largely U.S. dollar-denominated, while sales of pulp within Brazil are denominated in reais but based on U.S. dollar prices, working as a natural hedging for our currency exposure, with most of our operating costs being denominated in reais. Our export revenues and cross-currency interest rate swap contracts partially mitigate the exposure arising from our U.S. dollar-denominated debt. We evaluate the macroeconomic situation and its impact on our financial position on a weekly basis.

The specific foreign currency risks which have caused us to enter into swap contracts to protect ourselves against a possible devaluation of the real were associated with the exposures generated by our U.S. dollar-denominated (short- and long-term) debt. The contracts mitigate these risks by committing the counterparties and ourselves to positions in foreign currency, thereby offsetting, to the extent of these contracts, the effects of currency fluctuations on our foreign currency debts. The management of our net exposure position takes into account a number of current and projected economic factors and market conditions. At December 31, 2005 and 2006, the notional amounts of our outstanding foreign currency swap contracts were US$ 564 million and US$ 480 million, respectively, and their fair values were less than the aforementioned notional values by US$ 77 million and US$ 93 million, respectively. The weighted average pay rates on our outstanding foreign currency swap contracts are floating rate-based on the Certificado de Depósito Interbancário, or CDI. The fair values of our cross-currency interest rate swap contracts were estimated based on quoted market prices of comparable contracts. The table below provides information on our debt outstanding as of December 31, 2006. The amounts have been translated into U.S. dollars based on the exchange rate prevailing on December 31, 2006, as determined by the Central Bank (R$ 2.138 for US$ 1.00), as of December 31, 2006.

Our cross-currency interest rate swap contracts are effected to mitigate the potential foreign currency exchange losses which would be generated by our U.S. dollar-denominated liabilities in the event of a devaluation. We make our export sales in U.S. dollars, which helps us to mitigate potential losses in the event of a devaluation.

	Expected maturity date

(US$ in millions)	2007		2008		2009		After 2009		Total

Short-term debt:
Reais		0		0		0		0		0
U.S. dollars		242		0		0		0		242
Total short-term debt (including current portion of long-term debt)		242		0		0		0		242
Long-term debt:
Reais		38		38		22		63		161
U.S. dollars		132		43		62		901		1,138
Total long-term debt		170		81		84		964		1,299
Total		412		81		84		964		1,541

We incurred most of this debt mainly to mitigate our risk in relation to the position of the interest rate differentials between real-denominated financial instruments (cash and cash equivalents and held-to-maturity investments) and our foreign currency export credits See “Item 5—Operating and Financial Review and Prospects—Liquidity and capital resources—Capital expenditures.” We believe that, given our level of assets and resources, we should have sufficient cash and sources of working capital to meet our debt service.

On December 31, 2006, the carrying value of our U.S. dollar-denominated short-term debt was US$ 242 million and our U.S. dollar- and real-denominated long-term debt, including the current portion, was US$ 1,299 million.

We estimate that the foreign currency-denominated component of our paper costs does not exceed 10% of our total costs. We are self-sufficient in pulp, the principal raw material used in producing paper products. The energy, labor and other domestic components of our paper production costs are denominated in reais and, together with the cost of pulp, account for almost 90% of our paper costs. Although, in the long term, there is a clear correlation between international U.S. dollar-denominated pulp prices, reflecting the international nature of this commodity, and the prices we are able to charge, fluctuations in exchange rate are not always immediately reflected in our domestic prices. In the long term, when the international price of pulp increases, the domestic price follows and our domestic sales in reais also increase. In the short term, our domestic prices may deviate from the international U.S. dollar-denominated pulp prices. Timing of the fluctuations in exchange rate reflected in our prices may vary with the type of product, generally as follows:

	•	immediately for commodity products, such as pulp and uncoated wood-free paper;

	•	with a relatively short lag for coated papers, due to the sale of imported products in the domestic market; and

	•	with some lag for other specialty papers with limited exposure to external factors.

The percentage of our debt subject to fixed and floating interest rates is as follows:

	As of December 31,

	2006			2005

Floating rate debt:
• Denominated in U.S. dollars		58	%		64	%
• Denominated in reais		11	%		11	%

Subtotal		69	%		75	%
Fixed rate debt:
• Denominated in U.S. dollars		31	%		25	%
Subtotal		31	%		25	%

Total		100	%		100	%

Interest rate risk

Our floating interest rate exposure is primarily subject to the variations of LIBOR as it relates to U.S. dollar-denominated borrowings and to the variations of the TJLP, an annual long-term interest rate that includes an inflation factor and is determined quarterly by the Central Bank. On December 31, 2005, the TJLP was fixed at 9.75%, and during 2005 averaged 9.75% per year. On December 31, 2006, the TJLP was fixed at 6.85%, and during 2006 averaged 7.88% per year. The interest rate on our cash, cash equivalents and held-to-maturity investments denominated in reais is based on the CDI rate, the benchmark interest rate set by the interbank market on a daily basis and during 2006 averaged 15.04% per year.

The table below provides information about our significant interest rate-sensitive instruments. For variable interest rate debt, the rate presented is the weighted average rate calculated as of December 31, 2006.

100

	2007		2008		2009		After 2009		Total		Fair value⁽¹⁾

	(U.S.$ in millions)
Assets:
Cash and cash equivalents denominated in reais		362		—		—		—		362		362
Cash and cash equivalents denominated in U.S. dollars		49		—		—		—		49		49
Available-for-sales investments denominated in reais		360		—		—		—		360		360
Available-for-sales investments denominated in U.S. dollars		—		—		—		—		—		—
Total cash, cash equivalents and available-for-sales investments		771		—		—		—		771		771
Liabilities:
Short-term debt:
Floating rate, denominated in U.S. dollars		—		—		—		—		—		—
Floating rate, denominated in reais		—		—		—		—		—		—
Fixed rate, denominated in U.S. dollars		242		—		—		—		242		242
Fixed rate, denominated in reais		—		—		—		—		—		—
Long-term debt:
Floating rate, denominated in U.S. dollars		131		43		62		661		897		897
Floating rate, denominated in reais		38		38		22		63		161		161
Fixed rate, denominated in U.S. dollars		1		—		—		240		241		271
Total debt		412		81		84		964		1,541		1,571


(1)	The methodology used to determine the fair value included in the table above is described in note 14 to our audited consolidated financial statements.

(2)	Held-to-maturity or Available-for-sale investments

Cross-currency interest rate swaps

We primarily use derivatives to hedge our U.S. dollar-denominated debt. Because a large portion of our debt is denominated in U.S. dollars, we protect ourselves from the effects of unfavorable exchange movements by entering into cross-currency interest rate swap contracts or Brazilian public bonds. See note 14 to our audited consolidated financial statements for a discussion of the accounting policies for derivatives and other financial instruments.

Our counterparties are financial institutions, including Banco Votorantim, a member of the Votorantim group. Banco Votorantim is a commercial banking institution and is subject to Central Bank regulations. The rates that we negotiate with Banco Votorantim reflect those available in the current financial market. Our treasury department also compares these rates to those offered by other banks before closing the deal in order to assure that we receive the most favorable terms and conditions available for each transaction.

At December 31, 2006, US$ 135 million of all swap transactions were conducted with Banco Votorantim, representing approximately 28% of our outstanding foreign currency swap contracts. Our swap activities are contracted specifically to fulfill our needs. See note 12 to our audited consolidated financial statements.

101

The table below provides information about our cross-currency interest rate swap contracts:

	As of December 31, 2006

	Expected maturity date

Cross-currency interest rate swap contracts notional amount	2007			2008			2009		After 2009		Total			Fair Value of assets (liabilities) ⁽¹⁾			Average paying rate in reais		Average receiving rate

U.S. dollars to reais		(47	)		(44	)		—		—		(91	)		(89	)		100% of Brazilian Interbank Interest Rate		14.2% per year
Yen to U.S. dollars		(11	)		—			—		—		(11	)		(6	)		8.02% per year		4.25% per year
Reais to Reais		1			—			—		—		1			2			4.74% per year		5.44% per year
Total		(57	)		(44	)		—		—		(101	)		(93	)


(1)	The methodology used to determine the fair value included in the table above is described in note 13 to our audited consolidated financial statements.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures: Management, with the participation of our chief executive officer and our 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 Rules 13a-15(e)) as of the end of the period covered by this annual report, has concluded that, as of that date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting: VCP’s management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. VCP’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of VCP’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2006, VCP’s internal control over financial reporting is effective based on those criteria.

102

Management’s assessment of the effectiveness of internal controls over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers Auditores Independentes the independent registered public accounting firm who also audited VCP’s consolidated financial statements. PricewaterhouseCooopers’ attestation report on management’s assessment of VCP’s internal controls over financial reporting is included herein.

Changes in internal controls. There was no change in our internal control over financial reporting that occurred in the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

On April 27, 2005 we determined that Miguel Roberto Gherrize is our “audit committee financial expert,” serving on our Conselho Fiscal. Mr. Gherrize is independent, as required by rules of the New York Stock Exchange.

ITEM 16B.

CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to all VCP’s employees including the members of our financial department, including our chief executive officer, our chief financial officer and our chief accounting officer. No waivers, either explicit or implicit, of provisions of the code of ethics were granted to our chief executive officer, chief financial officer or chief accounting officer in 2006. A copy of our Code of Ethics has been filed as Exhibit 11.1 to this annual report.

Our code of ethics addresses, among others, the following topics:

	•	honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

	•	full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;

	•	compliance with applicable governmental laws, rules and regulations; and

	•	the prompt internal reporting of violations of the code of the appropriate person or persons identified in the code.

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth by category of service the total fees for services performed by PricewaterhouseCoopers Auditores Independentes during the fiscal years ended December 31, 2006, 2005 and December 31, 2004.

	Year Ended December 31,

	2006		2005		2004

	(in thousands of U.S. dollars)
Audit Fees and SOX Certification	US$	1,571	US$	285	US$	246
Audit-Related Fees⁽¹⁾		250		5		29
All Other Fees		—		—		74
Total	US$	1,821	US$	290	US$	349


(1)	Includes fees charged in connection with the review of the income tax returns of Votorantim Celulose e Papel S.A.

