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Natura Cosméticos S.A.
Financial Statements for the Years
Ended December 31, 2004 and 2003 and
Independent Auditors' Report




Deloitte Touche Tohmatsu Auditores Independentes
(Convenience Translation into English from
the Original Previously Issued in Portuguese)
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Natura Cosméticos S.A.
São Paulo - SP
1.
We have audited the accompanying individual (Company) and consolidated balance sheets
of Natura Cosméticos S.A. and subsidiaries as of December 31, 2004 and 2003, and the
related statements of income, changes in shareholders' equity, and changes in financial
position for the years then ended, all expressed in Brazilian reais and prepared under the
responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements.
2.
Our audits were conducted in accordance with auditing standards in Brazil and comprised:
(a) planning of the work, taking into consideration the significance of the balances, volume
of transactions, and the accounting and internal control systems of the Company and its
subsidiaries, (b) checking, on a test basis, the evidence and records that support the amounts
and accounting information disclosed, and (c) evaluating the significant accounting
practices and estimates adopted by management, as well as the presentation of the financial
statements taken as a whole.
3.
In our opinion, the financial statements referred to in paragraph 1 present fairly, in all
material respects, the individual and consolidated financial positions of Natura Cosméticos
S.A. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations,
the changes in shareholders' equity, and the changes in their financial positions for the years
then ended in conformity with Brazilian accounting practices.
4.
The supplementary information contained in Attachments I and II, referring to the
statements of cash flows and value added, respectively, is presented for purposes of
additional analysis and is not a required part of the basic financial statements. This
information was audited by us in accordance with the auditing procedures mentioned in
paragraph 2 and, in our opinion, is fairly stated, in all material respects, in relation to the
basic financial statements taken as a whole.
5.
The accompanying financial statements have been translated into English for the
convenience of readers outside Brazil.
São Paulo, February 4, 2005
DELOITTE TOUCHE TOHMATSU
Edimar Facco
Auditores Independentes
Engagement Partner
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$)
ASSETS
2004
2003
2004
2003
LIABILITIES AND SHAREHOLDERS' EQUITY
2004
2003
2004
2003
CURRENT ASSETS
CURRENT LIABILITIES
Cash and banks
26,656
30,801
29,592
34,072
Loans and financing
11,879
72,240
62,407
75,102
Temporary cash investments
158,631
26,482
202,020
102,039
Domestic suppliers
6,755
4,578
76,971
55,384
Trade accounts receivable
236,453
172,123
250,066
180,118
Foreign suppliers
-
-
4,172
2,139
Inventories
1,634
354
121,961
79,254
Suppliers - related parties
102,151
18,948
-
5,304
Recoverable taxes
3,009
715
18,158
8,525
Salaries, profit sharing and related charges
28,272
21,765
65,265
41,563
Advances to employees
4,084
3,558
6,949
4,938
Taxes payable
52,776
51,850
62,382
64,297
Related parties
833
25,837
-
1,275
Debentures
-
102,170
-
102,170
Deferred income and social contribution taxes
12,198
11,035
21,630
22,096
Related parties
94
939
-
964
Other receivables
358
2,180
6,063
5,214
Dividends
113,644
20,000
113,644
20,000
Total current assets
443,856
273,085
656,439
437,531
Interest on capital
13,623
8,541
13,623
8,541
Other payables
35,356
20,054
42,331
24,243
LONG-TEM ASSETS
Reserve for losses on swap contracts
4,544
9,012
6,138
9,012
Related parties
-
3,382
-
3,382
Total current liabilities
369,094
330,097
446,933
408,719
Advance for future capital increase
770
9,503
-
-
Receivables from shareholder
172
-
172
-
LONG-TERM LIABILITIES
Tax incentives
1,122
635
1,162
641
Loans and financing
19,549