103

Audit Fees

Audit fees in 2006, 2005 and 2004 consisted of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes in connection with the audit of our annual financial statements and reviews of quarterly financial statements and statutory audits of our subsidiaries.

Audit-Related Fees

Audit-related fees in 2006, 2005 and 2004 consisted of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes in connection with analysis of compliance by us of Sarbanes-Oxley provisions and services related to audits performed in connection with public offerings of our shares.

Tax Fees

We did not pay any tax fees in 2006, 2005 and 2004.

All Other Fees

The aggregate of all other fees, other than those described above billed by PricewaterhouseCoopers Auditores Independentes in 2006 and 2005 were related to risk management advice and analysis or review of business plan or planning processes (but not design or implementation thereof or performance of management functions).

Pre-Approval Policies and Procedures

Our Board of Directors approves, based on the recommendation of the Audit Committee, all audit, audit-related, tax and other services provided by PricewaterhouseCoopers Auditores Independentes. Any services provided by PricewaterhouseCoopers Auditores Independentes that are not specifically included within the scope of the audit must be pre-approved by our board of directors in advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related, tax and other services pursuant to a de minimis exception prior to the completion of an audit engagement. In 2006, 2005 and 2004 none of the fees paid to PricewaterhouseCoopers Auditores Independentes were approved pursuant to the de minimis exception.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Under the listed company audit committee rules of the NYSE and the SEC, effective July 31, 2005, we had to comply with Exchange Act Rule 10A-3, which requires that we either establish an audit committee composed of members of the Board of Directors that meets specified requirements or designate and empower our Conselho Fiscal to perform the role of the audit committee in reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3). In our assessment, our Conselho Fiscal is able to act independently in performing the responsibilities of an audit committee under the Sarbanes-Oxley Act of 2002 and to satisfy the other requirements of Exchange Act Rule 10A-3. For a further discussion of our Conselho Fiscal and the audit committee exemption, see “Item 6C. Board Practices—Conselho Fiscal.”

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

In 2006, we sold 1,051,299 preferred shares held in treasury in the market for a total amount of R$ 43.3 million (approximately US$20.3 million) and no repurchase was performed in 2006. At December 31, 2006 a total of 31,999 preferred shares were held in treasury.

104

PART III

ITEM 17.

FINANCIAL STATEMENTS

Not applicable.

ITEM 18.

FINANCIAL STATEMENTS

The following financial statements are filed as part of this annual report, together with the report of Independent Registered Public Accounting Firm:

	Report of Independent Registered Public Accounting Firm (including Item 15(c) attestation including report on internal control over financial reporting)		F-2

	Consolidated Balance Sheets as of December 31, 2006 and 2005		F-3

	Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004		F-5

	Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		F-8

	Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004		F-9

	Notes to Consolidated Financial Statements		F-11

Aracruz - Report of Independent Registered Public Accounting Firm

All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

ITEM 19.

EXHIBITS

Exhibit Number		Description

1*		English translation of the By-laws.

2**		Form of Amended and Restated Deposit Agreement among us, The Bank of New York, as depositary, and the Owners and Beneficial Owners of American Depositary Receipts, including the form of American Depositary Receipts.

2.4***		Indenture, dated January 23, 2004, among Voto-Votorantim Overseas Trading Operations III Limited, as issuer, The Bank of New York, as trustee, The Bank of New York, as transfer agent, paying agent and registrar, The Bank of Tokyo-Mitsubishi Ltd., London Branch, as principal paying agent, and Votorantim Participações S.A., Votorantim Celulose e Papel S.A., Cimento Rio Branco S.A., and Companhia Níquel Tocantins, as guarantors.

2.5*****		Indenture, dated June 24, 2005, among Voto-Votorantim Overseas Trading Operations IV Limited, as issuer, The Bank of New York, as trustee, The Bank of New York, as transfer agent, paying agent and registrar, The Bank of Tokyo-Mitsubishi Ltd., London Branch, as principal paying agent, and Votorantim Participações S.A., Votorantim Celulose e Papel S.A., Cimento Rio Branco S.A., and Companhia Níquel Tocantins, as guarantors.

105

Exhibit Number		Description

3.3****		Terms of Adhesion to the Shareholders’ Agreement of Aracruz Celulose S.A., dated November 1, 2001.

4.1.1+		VCP Overseas Holding Export Prepayment Facility Agreement dated as of June 30, 2006 among VCP Overseas Holding Kft, Votorantim Celulose e Papel S.A., VCP Overseas Holding Ltd Budapest - Baar Branch, the Lenders defined therein, ABN AMRO Bank N.V., LaSalle Bank National Association, et al: US$375,000,000 Senior Loans.

4.1.2+		Export Finance Agreement dated as of June 30, 2006 among VCP Overseas Holding Kft, Votorantim Celulose e Papel S.A., VCP Overseas Holding Ltd Budapest - Baar Branch, and LaSalle Bank National Association.

4.1.3+		Collateral Account Control Agreement dated as of June 30, 2006 among VCP Overseas Holding Kft, VCP Overseas Holding Ltd Budapest - Baar Branch, the Lenders defined therein, ABN AMRO Bank N.V., LaSalle Bank National Association,

4.1.3+		Security Agreement dated as of June 30, 2006 among VCP Overseas Holding Kft, Votorantim Celulose e Papel S.A., VCP Overseas Holding Ltd Budapest - Baar Branch, the Lenders defined therein, ABN AMRO Bank N.V., LaSalle Bank National Association,

4.2.1+		Restatement Agreement dated 27 September 2006 for Votorantim Celulose e Papel S.A. and the other parties named therein, relating to the ABN AMRO Facility Agreements and the ABN Loan No. 3, as defined therein.

4.2.2+		Restated US$223,000,000 Pre-Export Finance Agreement as restated on 27 September, 2006 pursuant to a Restatement Agreement dated 27 September, 2006 for Votorantim Celulose e Papel S.A. and ABN AMRO Bank N.V..

4.2.3+		Disclosed Pledge of Collection Account between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN AMRO Bank N.V..

4.2.4+		Assignment Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN AMRO Bank N.V..

4.3.1+		Restatement Agreement dated 27 September 2006 for Votorantim Celulose e Papel S.A. and the other parties named therein, relating to the Santander Facility Agreements and the Santander Loan No. 6, as defined therein.

4.3.2+		Restated US$225,000,000 Pre-Export Finance Agreement as restated on 27 September, 2006 pursuant to a Restatement Agreement dated 27 September, 2006 for Votorantim Celulose e Papel S.A. and Banco Santander Central Hispano S.A. – London Branch.

4.3.3+		Collection Account between VCP Overseas Holding Ltd Budapest - Baar Branch and Banco Santander Central Hispano S.A. – London Branch.

4.3.4+		Assignment Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and Banco Santander Central Hispano S.A. – London Branch.

4.4.1+		Restatement Agreement dated 27 September 2006 for Votorantim Celulose e Papel S.A. and the other parties named therein, relating to the Syndicated Facility Agreement as defined therein.

4.4.2+		Restated US$102,000,000 Pre-Export Finance Agreement as restated on 27 September, 2006 pursuant to a Restatement Agreement dated 27 September, 2006 for Votorantim Celulose e Papel S.A., ABN AMRO Bank N.V. and Banco Santander Central Hispano S.A. – London Branch.

4.4.3+		Disclosed Pledge of Collection Account between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN AMRO Bank N.V..

4.4.4+		Assignment Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN AMRO Bank N.V..

106

Exhibit Number		Description

4.5+		Exchange Agreement dated September 19, 2006 by and between Votorantim Celulose E Papel S.A. and International Paper Investments (Holland) B.V.

6+		See Note 2(l) to our financial statements for information explaining how earnings per share information was calculated.

8+		See Note 2(c) to our financial statements for information regarding our subsidiaries.

11.1***		English translation of Code of Ethics.

12.1+		Rule 13a-14(a)/15(d)-14(a) Certificate of Chief Executive Officer.

12.2+		Rule 13a-14(a)/15(d)-14(a) Certificate of Chief Financial Officer.

13.1+		Section 1350 Certification of Chief Executive Officer.

13.2+		Section 1350 Certification of Chief Financial Officer.


*	Incorporated herein by reference to our annual report on Form 20-F filed on June 30, 2005 (File No. 001-15018).

**	Incorporated herein by reference to our registration statement on Form F-6 filed on March 25, 2002 (File No. 333-84964).

***	Incorporated herein by reference to our annual report on Form 20-F filed on June 30, 2004 (File No. 001-15018).

****	Incorporated herein by reference to our annual report on Form 20-F filed on May 21, 2002 (File No. 001-15018).

*****	Incorporated herein by reference to our annual report on Form 20-F filed on June 29, 2006 (File No. 001-15018).

+	Filed herewith.

107

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.

	VOTORANTIM CELULOSE E PAPEL S.A.


	By:	/s/ Valdir Roque

	Name:	Valdir Roque
	Title:	Chief Financial Officer


	By:	/s/ José Luciano Duarte Penido

	Name:	José Luciano Duarte Penido
	Title:	Chief Executive Officer

Date: January 31, 2007

108

Votorantim Celulose e Papel S.A.
Consolidated Financial Statements
as at December 31, 2006 and 2005,
and for the Three Years Ended
December 31, 2006
and Report of Independent Registered
Public Accounting Firm

Index to Consolidated Financial Statements		Page

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheet		F-5
Consolidated Statements of Income		F-7
Consolidated Statements of Cash Flows		F-9
Consolidated Statements of Changes in Shareholders’ Equity		F-11
Notes to the Consolidated Financial Statements		F-13

Report of Independent Registered
Public Accounting Firm

To the Board of Directors and Shareholders
Votorantim Celulose e Papel S.A.

We have completed an integrated audit of Votorantim Celulose e Papel S.A. and its subsidiaries (together the “Company) 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits and the report of other auditors, are presented below.

Consolidated financial statements

In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Votorantim Celulose e Papel S.A. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Aracruz Celulose S.A., an affiliate, the investment in which totaled US$ 291 million and US$ 262 million at December 31, 2006 and 2005, respectively, and for which the equity in earnings of affiliate, included in net income, totaled US$ 56 million, US$ 42 million and US$ 28 million for each of the three years in the period ended December 31, 2006. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Aracruz Celulose S.A., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

F-2

Votorantim Celulose e Papel S.A.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, appearing under Item 15, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – on Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-3

Votorantim Celulose e Papel S.A.

São Paulo, January 30, 2007

PricewaterhouseCoopers
Auditores Independentes

F-4

Votorantim Celulose e Papel S.A.

Consolidated Balance Sheets at December 31

In millions of U.S. dollars, except number of shares

Assets	2006		2005

Current assets
Cash and cash equivalents		405		261
Available for sale securities		365		446
Trade accounts receivable, net		201		212
Inventories		198		157
Recoverable taxes		94		57
Deferred income tax		49		7
Long-lived assets held for sale		15
Other		20		24

		1,347		1,164

Investment in affiliates, including goodwill		900		596
Property, plant and equipment, net		1,945		1,758
Other assets
Recoverable taxes		25		31
Deferred income tax		79		89
Judicial deposits		97		87
Other		11		6

		212		213

		4,404		3,731

F-5

Votorantim Celulose e Papel S.A.

Consolidated Balance Sheets at December 31
In millions of U.S. dollars, except number of shares	(continued)

Liabilities and shareholders’ equity	2006			2005

Current liabilities
Trade payables		111			64
Short-term debt		242			132
Current portion of long-term debt		170			79
Unrealized loss from currency interest rate swaps		50			6
Payroll, profit sharing and related charges		20			20
Taxes on income and other taxes		34			21
Interest attributable to capital payable		129			103
Liabilities associated with long-lived assets classified as held for sale		1
Other		23			20

		780			445

Long-term liabilities
Long-term debt		1,129			1,285
Unrealized loss from currency interest rate swaps		44			71
Accrued liabilities for legal proceedings		152			172
Post-retirement benefits		24			21

		1,349			1,549

Commitments and contingencies (Note 15)
Shareholders’ equity
Preferred shares, no par value, 280,000,000 shares authorized, 98,443,055 shares issued and outstanding (2005 – 85,911,046)		953			785
Common shares, no par value, 140,000,000 shares authorized, 105,702,452 shares issued and outstanding		1,053			1,053
Additional paid-in capital		35			29
Treasury shares, at cost, 2006 - 31,998 preferred shares (2005 – 1,081,500 preferred shares)		(1	)		(13	)
Appropriated retained earnings		86			72
Unappropriated retained earnings		694			487
Accumulated other comprehensive deficit
Cumulative translation adjustments		(545	)		(687	)
Net unrealized gains on available for sale securities					11

		2,275			1,737

		4,404			3,731

The accompanying notes are an integral part of the consolidated financial statements.

F-6

Votorantim Celulose e Papel S.A.

Consolidated Statements of Income

Years Ended December 31

In millions of U.S. dollars, except number of shares

	2006			2005			2004

Net operating revenue
Domestic sales (net of sales taxes: 2006 - US$ 222; 2005 - US$ 183 and 2004 - US$ 119)		685			564			512
Export sales		632			566			498

		1,317			1,130			1,010

Operating costs and expenses
Cost of sales		813			654			518
Selling and marketing		136			138			121
General and administrative		63			55			40
Other, net		20			36			6

		1,032			883			685

Operating income		285			247			325

Non-operating income (expense)
Financial income		166			79			40
Financial expense		(148	)		(119	)		(69	)
Foreign exchange gain (loss) and unrealized gain (loss) on swaps, net		(4	)		(5	)		12

		14			(45	)		(17	)

Income before taxes on income and equity in affiliates		299			202			308

Current income tax expense
Domestic		(3	)		(45	)		(47	)
Foreign		(22	)		(6	)		(6	)
Deferred income tax benefit		21			59			17

Income before equity in affiliates		295			210			272

Equity in earnings of affiliates		77			54			31

Net income		372			264			303

The accompanying notes are an integral part of the consolidated financial statements.

F-7

Votorantim Celulose e Papel S.A.

Consolidated Statements of Income
Year Ended December 31
In millions of U.S. dollars, except number of shares	(continued)

	2006		2005		2004

Net income applicable to preferred shares		188		124		143
Net income applicable to common shares		184		140		160

Net income		372		264		303

Basic and diluted earnings - in U.S. dollars
Per preferred share or ADS		1.97		1.46		1.67
Per common share		1.79		1.33		1.51
Weighted average number of shares outstanding (thousand)
Preferred		92,240		85,451		85,773
Common		105,702		105,702		105,702

The accompanying notes are an integral part of the consolidated financial statements.

F-8

Votorantim Celulose e Papel S.A.

Consolidated Statements of Cash Flows

Years Ended December 31

In millions of U.S. dollars

	2006			2005			2004

Cash flows from operating activities
Net income		372			264			303
Adjustments to reconcile net income to cash provided by operating activities
Unrealized foreign exchange (gain) loss, net		4			5			(12	)
Equity in earning of affiliates		(77	)		(54	)		(31	)
Interest attributable to capital and dividends received		15			11			22
Deferred income tax		(21	)		(59	)		(17	)
Depreciation and depletion		193			117			89
Loss on disposal of property, plant and equipment		14			9			5
Decrease (increase) in assets
Trade accounts receivable		6			(4	)		(17	)
Inventories		(19	)		(6	)		(21	)
Other assets		(33	)		(38	)		(15	)
Decrease/increase in contingencies		(36	)		56			46
Decrease in other liabilities		(36	)		(67	)		(75	)

Net cash provided by operating activities		382			234			277

Cash flows from investing activities
Held-to-maturity securities purchased, net of proceeds on sale					6			48
Available for sale securities
Purchase		(431	)		(259	)
Proceeds from sale and maturities		602			149
Acquisition of an interest in an affiliate (Note 4 (a))		(36	)		(275	)
Acquisition of property, plant and equipment		(248	)		(247	)		(218	)

Net cash used in investing activities		(113	)		(626	)		(170	)

Cash flows from financing activities
Short-term debt
Borrowings		603			458			352
Repayments		(441	)		(403	)		(310	)
Long-term debt
Third parties
Borrowings		134			869			347
Repayments		(299	)		(324	)		(558	)
Related parties
Borrowings		45			43			46
Repayments		(56	)		(39	)		(30	)
Treasury shares
Acquisition					(12	)		(2	)
Sale		18			1			1
Dividends paid		(111	)		(88	)		(104	)

Net cash provided by (used in) financing activities		(107	)		505			(258	)

F-9

Votorantim Celulose e Papel S.A.

Consolidated Statements of Cash Flows
In millions of U.S. dollars	(continued)

	2006			2005			2004

Effect of exchange rate changes on cash and cash equivalents		(18	)		(3	)		12

Net increase (decrease) in cash and cash equivalents		144			110			(139	)

Cash and cash equivalents at beginning of year		261			151			290

Cash and cash equivalents at end of year		405			261			151

Supplemental cash flow information
Cash paid during the year for
Income tax		14			43			34
Interest		98			65			61
Supplemental non cash flow information
Income tax offset with tax credits		12
Issue of shares upon acquisition of an interest in an affiliate (Note 4(a))		168

The accompanying notes are an integral part of the consolidated financial statements.

F-10

Votorantim Celulose e Papel S.A.

Consolidated Statements of Changes in Shareholders’ Equity

In millions of U.S. dollars, except number of shares

	2006			2005			2004

Preferred shares
At beginning of year		785			785			553
Transferred from unappropriated retained earnings								232
Capital increase		168

At end of year		953			785			785

Common shares
At beginning and end of year		1,053			1,053			767
Transferred from unappropriated retained earnings								286

At end of year		1,053			1,053			1,053

Additional paid-in-capital
At beginning of year		29			29			29
Gain on sale of treasury shares		6

At end of year		35			29			29

Treasury shares
At beginning of year		(13	)		(2	)		(1	)
Preferred shares sold (2006 – 1,049,502; 2005 – 126,400 and 2004 - 114,500)		12			1			1
Preferred shares purchased (2005 - 1,050,700 and 2004 – 263,800)					(12	)		(2	)

At end of year		(1	)		(13	)		(2	)

Appropriated retained earnings
At beginning of year		72			60			46
Transferred from unappropriated retained earnings		14			12			14

At end of year		86			72			60

Unappropriated retained earnings
At beginning of year		487			440			773
Net income		372			264			303
Transferred to preferred shares								(232	)
Transferred to common shares								(286	)
Transferred to appropriated retained earnings		(14	)		(12	)		(14	)
Dividends and interest attributed to capital
Preferred		(76	)		(97	)		(49	)
Common		(75	)		(108	)		(55	)

At end of year		694			487			440

F-11

Votorantim Celulose e Papel S.A.

Consolidated Statements of Changes in Shareholders’ Equity
In millions of U.S. dollars, except number of shares	(continued)

	2006			2005			2004

Cumulative translation adjustments
At beginning of year		(687	)		(867	)		(981	)
Gain for the year		142			180			114

At end of year		(545	)		(687	)		(867	)

Net unrealized gains on available for sale securities
At beginning of year (2004 in affiliates)		11						(1	)
Realized (transferred to results of operations)		(11	)					1
Gain for the year (2005 - net of tax of US$ 6)					11

At end of year					11

Shareholders’ equity at end of year		2,275			1,737			1,498

Comprehensive income
Net income		372			264			303
Unrealized gains on available for sale securities					11
Translation adjustments		142			180			114

Comprehensive income		514			455			417

The accompanying notes are an integral part of the consolidated financial statements.

F-12

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

1	Operations

	Votorantim Celulose e Papel S.A. and its subsidiaries (the “Company”, “VCP” or “we”) is a limited liability company constituted in accordance with the laws of the Federative Republic of Brazil and headquartered in the state of São Paulo.