31,052
71,982
32,986
Deferred income and social contribution taxes
12,624
7,978
21,301
9,447
Debentures
-
130,656
-
130,656
Recoverable taxes
876
-
3,848
-
Reserve for contingencies
39,769
24,870
59,559
28,381
Escrow deposits
20,370
7,548
24,256
14,595
Provision for losses on subsidiaries
64
6,282
-
-
Other receivables
-
-
1,716
1,715
Other payables
841
-
1,885
1,809
Total long-term assets
35,934
29,046
52,455
29,780
Total long-term liabilities
60,223
192,860
133,426
193,832
(Continues)
Company
Consolidated
Company
Consolidated
2
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BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$)
(Continued)
ASSETS
2004
2003
2004
2003
LIABILITIES AND SHAREHOLDERS' EQUITY
2004
2003
2004
2003
PERMANENT ASSETS
MINORITY INTEREST
-
-
7
(30)
Investments
373,748
332,698
8,707
2,809
Property, plant and equipment
13,231
10,744
298,822
253,739
SHAREHOLDERS' EQUITY
Total permanent assets
386,979
343,442
307,529
256,548
Capital
230,762
56,387
230,762
56,387
Capital reserves
112,016
9,998
112,016
9,998
Profit reserves
94,674
56,231
93,279
54,953
Total shareholders' equity
437,452
122,616
436,057
121,338
TOTAL ASSETS
866,769
645,573
1,016,423
723,859
TOTAL LIABILITIES AND
866,769
645,573
1,016,423
723,859
SHAREHOLDERS' EQUITY
The accompanying notes and attachments are an integral part of these financial statements.
(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
Consolidated
Company
Consolidated
Company
3
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$, except for earnings per share)
2004
2003
2004
2003
Gross sales to domestic market
2,457,891
1,840,014
2,472,046
1,860,287
Gross sales to foreign market
-
-
66,782
47,876
Other sales
5
72
829
1,957
GROSS OPERATING REVENUES
2,457,896
1,840,086
2,539,657
1,910,120
Taxes on sales, returns and rebates
(576,564)
(439,013)
(769,993)
(581,210)
NET OPERATING REVENUES
1,881,332
1,401,073
1,769,664
1,328,910
Cost of sales
(776,170)
(634,815)
(575,260)
(458,405)
GROSS PROFIT
1,105,162
766,258
1,194,404
870,505
OPERATING (EXPENSES) INCOME
Selling
(458,913)
(374,060)
(535,909)
(403,018)
General and administrative
(248,006)
(147,360)
(216,900)
(180,545)
Management and employee profit sharing
(13,418)
(10,810)
(34,990)
(20,466)
Management compensation
(6,977)
(4,595)
(8,422)
(5,934)
Equity in subsidiaries
2,788
18,571
-
-
INCOME FROM OPERATIONS BEFORE FINANCIAL EFFECTS
380,636
248,004
398,183
260,542
Financial expenses
(18,301)
(61,478)
(38,156)
(64,439)
Financial income
21,125
25,834
35,414
34,339
INCOME FROM OPERATIONS
383,460
212,360
395,441
230,442
Nonoperating income (expenses), net
1,098
669
(868)
1,455
INCOME BEFORE DEBENTURES PARTICIPATION AND TAXES
384,558
213,029
394,573
231,897
Debentures participation
(7,178)
(127,709)
(7,178)
(127,709)
INCOME BEFORE TAXES ON INCOME
377,380
85,320
387,395
104,188
Income and social contribution taxes
(76,969)
(20,158)
(87,102)
(40,364)
NET INCOME BEFORE MINORITY INTEREST
300,411
65,162
300,293
63,824
Minority interest
-
-
1
60
NET INCOME
300,411
65,162
300,294
63,884
EARNINGS PER SHARE - R$
3.516
1,812.321
The accompanying notes and attachments are an integral part of these financial statements
Company
Consolidated
4
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(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$)
Treasury
Share
Investment
Retained
Company
Capital
shares
premium
grants
Legal
Retention
earnings
Total
BALANCES AS OF DECEMBER 31, 2002
56,387
-
-
9,998
7,429
17,357
-
91,171
Supplementary dividends for 2002
Dividends paid
-
-
-
-
-
(3,668)
-
(3,668)
Net income
-
-
-
-
-
-
65,162
65,162
Allocation of net income:
Legal reserve
-
-
-
-
3,258
-
(3,258)
-
Reserve for profit retention
-
-
-
-
-
31,855
(31,855)
-
Interest on capital
-
-
-
-
-
-
(10,049)
(10,049)
Dividends
-
-
-
-
-
-
(20,000)
(20,000)
BALANCES AS OF DECEMBER 31, 2003
56,387
-
-
9,998
10,687
45,544
-
122,616
Capital increases through:
Capitalization of debentures
138,569
-
100,000
-
-
-
-
238,569
Merger of Natura Empreendimentos S.A.