	We produce eucalyptus pulp which we use in our own integrated paper manufacturing facilities or, to a lesser extent, sell in the domestic and foreign markets. We also have forestry operations which produce the pulp wood required for our production. Our business has experienced, and is likely to continue to experience, cycles relating to available industry capacity and general industry economic conditions. Our sales (volumes and prices) are affected by such conditions which are beyond our control. We are a member of the Votorantim Group, which has other interests in Brazil and abroad, principally in cement, metallurgy, agribusiness, chemicals and financial services.

	Our preferred shares are traded on the São Paulo Stock Exchange under the symbol “VCPA4.” Our American Depositary Shares (“ADSs”) are traded on the New York Stock Exchange under the symbol “VCP”. Each ADS represents one of our preferred shares.

2	Significant Accounting Policies

(a)	Basis of presentation

	The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which differ in certain respects from the accounting principles applied by the Company in its financial statements prepared in accordance with accounting practices generally accepted in Brazil (“Brazilian GAAP”) as filed with the Comissão de Valores Mobiliários(Brazilian Securities Commission or “CVM”), or for other statutory purposes in Brazil.

(b)	Translation of financial statements

	We transact the majority of our business in Brazilian Reais (R$) and, therefore, have adopted the Brazilian Real as the functional currency and have selected the United States dollar as our reporting currency. The U.S. dollar amounts for all years presented have been translated from Reais amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards (“SFAS”) 52, “Foreign Currency Translation”. Assets and liabilities are translated from the functional currency to the reporting currency using the official exchange rates reported by the Brazilian Central Bank at the balance sheet date (December 31, 2006 - US$ 1.00 : R$ 2.1380 - December 31, 2005 - US$ 1.00 : R$ 2.3407; December 31, 2004 - US$ 1.00 : R$ 2.6544).

F-13

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	Revenue, expenses and gains and losses are translated from the functional currency to the reporting currency using the monthly weighted-average exchange rates for the year. Capital accounts are recorded at historical exchange rates. Translation gains and losses are recorded in the Cumulative Translation Adjustments account (“CTA”) in shareholders’ equity.

(c)	Principles of consolidation

	Our consolidated financial statements include the accounts of VCP and our directly and indirectly controlled subsidiaries. The more significant subsidiaries are the following: VCP Exportadora e Participações S.A. (“VEP”) which was merged into VCP on April 1, 2006, Normus Emprendimentos e Participações Ltda., Newark Financial Inc. (“Newark”), VCP North America Inc., VCP Trading N.V. and VCP Overseas Holding KFT, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in the consolidation. The 12.35% owned equity investee, Aracruz Celulose S.A. (“Aracruz”), in which we acquired our interest during 2001 and our 50% owned equity investees, Ripasa S.A. Celulose e Papel (“Ripasa”) and Voto - Votorantim Overseas Trading Operations IV Limited. (“VOTO IV”) are accounted for using the equity method.

	On March 31, 2005, via a 50% owned joint venture Ripasa Participações S.A. (“Ripar”), Ripar acquired a 46.06% interest in the total capital and 77.59% interest in the voting capital of Ripasa, a Brazilian pulp and paper producer. On May 24, 2006, Ripasa’s minority preferred non-voting shareholders exchanged their interests in Ripasa for shares in the joint venture partners of Ripar (Note 4(a)) which, among other things, results in VCP indirectly owning 50% of Ripasa, via Ripar and subsequently their assets were distributed to VCP and Suzano, in equal parts (Note 4(a). On July 4, 2006, the joint venture partners paid US$ 71 to a group of Ripasa’s minority preferred non-voting shareholders. We account for our equity interest in Ripasa using financial information with a one month lag.

(d)	Cash and cash equivalents

	We consider all highly liquid investments with a maturity at acquisition of three months or less to be cash equivalents.

(e)	Available for sale securities

	We consider debt securities as available for sale securities when we intend to sell the securities before its maturity. Available for sale securities are presented based on quoted market prices and the unrealized gain or loss, net of taxes, is recorded in shareholders’ equity until the maturity or sale date, when the gain or loss is recorded in the statement of income. Interest income, including amortization of any premium or discount arising at acquisition, is recognized as “financial income”, in the statement of income.

F-14

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(f)	Inventories

	Inventories, including timber, are stated at average acquisition or production cost, which is lower than market.

(g)	Investment in affiliates, including goodwill

	Investments in affiliates in which we have the ability to exercise significant influence over the operating and financial policies are accounted for under the equity method. Our investment in affiliates is presented together with goodwill resulting on the acquisitions of such investments.

	Goodwill on the acquisition of affiliates with indefinite lives is tested annually for impairment.

(h)	Property, plant and equipment

	Property, plant and equipment are stated at cost of acquisition or construction, including interest during the construction period. Expenditures which materially extend the useful lives of the existing facilities and equipment are capitalized. We depreciate property, plant and equipment using the straight-line method at rates we judge to be compatible with the useful lives, principally 10 years for furniture and fixtures and 5 years for vehicles. Maintenance costs are expensed as incurred.

	In May 2006, based on an independent appraisal, the machinery, equipment and installations total useful lives were modified from 25 years to 18 years and 3 months.

	Depletion of forests is computed on the unit-of-production method, based on the volume of timber harvested in each period. Software costs capitalized are amortized on a straight-line basis over 5 years.

	Forest development costs, primarily project implementation costs (preparation of soil, planting, pest control and clearing etc.) and on-going development costs are capitalized as incurred. As a result of improvements in forest management techniques, including genetic improvement in trees, we harvest and replant our forests approximately every seven years. Capitalized costs are expensed at the time of each harvest.

	We review our property, plant and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable on the basis of undiscounted future cash flows. The reviews are carried out at the lowest level of groups of assets to which we are able to attribute identifiable future cash flows. Asset groups are forestry projects or production facilities for paper and pulp. We adjust the net book value of the underlying assets if the sum of the expected future cash flows is less than book value. These reviews to date have not indicated the need to recognize any impairment.

F-15

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(i)	Income taxes

	Brazilian taxes on income consist of federal income and social contribution taxes, the latter being a federal tax based on adjusted taxable income determined under Brazilian tax regulations. There are no taxes levied by state or local authorities on income in Brazil. For the purposes of these financial statements, we have applied SFAS 109 “Accounting for Income Taxes”, for all periods presented. The effect of adjustments made to reflect the requirements of US GAAP as well as the differences between the tax basis of non-monetary assets have been recognized as temporary differences for the purpose of recording deferred income taxes. Current and non-current deferred tax assets and liabilities are presented separately.

(j)	Revenues and expenses

	We recognize revenue and associated costs of sales at the time our products are delivered to our customers which is when title and associated risks pass to our customers. Revenue is recorded net of sales returns of US$ 10 in 2006 (US$ 7 in 2005 and US$ 6 in 2004). Our customers that purchase on credit agree to payment terms that effectively include finance charges. The finance charge on each sale is the difference between the amount the customer agrees to pay at the due date and the cash sale price. The finance charges are recognized over the payment period and are included in financial income. Recognition of revenue for our two segments and for domestic and export sales is based on the following principles:

		Paper - domestic market - Sales are either on cash or credit terms (normally 30, 60, 90 days) or through our vendor program. Credit sales receivables are discounted to present values as our price list is dependent on the length of credit granted. Revenue is recognized when the customer takes delivery of the product either upon delivery to the customer’s carrier (FOB) or premises (CIF). Sales through our vendor program are made to certain of our pre-qualifying domestic customers, and represented approximately 22% of our domestic sales in 2006 (2005 - 22%; 2004 - 21%). Under the vendor program, the customer agrees to pay the bank and the bank in turn pays us on behalf of the customer for the purchase price of the product. We guarantee full repayment of the loan for which the maximum allowable term for payment is generally 180 days, though in the case of a few customers, we extend the term to 360 days.

		We estimate that for 2006, 2005 and 2004, an average of approximately 3% of our total number of regular domestic customers (approximately 22%, 22% and 21%, respectively, of total domestic sales value) obtained our guarantee for their loans.

		Paper - export market - Export orders are normally met by own or third party warehouses located close to strategic markets. These sales are recognized when products are delivered to the carrier and risks have passed to the customer. CIF and FOB terms determine timing of revenue recognition.

F-16

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

		Pulp - domestic market - Sales are primarily under credit terms which do not exceed 30 days. Revenue recognition is consistent with that applied to paper sales.

		Pulp - export market - All export orders are normally satisfied by own or third party warehouses located close to strategic markets. These sales are recognized when products are delivered to the carrier and risks have passed to the customer.

	Research and development expenses are charged to expense as incurred and totaled US$ 1 in each of 2006, 2005 and 2004. Start-up expenses of new facilities and restructuring charges are also directly expensed. Shipping and handling costs are charged to selling and marketing expenses and totaled US$ 79, US$ 75 and US$ 76 in 2006, 2005 and 2004, respectively.

(k)	Comprehensive income

	We report comprehensive income in accordance with SFAS 130, “Reporting Comprehensive Income”, and have elected to present this in the Statement of changes in shareholders’ equity. In our case, comprehensive income comprises the results of our operations, the translation adjustments included in the CTA component of shareholders’ equity and the changes in the fair value of available for sale securities.

(l)	Earnings per share

	In conformity with SFAS 128, “Earnings per Share”, we have presented earnings per share for each class of shares, taking into account that the preferred shares are entitled to a dividend 10% greater than that paid to the common shares. The computation has been made as if the net income for each period will be fully distributed. Earnings may be capitalized or otherwise appropriated; consequently such earnings would no longer be available as dividends. Therefore, there is no assurance that preferred shareholders will receive a 10% premium on undistributed earnings. We may also pay dividends through interest attributed to capital in accordance with our by-laws.

(m)	Use of estimates

	The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Estimates are used for, but not limited to: accounting for allowance for doubtful accounts, selection of depreciable lives of assets, asset impairments, tax valuation allowances, contingencies and other similar evaluations. Actual results could differ from those estimates.