1,415
-
-
-
-
-
-
1,415
Capitalization of BNDES loan (Debentures)
34,391
-
-
-
-
-
-
34,391
Purchase of shares
-
(1,415)
-
-
-
-
-
(1,415)
Sale of treasury shares through exercise of stock options
-
309
5,177
-
-
-
-
5,486
Receivables from shareholder
-
(3,029)
-
-
-
-
-
(3,029)
Profit on sale of shares
-
480
496
-
-
-
-
976
Recognition of net liabilities on merger of Natura Empreendimentos S.A.
-
-
-
-
-
(23,367)
-
(23,367)
Recognition of net liabilities on merger of Natura Participações S.A.
-
-
-
-
-
(29,235)
6,986
(22,249)
Absorption of reserve
-
-
-
-
(7,058)
7,058
-
-
Net income
-
-
-
-
-
-
300,411
300,411
Allocation of net income:
Legal reserve
-
-
-
-
15,021
-
(15,021)
-
Reserve for profit retention
-
-
-
-
-
76,024
(76,024)
-
Dividends
-
-
-
-
-
-
(186,910)
(186,910)
Interest on capital
-
-
-
-
-
-
(29,442)
(29,442)
BALANCES AS OF DECEMBER 31, 2004
230,762
(3,655)
105,673
9,998
18,650
76,024
-
437,452
The accompanying notes and attachments are an integral part of these financial statements.
Profit reserves
Capital reserves
5
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(In thousands of Brazilian reais - R$)
2004
2003
2004
2003
SOURCES OF FUNDS
From operations:
Net income
300,411
65,162
300,294
63,884
Items not affecting working capital:
Depreciation and amortization
3,809
3,887
34,340
33,673
Monetary and exchange variations on long-term items, net
(6,772)
(6,544)
(1,307)
(10,136)
Increase in provision for contingencies
17,796
14,050
33,052
16,551
Increase in other provisions
1,168
919
1,420
906
Deferred income and social contribution taxes
(4,233)
(1,138)
(9,196)
5,017
Equity in subsidiaries
(2,788)
(18,571)
-
-
Disposal of permanent assets
1,333
669
1,828
1,596
Minority interest
-
-
(1)
(60)
310,724
58,434
360,430
111,431
From shareholders:
Capitalization of debentures
107,913
-
107,913
-
Capital increase through subscription of shares
34,391
-
34,391
-
Sale of treasury shares
630
-
630
-
Dividends received
-
25,722
-
-
From third parties:
Transfer from long-term to current assets
-
-
20,122
1,222
Increase in long-term liabilities
-
17,054
-
17,025
Minority interest
-
-
37
(28)
Total sources
453,658
101,210
523,523
129,650
USES OF FUNDS
Additions to property, plant and equipment
7,629
5,414
76,886
23,891
Increase in investments
34,975
12,966
6,179
-
Increase in long-term assets
9,070
17,913
15,289
5,910
Decrease in long-term liabilities
18,656
-
-
-
Transfer from long-term to current liabilities
11,809
73,750
24,740
75,686
Dividends proposed and paid
186,910
23,668
186,910
23,668
Interest on capital
29,442
10,049
29,442
10,049
Total uses
298,491
143,760
339,446
139,204
Merger of Natura Empreendimentos S.A. and
Natura Participações S.A. net assets
23,393
-
3,383
-
INCREASE (DECREASE) IN WORKING CAPITAL
131,774
(42,550)
180,694
(9,554)
REPRESENTED BY
Increase in current assets
170,771
37,169
218,908
91,895
Increase in current liabilities
38,997
79,719
38,214
101,449
INCREASE (DECREASE) IN WORKING CAPITAL
131,774
(42,550)
180,694
(9,554)
The accompanying notes and attachments are an integral part of these financial statements.
Consolidated
Company
(Convenience Translation into English from the Original Previously Issued in Portuguese)
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NATURA COSMÉTICOS S.A.
6
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(Convenience Translation into English form the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
1.
OPERATIONS
Natura Cosméticos and its subsidiaries (the "Company") are engaged in the development,
production, distribution and sale, substantially through direct sales by Natura beauty
consultants, of cosmetics, fragrances, hygiene and health products. The Company also holds
equity interests in other companies in Brazil and abroad.
The Extraordinary Shareholders' Meeting held on March 5, 2004 approved the merger of
the net assets of Natura Empreendimentos S.A. and Natura Participações S.A. into the
Company. The merger was recorded based on an accounting valuation supported by a
valuation report issued by independent experts. Natura Participações S.A. owned 100% of
the capital stock of Natura Empreendimentos S.A., which in turn, owned 100% of the
capital stock of the Company. These mergers did not modify the activities described in the
paragraph above.
The shareholders' equity of Natura Empreendimentos S.A. and Natura Participações S.A. as
of January 31, 2004, the accounting date of the mergers, were R$104,951 and R$75,716,
respectively. After eliminations of intercompany receivables and payables and the
investment balances, as required by Brazilian accounting practices, the Company recorded
net liabilities of Natura Empreendimentos S.A. and Natura Participações S.A. amounting to
R$23,367 and R$29,235, respectively.
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Natura Cosméticos S.A.
8
The amounts of the net assets are as follows:
NATURA EMPREENDIMENTOS S.A.

ASSETS
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT ASSETS
CURRENT LIABILITIES
Cash and banks
24,105 Loans and financing
17,566
Recoverable taxes
645 Taxes payable
660
Other receivables
33,338 Dividends
61,215
Total current assets
58,088 Other payables
3,747
Total current liabilities
83,188
LONG-TERM ASSETS
Related parties
10,544 LONG-TERM LIABILITIES
Total long-term assets
10,544 Loans and financing
17,004
Other payables
11
PERMANENT ASSETS
Total long-term liabilities
17,015
Investments
136,522
Total permanent assets
136,522 SHAREHOLDERS' EQUITY
Capital
86,950
Capital reserves
5,347
Profit reserves
12,654
Total shareholders' equity
104,951

TOTAL ASSETS
205,154
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
205,154
NATURA PARTICIPAÇÕES S.A.

ASSETS
LIABILITIES
AND
SHAREHOLDERS' EQUITY
CURRENT ASSETS
CURRENT LIABILITIES
Cash and banks
307 Other payables
86,001
Recoverable taxes
129 Total current liabilities
86,001
Related parties
61,215
Total current assets
61,651 LONG-TERM LIABILITIES
Related parties
10,391
LONG-TERM ASSETS
Total long-term liabilities
10,391
Receivables from sale of shares
5,506
Total long-term assets
5,506 SHAREHOLDERS' EQUITY
Capital
1,107,776
PERMANENT ASSETS
Capital reserves
5,450
Investments
104,951 Profit reserves
5,550
Goodwill on investments
1,208,041 Accumulated deficit
(1,043,060)
(-) Provision for maintenance of
Total shareholders' equity
75,716
dividend payment capacity
(1,208,041)
Total permanent assets
104,951

TOTAL ASSETS
172,108
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
172,108
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Natura Cosméticos S.A.