F-17

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(n)	Employee benefits and other related matters

	In March 2000 we launched a defined contribution plan which provides pension and post-retirement benefits (Note 20). We also contribute to the Government pension, welfare and redundancy plans on behalf of our employees and these contributions are expensed as incurred. Most of our employees are members of unions, with which we enter into collective-bargaining arrangements annually. The liability for future compensation for employee vacations is accrued as earned.

	We adopt SFAS 106, “Employers’ Accounting for Post-retirement Benefits Other than Pensions”, which requires a provision for the costs of post-retirement benefits expected to be paid to current, former or inactive employees upon retirement. Expenses relating to benefits we provide to our current employees are expensed as incurred whereas those relating to retired employees (current as well as expected in the future) and their dependents are accounted for in accordance with SFAS 106.

(o)	Environmental matters

	Our production facilities and forestry operations are subject to a number of environmental risks which we seek to mitigate by strict operating procedures and investments in pollution control equipment and systems. Ongoing environmental compliance expenditures are expensed as incurred and new equipment and systems are capitalized. We believe that no provision for losses related to environmental matters is currently required based on prevailing laws and regulations in Brazil.

(p)	Reclassification

	The statement of cash flows presentation was modified to present “Interest attributable to capital and dividends received” which was previously included in investing activities and was reclassified to operating activities. The amounts reclassified for the years ended December 31, 2005 and 2004 were R$ 11 and R$ 22, respectively.

F-18

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

3	Recently Issued Accounting Pronouncements

	The Financial Accounting Standards Board (“FASB”) recently issued a number of Statements of Financial Accounting Standards and interpretations; neither of the standards or interpretations described below had or are expected to have a material impact on the financial position and results of operations of the Company.

(a)	In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The main topics are described below:

	•	Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.

	•	Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133.

	•	Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation.

	•	Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives.

	•	Amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

	This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company believes that such pronouncement will not have effects on its consolidated financials statements.

(b)	In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. SFAS 156 amends Statement 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. An entity shall adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted in certain cases.

F-19

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	The impact of adopting this new rule is dependent on events that could occur in future periods, and as such, an estimate of the impact cannot be determined until the event occurs in future periods.

(c)	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), 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. According to the Board, a single definition of fair value, together with a framework for measuring fair value, should result in increased consistency and comparability in fair value measurements.

	This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.

(d)	In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)”.

	SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.

	This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to:

	•	Recognize the funded status of a benefit plan - measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation - in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation.

F-20

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	•	Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant.

	•	Measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions).

	•	Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.

	An employer with publicly traded equity securities, which is the case of VCP, is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The Company believes that the adoption of such standard will not have material impact on its financial statements.

(e)	In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FAS 109”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.

	This Interpretation prescribes a (more-likely-than-not) recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

	This Interpretation does not change the classification requirements for deferred taxes. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Also, following this Interpretation, the use of a valuation allowance as described in Statement 109 is not an appropriate substitute for the derecognition of a tax position. However, the requirement to assess the need for a valuation allowance for deferred tax assets based on the sufficiency of future taxable income is unchanged by this Interpretation.

	The Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company believes that the adoption of such Interpretation will not have impact on its financial statements.

F-21

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

4	Significant Transactions

(a)	Ripasa

	On November 10, 2004, we signed an agreement to acquire an interest in Ripasa through a venture with Suzano Bahia Sul Papel e Celulose S.A. (“Suzano”). The agreement was consummated on March 31, 2005 when Ripar was constituted by VCP and Suzano upon each contributing US$ 275 in exchange for equal shareholder rights and responsibilities, including equal direct and indirect holdings in the capital of Ripasa. On March 31, 2005, Ripar acquired and paid for 129,676,966 common shares and 41,050,819 preferred shares of Ripasa, representing 77.59% of the voting share capital and 46.06% of the total stock, the Reais equivalent, at that date, of US$ 550.

	Pursuant to the November 10, 2004 agreement, VCP and Suzano have a call option to acquire 37,449,084 common shares and 12,388,719 preferred shares of Ripasa, representing 22.41% of the voting stock and 13.45% of the total stock for a twelve-month period starting on the fifth anniversary of the closing date, for the Reais equivalent, at that date, of US$ 160 plus interest (split equally between VCP and Suzano). The shareholders of Ripasa who are party to the agreement have a put option which may require Ripar to acquire all their common and preferred shares, representing 22.42% and 13.45% of the voting and total stock, respectively, during a period of five years from the closing date. The shareholder agreement between VCP and Suzano provides for certain rights of first refusal in relation to their respective interest in Ripar.

	On July 20, 2005, the Boards of Directors of VCP, Suzano and Ripasa, approved the corporate restructuring that would allow Ripasa’s minority shareholders to exchange their interests in Ripasa for VCP and Suzano stock, in equal parts. The restructuring involved two phases: (i) the merger of Ripasa into Ripar and (ii) the distribution of assets to VCP and Suzano, in equal parts. Upon completion of the restructuring, Ripasa’s minority shareholders would become shareholders in VCP and Suzano, in accordance with the Protocol and Justification of Share Merger and Distribution (“Protocol”) that VCP, Suzano, Ripasa and Ripar executed on July 20, 2005.

	In April 2006, VCP and Suzano entered into an agreement with a group of Ripasa preferred shareholders to settle their claims which challenged Ripasa’s corporate restructuring. On July 4, 2006, VCP and Suzano disbursed to the former Ripasa minority preferred shareholders R$ 1.0538 for each Ripasa preferred share held by them totaling R$ 154, equivalent, at that date, of US$ 71 (corresponding to an additional US$ 36 cash disbursement for VCP shares).

	On May 24, 2006, the shareholders of VCP, Suzano, Ripasa and Ripar approved the corporate restructuring that allowed Ripasa’s minority preferred shareholders to exchange their interests in Ripasa for VCP and Suzano shares, as per the Protocol executed on May 5, 2006.VCP issued 12,532,009 preferred shares, with no par value, to the former Ripasa shareholders for the purchase of the remaining outstanding Ripasa voting and preferred shares. As a result, VCP’s preferred stock capital was increased by US$ 168 from US$ 785 to US$ 953, determined based on the shares quoted market price at that date.

F-22

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	VCP and Suzano are jointly the sole owners of all Ripasa shares. VCP owns 50% 83,563,025 common shares and 101,759,330 preferred shares of Ripasa and accounts for its interest in Ripasa on the equity method of accounting.

	This transaction is still subject to the approval of the Brazilian antitrust authorities.

	Following the corporate restructuring, the separate agreement dated November 10, 2004 which established the Suzano and VCP call options, and the put option of certain former minority shareholders of Ripasa, was modified to substitute the Ripasa shares for shares in VCP and Suzano as those former Ripasa minority shareholders had exchanged their shares of Ripasa for shares in VCP and Suzano. Accordingly, VCP has a call option to acquire 3,124,139 of its own non-redeemable preferred shares during a twelve-month period starting on March 31, 2010, for the Reais equivalent, at that date, of US$ 80 plus Brazilian market interest rates beginning from March 31, 2005 (on December 31, 2006, that amount, including interest, totaled US$ 133). The former shareholders of Ripasa, now shareholders of VCP, who are party to the agreement, have a put option which may require VCP to acquire all their non-redeemable preferred shares during a period of five years through March 31, 2010. According to the agreement, as a required preceding condition, the put/call options can only be exercised in case the underlying shares are free of liens and encumbrances.

	As the VCP shares held by the former Ripasa minority shareholders party to the agreement are subject to liens and encumbrances under legal proceedings which are not expected to be released prior to the expiry of the put/call options, the fair value of the derivative instruments, accounted for under SFAS No. 133 - “Accounting for Derivative Instruments and Hedging Activities”, is not material to Company’s financial statements as of December 31, 2006. The Company will mark to market these options with charges to the statements of income at every reporting period.

(b)	Asset exchange

	On September 19, 2006, VCP entered into an agreement with International Paper Investments (Holland) B.V. (“International Paper”) to exchange industrial and forestry assets between the two entities. Under the terms of the agreement, VCP will transfer to International Paper its pulp and paper plant located in the city of Luiz Antonio (State of São Paulo) and the plant’s related timberlands. International Paper will in turn, transfer to VCP assets used for the production of eucalyptus pulp, including: land, forests, and all rights related to an eucalyptus pulp mill development and construction project, amounting to US$ 1,150, located in the city of Três Lagoas (State of Mato Grosso do Sul).

	The asset exchange transaction is expected to be concluded by February 1, 2007.

F-23

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(c)	Announced intention to sell plant

	On September 4, 2006, the Company announced its intention to sell one of its paper plants, located in the municipality of Mogi das Cruzes in the State of São Paulo. The sales of the Mogi das Cruzes paper plant represented 2% of the Company total net sales in 2006.

	The Company has assessed its plan to sell this plant under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and has concluded that, at December 31, 2006, it meets all the criteria required by SFAS 144, to classify and account for the plant as an asset held for sale, in connection with discussions currently being held with prospective buyers.

	The carrying amount, as of December 31, 2006, of the major classes of assets and liabilities included as part of this disposal group may be identified as follow:

Description	2006

Inventories		4
Property, plant and equipment, net		11

Total assets		15

Costs with employers and others liabilities		1

Total liabilities		1

	No impairment loss has been recognized in connection with the classification of the plant as long-lived assets held for sale. The statement of income and cash flows effects are not material.

5	Income Taxes

	Income taxes in Brazil include federal income tax and social contribution. The composite tax rate on adjusted taxable income is 34%. From 2001 to 2004 we elected to calculate and pay our income taxes based on the provisions of REFIS (an estimated tax basis which is based on a percentage of net sales adjusted by financial income and other income). As from 2005, taxes on income are based on adjusted taxable income determined under Brazilian tax regulations.