9
2.
PRESENTATION OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with Brazilian
accounting practices and standards established by the Brazilian Securities Commission
(CVM).
Until December 31, 1995, the Brazilian corporate law established a simplified methodology
for the recording of inflation effects determined to that date. This methodology, named
Monetary Restatement of the Balance Sheet, consisted of the restatement of permanent
assets (investments, property, plant and equipment, and deferred charges) and shareholders'
equity accounts at the indexes disclosed by the Federal Government. The net effect of the
monetary restatement was accounted for in the statement of income in a specific account
under the heading Monetary Restatement of the Balance Sheet. This monetary restatement
was prohibited by Law No. 9249, of December 26, 1995, effective January 1, 1996.
3.
SIGNIFICANT ACCOUNTING PRACTICES
a)
Results of operations
Determined on the accrual basis of accounting.
b)
Temporary cash investments
Consists of highly liquid temporary investments with maturities of less than three
months, stated at cost plus income earned to the balance sheet dates.
c)
Allowance for doubtful accounts
Recognized based on an analysis of risks on realization of receivables, in an amount
considered sufficient to cover possible losses.
d)
Inventories
Stated at the average cost of acquisition or production, adjusted to market value and for
possible losses, when applicable.
e)
Investments
Investments in subsidiaries are accounted for under the equity method, plus goodwill on
acquisition of investments, as shown in Note 11.
f)
Property, plant and equipment
Recorded at acquisition cost, monetarily restated to December 31, 1995, plus interest
capitalized during the construction period. Depreciation is calculated under the straight-
line method, based on the estimated economic useful lives of the assets, at the rates
shown in Note 12.
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Natura Cosméticos S.A.
10
g)
Deferred charges
Represented by goodwill arising from the merger of shares of Natura Empreendimentos
S.A., into Natura Participações S.A., less the provision for adjustment to market value,
as described in Note 13.
h)
Current and long-term liabilities
Stated at known or estimated amounts, plus, if applicable, interest and monetary and
exchange variations incurred to the balance sheet dates.
i)
Income and social contribution taxes
The provision for income tax was recorded at the rate of 15%, plus a 10% surtax on
annual taxable income exceeding R$240. Social contribution tax was calculated at the
rate of 9% of taxable income. Deferred income and social contribution taxes recorded in
current and long-term assets result from expenses recorded in income, although
temporarily nondeductible for tax purposes. Additionally, deferred income and social
contribution taxes were recorded on tax loss carryforwards.
Pursuant to CVM Resolution No. 273/98 and CVM Instruction No. 371/02, deferred
taxes are recorded at their probable realizable values, as detailed in Note 9.
j)
Loans and financing
Adjusted based on exchange and monetary variations and interest incurred to the balance
sheet dates, as provided for by contract and mentioned in Note 14.
k)
Reserve for contingencies
Adjusted to the balance sheet dates based on the probable loss amount, according to the
nature of each contingency and supported by the opinion of the Company's legal
counsel. The fundamentals and the nature of reserves are described in Note 16.
l)
Hedge transactions
The nominal values of hedge transactions are not recorded in the balance sheet.
Unrealized gains or losses on these transactions are recorded on the accrual basis of
accounting, as mentioned in Note 22.b).
m)
Financial income and expenses
Represented by interest and monetary and exchange variations on temporary cash
investments, loans and financing.
n)
Interest on capital
For corporate purposes, interest on capital is accounted for as allocation of income in
shareholders' equity. For tax purposes, interest on capital is treated as financial expense,
reducing the income and social contribution tax basis for the year.
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Natura Cosméticos S.A.