F-24

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(a)	Income tax analysis

	The statutory rate applied to income before taxes is reconciled to income tax expense as follows:

	2006			2005			2004

Income before taxes on income		299			202			308

Income tax expense at statutory tax rate - 34%		(102	)		(69	)		(105	)
Reconciliation of statutory to effective rate
Effect of REFIS election								69
Benefit from interest attributable to capital		51			42
Difference in foreign income tax rates and other permanent differences		47			35

Income tax (expense) benefit		(4	)		8			(36	)

(b)

Analysis of deferred tax balances

	2006			2005

Deferred tax assets
Tax effects on impairment of Aracruz		46			46
Cross currency interest rate swap contracts		38			30
Provisions		24			28
Tax loss carryforwards		10			7
Post-retirement benefits		8			7
US GAAP adjustments and others		2			1

Total deferred tax assets		128			119

Deferred tax liabilities
Accelerated depreciation and US GAAP adjustments					(17	)
Tax effect on unrealized gains on available for sale securities					(6	)

Total deferred tax liabilities					(23	)

Net deferred tax assets		128			96
Less: current portion		(49	)		(7	)

Non-current portion		79			89

F-25

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	We recognize deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. If we or one of our subsidiaries operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period over which the underlying temporary differences become taxable or deductible, we evaluate the need to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in an increase in our effective tax rate.

6	Available for Sale Securities

	2006		2005

Denominated in Reais
Credit linked notes		294		30
Foreign Government Bonds		67		54
FIDC (Fundo de Investimento em Direitos Creditórios)		4
Securities				207
Denominated in U.S. dollars
Brazilian Government Bonds				155

Total		365		446

7	Trade Accounts Receivable

	2006			2005

Domestic receivables		109			124
Export receivables, denominated in U.S. dollars		100			95
Allowance for doubtful accounts		(8	)		(7	)

		201			212

No single customer represented more than 10% of our trade accounts receivables balance or net sales.

F-26

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

8	Inventories

	2006			2005

Finished products		101			64
Work in process		10			8
Raw materials and supplies		86			82
Imports in transit and other		5			3

		202			157

Inventories transferred to held for sale		(4	)
		198			157

9	Investment in significant affiliated company

(a)	Aracruz Celulose S.A.

	The Company accounts for its investment in Aracruz using the equity method of accounting. At December 31, 2006 the Company’s investment in Aracruz amounted to US$ 291. Included in the investment balance is unamortized goodwill of US$ 19. In 2006, the Company recorded equity in earnings for this investee of US$ 56 (2005 - gain of US$ 42; 2004 – gain of US$ 28).

(b)	Ripasa S.A. Celulose e Papel

	The Company accounts for its investment in Ripasa using the equity method of accounting using financial information with a one month lag. At December 31, 2006 the Company’s investment in Ripasa amounted to US$ 601. Included in the investment balance is unamortized goodwill of US$ 168. In 2006, the Company recorded equity in earnings for this investee of US$ 19 (2005 - US$ 10).

F-27

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

Ripasa and Aracruz’s condensed Balance Sheet and condensed Statement of Income for the three years then ended are as follows:

	Ripasa(i)

	2006		2005

Current assets		327		296
Property, plant and equipment, and other assets		1,258		1,185
Current liabilities		170		179
Long-term debt (long-term portion)		236		240
Other long-term liabilities		315		316

		864		746

	Ripasa(i)

	2006		2005

Net sales		573		507
Operating income		67		39
Net income		55		38

	Aracruz(ii)

	2006		2005

Current assets		1,200		1,095
Property, plant and equipment, and other assets		2,796		2,669
Current liabilities		287		485
Long-term debt (long-term portion)		1,155		1,011
Other long-term liabilities		352		304

		2,202		1,964

	Aracruz(ii)

	2006		2005		2004

Net sales		1,681		1,345		1,167
Operating income		499		447		357
Net income		455		341		227

(i) 50% ownership interest; (ii) 12.35% ownership interest.

F-28

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

10	Property, Plant and Equipment

	2006			2005

Land		191			155
Buildings		161			138
Machinery, equipment and installations		1,609			1,393
Forests		379			315
Other		186			174
Construction in progress		122			93

		2,648			2,268
Accumulated depreciation and depletion		(703	)		(510	)

		1,945			1,758

	In May 2006, the average estimates of total useful lives of the machinery, equipment and installations were reduced from 25 years to 18 years and 3 months. As a consequence, the depreciation expense increased in the year ended December 31, 2006 by US$ 65 if compared to the year ended December 31, 2005 (2006 effect on net income per average: preferred shares US$ 0.70; common shares US$ 0.61).

	During 2006, the Company concluded a physical inventory of machinery, equipment and installations and, as a result, wrote off US$ 8. Interest capitalized on construction in progress in each of the periods was: 2006 - US$ 11; 2005 - US$ 5 and 2004 - US$ 4.

11	Short-term Debt

	Short-term debt represents commitments under recourse provisions to honor export receivables transferred to banks accounted for as secured borrowings (ACEs), bearing an annual average interest rate of 5.5,% at December 31, 2006 (2005 - 4.6%). Historically, we have not incurred significant losses in connection with such recourse provisions.

F-29

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

12	Long-term Debt

	Interest rate December 31, 2006			2006			2005

Third parties
In U.S. dollars
Export credits (prepayment)		LIBOR + 0.67	%		873			936
Others								1
Total third parties					873			937

Related parties
In U.S. dollars
VOTO III loan		7.88	%		41			41
VOTO IV loan		7.75	%		200			201
In Reais
Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”)
TJLP		TJLP + 3	%		160			158
UMBNDES		various currencies + 3.6	%		25			27

Total related parties					426			427

Total debt					1,299			1,364

Less: current portion					(170	)		(79	)

Long-term portion					1,129			1,285

	•	LIBOR (London Interbank Offered Rate) at December 31, 2006 was 5.37% p.a. (2005 - 4.69%).

	•	TJLP (“Taxa de juros de longo prazo”), a long-term interest rate fixed quarterly by the Brazilian Central Bank. At December 31, 2006, the TJLP was 6.85% p. a. (2005 – 9.75%)

	•	The UMBNDES is a weighted average rate based on the exchange rates in a basket of currencies, predominantly U.S. dollars, held by BNDES.

F-30

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(a)	Export credits (prepayment)

	In September 2006 we signed an Export Prepayment Facility Agreement with a pool of banks (ABN Amro Bank, Banco Santander Central Hispano and Banco Bradesco) in an aggregate amount of US$ 550 at LIBOR plus 0.57%. Payments are due from 2007 through 2014 in installments to match export shipments. The financing are guaranteed by export contracts. The proceeds of the Agreement were used to prepay the following then outstanding Export Prepayment loans: (i) agreements dated May and July 2004 with ABN Amro Bank N.V., Banco Santander Central Hispano and Banco Bradesco in the aggregate amount of US$ 350 at LIBOR plus 2.00% due through 2011 in installments to match export shipments; and (ii) various other agreements including those executed during 2006.

	In July 2006, our wholly-owned subsidiary VCP Overseas Holding KFT, signed an Export Prepayment Agreement with a syndicate of banks in an aggregate amount of US$ 375 at LIBOR plus 0.57%. Payments are due from 2007 through 2014 in installments to match export shipments. The financing are guaranteed by export contracts. The proceeds were used to purchase from the lender and convert into an inter-company loan the following then outstanding Export Prepayment loans: (i) agreements dated May 2005 with ING Bank N.V. and Bayerishe Hypo and Vercinsbank in an aggregate amount of US$ 150; (ii) agreement dated July 2005 with Banco Santander Hispano London Branch in an aggregate amount of US$ 100; and (iii) outstanding loans in the aggregate of US$ 125 with Banco Santander Central Hispano and BNP Paribás that are part of the agreement dated March 2005.

(b)	VOTO III Loan

	In January 2004, Votorantim Participações S.A. (“VPAR”), our ultimate controlling shareholder formed VOTO III, a company based in the Cayman Islands, for the sole purpose of raising funds. VOTO III issued US$ 300, 7.875% Bonds due 2014 in the international market. We received 15% of the total amount issued or US$ 45 for which we are the guarantors.

(c)	VOTO IV loan

	In July 2003, together with VPAR, we formed VOTO II, a 50% owned affiliated company based in the Cayman Islands, for the sole purpose of raising funds. VOTO II issued US$ 250, 5.75% Bonds due in June 2005 in the international market, under Regulation S and on-lent US$ 125 to each of St. Helen III (our consolidated subsidiary) and St. Helen II (owned by VPAR). Together with VPAR and Cimento Rio Branco S.A., a company also under common control of our shareholder VPAR, we are the guarantors for this operation. The loan was fully repaid by St. Helen III to VOTO II on June 27, 2005 with the proceeds of the loan from VOTO IV.

F-31

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	On June 24, 2005 VOTO IV, a wholly-owned subsidiary of VPAR, issued US$ 400, 7.75% Fixed Rate Notes due 2020 in the international market, under Rule 144A and Regulation S. VCP is a guarantor of 50% of the debt issued by VOTO IV and in turn received US$ 200 of the proceeds. On September 6, 2005, we acquired a 50% interest in VOTO IV and together with VPAR we are the guarantors for this operation. From the proceeds of US$ 200, US$ 125 was used by St. Helen III to repay the debt incurred with VOTO II.

(d)	BNDES

	On May 20, 2005, we signed a financing agreement with BNDES for a total equivalent to US$ 93 for the purpose of financing acquisition of timberlands. Part of the loan, equivalent to US$ 79, bears interest at TJLP plus 4.5% per annum. The remaining balance is indexed to the UMBNDES plus 4.5% per annum and carries annual interest of 10.01%. This financing will mature in July 2015. VCP has drawn down US$ 48 to date. We have other outstanding financing agreement with BNDES amounting to US$ 112 at December 31, 2006.

(e)	Other guarantees

	The BNDES loans are secured by property, plant and equipment and a lien on certain land and personal guarantees of an owner of VPAR.

(f)	Long-term debt maturities

	At December 31, 2006, the long-term position of long-term debt maturities is as follows:

2008			81
2009			83
2010			92
2011			295
2012			201
After 2012			377

			1,129

(g)	Covenants

	We are subject to a number of material affirmative and negative covenants including, among others: limitations on our ability to incur debt; limitations on the existence of liens on our properties; limitations on transactions with related parties, which generally must be on terms no less favorable than those that could be obtained in a comparable arm’s-length transaction; and maintenance of certain financial ratios calculated based on Brazilian GAAP. We were in compliance with all covenants during each period presented.