11
o)
Earnings per share
Calculated based on the number of shares at the balance sheet dates.
p)
Supplementary information
In order to permit additional analysis, the Company presents as supplementary
information the consolidated statements of cash flows and value added.
q)
Use of estimates
The preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses for the reporting periods. Since
management's judgment involves estimates of the probability of future events, actual
results may differ from the estimates.
4.
CONSOLIDATION CRITERIA
The consolidated financial statements as of December 31, 2004 and 2003 have been
prepared in accordance with the consolidation principles established by Brazilian
accounting practices and regulatory instructions established by the CVM, and include the
financial statements of the Company and its direct and indirect subsidiaries, as follows:
Ownership
interest - %
2004
2003
Direct:
Indústria e Comércio de Cosméticos Natura Ltda.
99.76
99.76
Natura Cosméticos S.A. - Chile
99.96
99.96
Natura Cosméticos S.A. - Peru
99.85
99.85
Natura Cosméticos S.A. - Argentina
99.99
99.99
Natura Brasil Cosmética Ltda. - Portugal
99.99
99.99
Commodities Trading S.A. - Uruguay
100.00 100.00
Nova Flora Participações Ltda.
100.00
99.43
Natura Inovação e Tecnologia de Produtos Ltda.
100.00
-
Natura Europa SAS
100.00
-
Indirect:
Natura Logística e Serviços Ltda.
99.99
99.99
Flora Medicinal J. Monteiro da Silva Ltda.
100.00 100.00
Ybios S.A.
31.93
-
The consolidated financial statements have been prepared based on the financial statements
as of the same date and consistent with the accounting practices described in Note 3.
Investments in subsidiaries were proportionally eliminated against shareholders' equity and
net income of the respective subsidiaries. Intercompany balances and transactions and
unrealized profits were also eliminated. The minority interest in the Company's subsidiaries
was shown separately. The financial statements of foreign subsidiaries were translated into
Brazilian reais at the exchange rates in effect on the date of the related financial statements.
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Natura Cosméticos S.A.
12
After the merger of Natura Empreendimentos S.A. in March 2004, as described in Note 1,
the Company became the parent company of Natura Inovação e Tecnologia de Produtos
Ltda., which was previously wholly owned by Natura Empreendimentos S.A..
In 2004, the Company acquired ownership interest in the companies Ybios S.A. and Natura
Europa SAS, established in the same year.
The Company's shareholders' equity and net income as of December 31, 2004 and 2003
differ by R$1,395 and R$1,278, and R$117 and R$1,278, respectively, from the amounts
stated in the consolidated financial statements, due to the elimination of the subsidiaries'
unrealized profits.
Reconciliation between individual (Company) and consolidated net income and
shareholders' equity:
Net income
Shareholders' equity
2004
2003
2004
2003
Company
300,411 65,162 437,452 122,616
Elimination of unrealized profits of the subsidiary
Indústria e Comércio de Cosméticos Natura Ltda.
with other subsidiaries
(117) (1,278) (1,395) (1,278)
Consolidated
300,294 63,884 436,057 121,338
The operations of the direct and indirect subsidiaries are as follows:
·
Indústria e Comércio de Cosméticos Natura Ltda. - Engaged in the production and sale of
Natura products to Natura Cosméticos S.A. - Brazil, Chile, Peru and Argentina, whose
amounts are mentioned in Note 10.
·
Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A.
- Argentina, Natura Brasil Cosmética Ltda. - Portugal, Commodities Trading S.A. -
Uruguay - Their activities are an extension of the activities conducted by the parent
company Natura Cosméticos S.A. - Brazil.
·
Nova Flora Participações Ltda. - Holds equity interest in the subsidiary Flora Medicinal
J. Monteiro da Silva Ltda.
·
Natura Inovação e Tecnologia de Produtos Ltda. - Engaged in product research and
development.