F-32

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

13	Related Parties

	Balances and transactions with related parties are as follows:

	Nature and business purpose of transactions		2006			2005

Cash, cash equivalents and available for sale		Surplus cash funds invested with Votorantim Group financial institutions
Banco Votorantim S.A.				325			576
FIDC – Cia Nitroquímica Brasileira				4
Unrealized losses from cross currency interest rate swaps		Arising from swap contract transactions in which the Votorantim Group financial institution acts as counter- party
Banco Votorantim S.A.				(91	)		(54	)
Long-term loans		Loans from related parties
Votorantim Group
VOTO III				41			41
VOTO IV				200			201
BNDES (shareholder)				185			185
Trade payables from related parties Ripasa		Purchases of wood, pulp and paper		43			12

Revenue, income and expenses from transactions with related parties were as follows:

	2006		2005		2004

Purchases from Ripasa		75
Financial income		70		52		35
Financial expenses		90		115		53

Financial income arises from loans made to related parties and investments made in Banco Votorantim S.A.; and financial expenses represent mainly losses on cross currency interest rate swaps, including their respective fair values.

F-33

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

14	Financial Instruments

	We primarily use cross currency interest rate swap contracts and Brazilian Government bonds indexed to the U.S. dollar to hedge our U.S. dollar denominated debt. By entering into these contracts or purchasing Brazilian Government bonds, we partially protect ourselves from the effects of unfavorable exchange movements. Accordingly, if the Real devalues against the U.S. dollar and results in a foreign exchange loss, we are at least in part protected by an offsetting gain from the swap contracts.

	The fair values of our long-term and short-term debt were estimated based on available quoted rates for loans of substantially similar terms and maturities.

	The fair values of our cross currency interest rate swap contracts were estimated based on quoted market prices of comparable contracts. At December 31, 2006 and 2005 the notional amounts of our outstanding cross currency interest rate swap contracts were US$ 480 and US$ 564, respectively and their fair values of US$ 8 and US$ 15, respectively. The actual cash settlements on the contracts occur at times specified in each agreement.

	The carrying amounts and fair values of our financial instruments at December 31 were as follows:

	2006						2005

	Carrying amount			Fair value			Carrying amount			Fair value

Cash and cash equivalents		405			405			261			261
Available for sale securities
Securities tradable								207			207
Brazilian Government Bonds denominated in U.S. dollars								155			155
Credit linked notes		294			294			30			30
Foreign Government Bonds denominated in Reais		67			67			54			54
FIDC		4			4
Unrealized losses from cross currency interest rate swaps		(94	)		(94	)		(77	)		(77	)
Short-term debt		242			242			132			132
Long-term debt		1,299			1,329			1,364			1,371

F-34

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

15	Commitments and Contingencies

	We are party to certain legal proceedings in Brazil arising in the normal course of business, and have made provisions when we believe that we can reasonably estimate probable losses. In connection with some of these proceedings we have made deposits (in “Other assets”) which will only be released to us upon a judgment in our favor. The position of such provisions for tax and other litigation and deposits is as follows:

	2006				2005

	Deposits		Provisions		Deposits		Provisions

Tax-related		92		133		83		157
Labor-related		5		13		4		11
Civil-related				6				4

		97		152		87		172

The activity in our provision account was as follows:

	2006			2005		2004

At beginning of year		172			104		56
Provisions for new legal proceedings		11			54		45
Reversal (iv)		(47	)
Translation adjustment		16			14		5
Amounts paid to settle litigation							(2	)

At end of year		152			172		104

(a)	Tax-related

	We have instituted a number of legal proceedings which we are seeking a refund or contesting the imposition of certain taxes. The more significant of these proceedings are as follows:

	(i) In 1999, we filed a lawsuit challenging the 1% increase in the COFINS (Social Contributions on Revenues) tax rate (from 2% to 3%), a tax on revenues. Although we have obtained a legal injunction, based on advice from our legal counsel and reflecting rulings by the Federal Supreme Court, we accrued US$ 55 relating to this claim, from 2002 through 2004. In December 2005 we made a judicial deposit of US$ 55 following an unfavorable decision of the Supreme Court.

	(ii) During 2002, we filed a lawsuit challenging the inclusion of the ICMS (Value-added sales tax) in the computation basis for the COFINS tax, relating to the period from 1996 to 2003, as well as our deductibility of recoverable ICMS originated from raw material used for tax exempt paper products. We have accrued and deposited US$ 26 relating to this claim.

F-35

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	(iii) In 1996, we filed a judicial claim to assure our right to the deductibility of inflation-indexed depreciation (an uplift of 70%) arising from a government economic stabilization program in January 1989. We obtained a favorable decision enabling the partial deduction of an uplift of 43%. Based on advice from our legal counsel, we have accrued US$ 7 relating to this claim.

	(iv) In 1998, Brazilian Law 9718/98 was enacted which increased the base for both PIS and COFINS for 1999 (applying to other revenue lines and not only billings), while at the same time, increasing the rate for COFINS. On June 23, 2006 and August 29, 2006, we received unappealable favorable rulings for separate legal cases related to our challenge that the payment of Social Contributions on Revenues (PIS and COFINS) on other revenues (primarily on financial income) was inappropriate. As a result, in 2006 we reversed US$ 47 in the statement of income as “financial income”.

(b)	Other unprovided possible losses

	VCP is party to a substantial number of other legal proceedings in the normal course of its business involving possible risk of loss, in addition to the lawsuits and administrative proceedings discussed above.

	Management does not believe that such legal proceedings will, individually or in the aggregate, have a material adverse affect on our business, results of operations or financial condition, and therefore, no provisions have been recorded based on management’s assessment of the probability of loss.

	These possible losses, at December 31, are as follows:

	2006		2005

Tax-related		196		112
Civil-related		8		13
Labor-related		12		11

		216		136

(c)	Sale of affiliate

	In 1999, we sold our 51% interest in Indústria de Papel de Salto Ltda. Under the terms of the sale, we have indemnified the purchaser against certain losses in excess of amounts recorded limited to US$ 6 through 2007. No amounts have been paid under this indemnification in 2006 and 2005 and we believe such amounts if ultimately paid, if any, will not be significant.

F-36

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(d)	Commitments

	We do not maintain insurance for our forests; rather, our policy is to self-insure against fire, disease and other risks to our forests. We have taken measures to mitigate these risks, but any losses from damage outside of our control would be for our own account.

	We provide guarantees to banks, not in excess of 180 days, although in exceptional cases, this is extended to 360 days, which finance sales to certain of our selected customers. We recognize revenue on these sales at the time our products are delivered which is the time we transfer title to our customers. Under the vendor program we are the secondary obligor to the bank and monitor the amount due from the customer to the bank. We periodically review the adequacy of our allowance for estimated losses and adjust our allowance accordingly. At December 31, 2006, customer guarantees provided by us totaled US$ 120, including interest (US$ 57 at December 31, 2005). Our guarantees are usually secured by the personal guarantee of the customer’s owner.

	We lease timberlands under operating leases from third parties as a source for raw material for our products. The leases, most of which commenced in 1991, are typically for a term of 21 years. Lease payments, equal to 30% of the market value of the timber harvested on the property, are payable after each harvest. We guarantee to the lessor a minimum harvest payment. Payments under these operating leases were US$ 2 in 2006 and US$ 2 in 2005 and US$ 1 in 2004. At December 31, 2006, future minimum lease payments are due in 2007 total US$ 2.

	At December 31, 2006, future minimum operating lease payments were as follows:

2008			2
2009			2
2010			2
2011			2
2012			2
After 2012			2

			12

	We have commitments for capital expenditures amounting to US$ 17 at December 31, 2006.

	We have long-term “Take-or-Pay” contracts with suppliers of chemical products for periods from 1 to 10 years. The contractual obligations in connection with such contracts are US$ 38 per year.

F-37

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

The following is a summary of guarantees issued to other companies of the Votorantim Group:

Outstanding
guarantee amount

Primary obligor

Obligations

Beneficiary

2006

2005

VOTO III

US$ 300 notes issuance

Noteholders and the trustee

VOTO IV

US$ 400 notes issuance

Noteholders and the trustee

200

16	Segment Information

(a)	Segment information

	The following information about segments is based upon information used by our senior management to assess the performance of our operating segments and decide on the allocation of resources. This approach is required by SFAS 131, “Disclosure about Segments of an Enterprise and Related Information”, and has been applied for all periods presented. Our paper and pulp operations are based solely in Brazil. Intersegment revenues are accounted for at amounts which approximate those that would be obtained in a sale to third parties.

	The accounting policies underlying the financial information provided for the segments are based on Brazilian GAAP. We evaluate segment performance information generated from the statutory accounting records, except for the effects of our affiliates Aracruz and Ripar which are proportionally consolidated in our Brazilian GAAP financial statements but are not included in information used by our senior management to assess the performance of our segments. The local currency information related to statement of income data has been translated to U.S. dollars, for convenience purposes, at the average rate of each year presented. The information as at the balance sheet dates has been translated at the respective year-end exchange rates.

F-38

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	2006			2005			2004

Net operating revenue - Brazilian GAAP
Pulp		520			440			385
Paper		803			704			634

Reconciling item to US GAAP
Pulp		(1	)		(1	)
Paper		(5	)		(13	)		(9	)

Total net operating revenue - US GAAP		1,317			1,130			1,010

Intersegment sales of pulp to paper segment		254			249			214

Net operating revenue before intersegment sales eliminations - US GAAP		1,571			1,379			1,224

	2006			2005			2004

Depreciation and depletion expense –
Brazilian GAAP
Pulp		127			89			69
Paper		68			31			23

Reconciling items to US GAAP
Pulp		(2	)		(2	)		(2	)
Paper					(1	)		(1	)

Depreciation and depletion expense - US GAAP		193			117			89

There are certain differences between the methodologies we use to determine the operating profit shown in the following table and operating profit reported in our US GAAP statement of income. For segment reporting purposes we defer start-up costs of new facilities and amortize them against operating profit over the subsequent 10 years. We allocate depreciation to segments based on property, plant and equipment amounts which have been indexed for inflation, rather than the historical Real amounts. Also, we depreciated our machinery, equipment and installations over 10 years up to December 31, 1996, over 25 years up to December 31, 2005 and over 18.25 years thereafter.