·
Natura Europa SAS - Engaged in the purchase, sale, import, export and distribution of
cosmetics, fragrances in general, and hygiene and health products.
·
Natura Logística e Serviços Ltda. - Engaged in the provision of administrative and
logistics services.
·
Flora Medicinal J. Monteiro da Silva Ltda. - Engaged in the production and sale of
phytotherapic products of its own brand.
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Natura Cosméticos S.A.
13
·
Ybios S.A. - Engaged in research, management and development of projects, products
and services in the biotechnology area, and may also enter into agreements and/or
partnerships with universities, foundations, companies, cooperatives, associations, and
other public and private entities; provision of services in the biotechnology area; and
holding of equity interest in other companies.
5.
TEMPORARY CASH INVESTMENTS
Company
Consolidated
2004
2003
2004
2003
Bank certificates of deposit (CDBs)
128,841 26,482 165,583
57,527
Investment funds
29,790 - 36,437 44,512
158,631 26,482 202,020 102,039
As of December 31, 2004, bank certificates of deposit (CDBs) are remunerated at rates
ranging from 100% to 101.8% of the CDI (interbank deposit rate) (100% to 101.5% in
2003). Investments funds are remunerated at rates ranging from 99.5% to 105.5% of the
CDI (100% to 106% in 2003).
6.
TRADE ACCOUNTS RECEIVABLE
Company
Consolidated
2004
2003
2004
2003
Trade accounts receivable
250,246 187,670 265,048 197,845
Allowance for doubtful accounts
(13,793) (15,203) (14,982) (17,383)
Allowance for return of goods
- (344) - (344)
236,453 172,123 250,066 180,118
7.
INVENTORIES
Company
Consolidated
2004
2003
2004
2003
Finished products
1,604
354
57,105
35,163
Raw materials and packaging
2
-
62,327
42,486
Work in process
-
-
7,617
5,931
Promotional material
28
-
9,308
2,239
Imports in transit
-
-
-
824
Reserve for losses
-
- (14,396) (7,389)
1,634
354 121,961
79,254
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Natura Cosméticos S.A.
14
8.
RECOVERABLE TAXES
Company
Consolidated
2004
2003
2004
2003
IRPJ (corporate income tax)
2,701
-
8,984
2,688
Social contribution tax
-
-
1,420
583
ICMS (state VAT)
1,184
715
6,129
1,827
IPI (federal VAT)
-
-
-
1,063
PIS/COFINS/CSLL - withheld at source
-
-
1,896
-
Other
-
-
3,577
2,364
3,885
715
22,006
8,525
Long-term
876
-
3,848
-
Current
3,009
715
18,158
8,525
9.
INCOME AND SOCIAL CONTRIBUTION TAXES
a)
Deferred
Deferred income and social contribution taxes recorded in the financial statements result
from temporary differences (Company) and temporary differences and tax loss
carryforwards (subsidiaries). These credits are recorded in current and long-term assets,
in view of their expected realization based on projections of taxable income, considering
the limit of 30% for annual offset of tax loss carryforwards against taxable income,
pursuant to applicable legislation. The amounts are as follows:
Company
Consolidated
2004
2003
2004
2003
Current:
Tax loss carryforwards
-
-
691
6,468
Temporary differences:
Reserve for inventory losses
-
-
4,895
2,512
Allowance for doubtful accounts
4,829
5,169
4,829
5,169
Reserve for losses on swap contracts
1,545
3,064
2,087
3,064
Other
5,824 2,802 9,128 4,883
Deferred income and social contribution taxes
12,198 11,035 21,630 22,096
Long-term:
Tax loss carryforwards
-
-
2,032
-
Temporary differences:
Reserve for contingencies
12,058
7,368 18,399
8,562
Other
566
610 870
885
Deferred income and social contribution taxes
12,624
7,978 21,301
9,447
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Natura Cosméticos S.A.