F-39

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

These differences are reconciled as follows:

	2006			2005			2004

Segment operating income - Brazilian GAAP
Pulp		200			155			177
Paper		124			113			150

Operating income under Brazilian GAAP		324			268			327

Reconciling items to US GAAP
Depreciation and amortization expense
Pulp		2			2			2
Paper		2			1			1
Other adjustments
Pulp		(21	)		(10	)		1
Paper		(22	)		(14	)		(6	)

Total pulp		181			147			180
Total paper		104			100			145

Operating income - US GAAP		285			247			325

Segment assets
Pulp		1,332			1,167			943
Paper		556			513			433

Total segment assets per Brazilian GAAP		1,888			1,680			1,376

Reconciling items to US GAAP
Pulp		37			44			41
Paper		20			34			26

Total pulp		1,369			1,211			984
Total paper		576			547			459

Property, plant and equipment - US GAAP		1,945			1,758			1,443

Capital expenditures per Brazilian GAAP
Pulp		198			188			178
Paper		50			54			36

Reconciling items to US GAAP
Capitalized interest
Pulp		2			4			3
Paper		0			1			1

Total capitalized interest		2			5			4

Total pulp		199			192			181
Total paper		49			55			37

Capital expenditures - US GAAP		248			247			218

F-40

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

(b)	Export sales by region

	The following table includes our sales made directly to unaffiliated customers (the final customers) as well as our sales made to Votorantrade N.V. and related parties (also a member of the Votorantim Group) to the final customers. Sales are classified by region based on the location of the customer.

	2006				2005				2004

	Paper		Pulp		Paper		Pulp		Paper		Pulp

Europe		54		292		50		243		45		164
Middle East and Asia		5		127		10		120		9		150
North America		57		46		54		39		53		37
South America, other than Brazil		49				44				33
Africa		2				5		1		4		3

		167		465		163		403		144		354

17	Shareholders’ Equity

	Our by-laws require that we pay a dividend to our common and preferred shareholders of at least 25% of our annual net distributable income determined in accordance with Brazilian Corporate Law. Preferred shareholders are entitled to receive a dividend per share 10% higher than that paid to common shareholders. In 2006, 2005 and 2004 we paid dividends in excess of the mandatory amount.

	The preferred shareholders may not vote at shareholders meetings but have priority in repayment of their capital, in the case of liquidation.

	In accordance with the Brazilian Corporate Law and our by-laws we are required to make annual appropriations to certain reserves (“Appropriated retained earnings”). These comprise mainly (a) 5% of the net income in our statutory accounts which must be transferred to a legal reserve until such reserve reaches 20% of our share capital and (b) appropriation to an investment incentive reserve of an amount equal to income tax abatements related to income generated from investments in certain underdeveloped regions of Brazil. The legal and investment incentives reserves cannot be used to distribute dividends to our shareholders.

	Brazilian companies are permitted to pay limited amounts of interest attributable to capital to shareholders and treat such payments as an expense for Brazilian income and social contribution tax purposes. This notional interest distribution is treated for accounting purposes as a deduction from shareholders’ equity in a manner similar to a dividend. Interest attributable to capital is treated as a dividend for purposes of the mandatory dividend payable. A 15% tax is withheld and paid by upon credit of the interest.

F-41

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

	The devaluation of the Real impacts the amount available for distribution when measured in U.S. dollars. Amounts reported as available for distribution in our statutory accounting records prepared under Brazilian GAAP will decrease or increase when measured in U.S. dollars as the Real depreciates or appreciates, respectively, against the U.S. dollar. The devaluation of the Real results in net foreign exchange losses which are included in the statement of income determined under Brazilian GAAP and which reduces the amount of unappropriated earnings available for distribution. Brazilian law permits the payment of dividends only in Reais limited to the unappropriated retained earnings in our financial statements prepared in accordance with Brazilian GAAP. At December 31, 2006, we had unappropriated retained earnings of R$ 1,761 million (2005 - R$ 1,469 million) in our statutory books, equivalent, at the exchange rate at December 31, 2006, to US$ 824 (2005 - US$ 628).

	Dividends paid per shares in U.S. dollars were as follows:

	2006		2005		2004

Preferred		0.80		0.45		0.58
Common		0.72		0.41		0.52

	In accordance with VCP’s dividend policy, VCP intends to pay dividends and/or interest attributable to capital based on 60% of its “free operating cash flow”. Free operating cash flow is expected to be an amount equal to net income, as adjusted by the sum of (1) non – cash items such as depreciation, amortization, unrealized foreign exchange gains (losses) and equity gain (loss) of affiliate, and (2) net financial income (expense) and income and social contribution taxes effectively paid, and reduced by (3) the sum of changes in working capital required in the business and capital expenditures. The computation is based upon VCP’s financial statements prepared in accordance with Brazilian GAAP.

	On October 18, 2004, the Extraordinary General Meeting approved the following proposals:

	(i) an increase of subscribed capital stock, from US$ 1,320 to US$ 1,838, by means of capitalization of part of unappropriated retained earnings without issue of new shares; (ii) a reverse stock split dividing the entire subscribed capital of the Company, by 200 resulting in 191,613,498 shares, of which 105,702,452 are shares of common stock and 85,911,046 are shares of preferred stock; and (iii) a reverse split of our American Depositary Shares - ADSs traded on the New York Stock Exchange, each of which had previously represented 500 preferred shares, to represent one preferred share per ADS.

F-42

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

18	Concentration of Credit Risk

	We are potentially subject to credit risk with respect to our cash equivalents, held-to-maturity investments, available for sales securities, trade receivables, guarantees provided to banks which finance our customers, and derivative contracts. We limit our risk associated with cash equivalents and available for sales securities by placing our investments with highly rated financial institutions and we only take out derivative contracts with financially sound counter-parties. With respect to trade receivables and guarantees, provided to banks financing our customers, we perform initial and ongoing credit evaluations of our customers and, when deemed necessary, obtain collateral or letters of credit to protect our interests. Additionally, most of our export sales to the USA and Europe are secured by letters of credit. We establish an allowance for doubtful accounts against receivables we believe will not be fully collected.

19	Financial Income and Financial Expense

	2006		2005		2004

Financial income
Gain on:
Available for sale securities		62		22
Held-to-maturity securities				13		15
Reversal of contingency provision (Note 15 (a)(iv))		47
Interest income on cash equivalents		37		32		39
Other (including taxes) and present value adjustment		16		5		(18	)
Interest income on credit sales		4		7		4

		166		79		40

Financial expenses
Interest and charges on U.S. dollar debt		91		62		39
Interest and charges on Real debt		15		16		16
Tax on checking accounts - CPMF		9		10		7
Indexation and interest charges on contingencies		6		17
Other		27		14		7

		148		119		69

F-43

	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

20	Retirement benefits

(a)	Defined contribution plan

	In March 2000 we began co-sponsoring a multi-employer defined contribution plan of the Votorantim Group which is available to all of our employees. For employees below a certain income level we match the employee’s contribution limited to 1.5% of the employee’s compensation. For employees above that income level we match the employee’s contribution up to 6% of the employee’s compensation. At our option we may also make additional contributions. Our contributions vest in varying percentages depending on the employee’s years of service and will fully vest upon the employee’s retirement, death or disability, provided the employee has at least one year of service. Our contributions were US$ 3 in 2006, US$ 2 in 2005 and US$ 2 in 2004.

(b)	Post-retirement benefits

	The Company has an actuarial liability that relates to its proportion of the costs of Sepaco, a hospital facility we share with co-sponsors. Although the not-for-profit hospital is funded by multiple-employers, it has no separate assets and its costs are apportioned among the sponsors based on usage. Contributions paid to the hospital in the year ended December 31, 2006 and 2005 amounted to, US$ 1 and US$ 1, respectively and the accumulated post-retirement benefit obligation and accrued benefit cost (no plan assets) was US$ 24 at December 31, 2006 and US$ 21 at December 31, 2005.

	Measurement of obligations for the post-retirement benefits plan is calculated as of December 31, 2006. The discount rates used to determine the actuarial present value of projected benefit obligations under such plans were 8.5% as of December 31, 2006. The assumed weighted annual average rate of increase in health care cost trend on covered changes was 3.0% as of December 31, 2006.

	Based on the report of our independent actuary, the accumulated post-retirement benefit obligation and accrued benefit cost (no plan assets) was US$ 24.

	2006		2005

	Percentage		Percentage
Weighted-average assumptions as of December 31, 2006
Discount rate		8.5		8.5
Health care cost trend on covered changes		3.0		3.0

	US$		US$

Components of net periodic benefit cost for 2007
Interest cost		3		2
Total net periodic benefit cost (benefit)		3		2

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	Votorantim Celulose e Papel S.A.

	Notes to the Consolidated Financial Statements
	In millions of U.S. dollars, unless otherwise stated

It has been assumed, for measurement purposes, that health care cost trends for 2007 will not be considerably different from 2006. Our actuaries are unable to project the direction and pattern of changes in both the assumed and ultimate trend rates, nor can they estimate when the rates are expected to be achieved. A one-percentage-point change in assumed health care cost trend rates would have the following effects in 2006 (all other assumptions have been held constant):

	One- percentage- point increase		One- percentage- point decrease

Sensitivity of retiree welfare results
On total service and interest cost components		0.3		(0.3	)
On post-retirement benefit obligation		2.7		(2.5	)

21	Subsequent Events

	On January 2, 2007, the Company transferred to a new entity, LA Celulose e Papel Ltda. (“LA”), the net assets, including timberland, of its pulp and paper plant located in the city of Luiz Antonio (state of São Paulo).

	LA was created by the Company specifically to give effect to the asset exchange transaction that is expected to be concluded by February 1, 2007, upon the completion of certain procedures agreed between the parties (Note 4(b)).

* * *

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