15
As required by CVM Resolution No. 273/98 and CVM Instruction No. 371/02,
management, based on projections of results, estimates that the recorded tax credits will
be fully realized within five years. The amounts recorded in long-term assets will be
realized as follows:
Consolidated
2004
2003
2005
- 5,514
2006
1,644 1,102
2007
3,207 1,143
2008
9,796 1,688
2009
6,654 -
21,301 9,447
b)
Current expense
Reconciliation of income and social contribution taxes:
Company
Consolidated
2004
2003
2004
2003
Income before taxes on income
377,380 85,320 387,395 104,188
Income and social contribution taxes at the rate of
34%
(128,309) (29,009) (131,714) (35,424)
Equity in subsidiaries
948
6,314
-
-
Losses generated by subsidiaries
-
-
(6,317)
(7,430)
Deferral of exchange variation
-
(1,290)
-
(1,290)
Interest on capital
10,011
3,417
10,011
3,417
Reversal of provision for maintenance of dividend
payment capacity
41,611
-
41,611
-
Other
(1,230) 410 (693) 363
Income and social contribution taxes
(76,969) (20,158) (87,102) (40,364)
Current income and social contribution taxes
(81,497) (28,494)
(96,736) (43,892)
Deferred income and social contribution taxes
4,528 8,336 9,634 3,528
(76,969) (20,158) (87,102) (40,364)
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Natura Cosméticos S.A.
16
10.
RELATED PARTIES
Receivables from and payables to related parties are as follows:
Company
Consolidated
2004
2003
2004
2003
Current assets:
Accounts receivable:
Indústria e Comércio de Cosméticos Natura Ltda. (a)
-
49
-
-
Natura Logística e Serviços Ltda. (a)
-
58
-
-
Natura Inovação e Tecnologia de Produtos Ltda. (a)
-
8
-
1,234
Nova Flora Participações Ltda. (b)
833
-
-
Natura Participações S.A. (c)
-
-
-
14
Natura Empreendimentos S.A. (c)
-
-
-
27
Dividends receivable:
Indústria e Comércio de Cosméticos Natura Ltda.
- 25,722 - -
833 25,837 - 1,275
Long-term assets:
Loans:
Natura Participações S.A. (d)
- 3,382 - 3,382
Advance for future capital increase:
Nova Flora Participações Ltda. (e)
770 9,503 - -
Receivables from sale of shares (f)
172 - 172 -
Current liabilities:
Suppliers:
Indústria e Comércio de Cosméticos Natura Ltda. (g)
85,874 10,379
-
-
Natura Logística e Serviços Ltda. (h)
8,028
3,265
-
-
Natura Inovação e Tecnologia de Produtos Ltda. (i)
8,249 5,304 - 5,304
102,151 18,948 - 5,304
Loans:
Natura Empreendimentos S.A. (d)
- 791 - 816
Accounts payable
Natura Inovação e Tecnologia de Produtos Ltda.
94
-
-
-
Natura Participações S.A. (j)
- 148 - 148
94 939 - 964
Dividends payable:
Natura Empreendimentos S.A.
- 20,000
- 20,000
Shareholders
113,644 - 113,644 -
113,644 20,000 113,644 20,000
Interest on capital payable:
Natura Empreendimentos S.A.
- 8,541
- 8,541
Shareholders
13,623 - 13,623 -
13,623 8,541 13,623 8,541
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Natura Cosméticos S.A.
17
Transactions with related parties are summarized as follows:
Product
Product
sales
purchases
2004
2003
2004
2003
Natura Cosméticos S.A.
-
- 924,649 765,789
Indústria e Comércio de Cosméticos Natura Ltda.
949,674 783,541
-
-
Natura Cosméticos S.A. - Argentina
-
-
13,353
9,292
Natura Cosméticos S.A. - Peru
-
-
6,800
4,899
Natura Cosméticos S.A. - Chile
-
-
4,374
2,803
Natura Europa SAS
-
-
317
-
Natura Inovação e Tecnologia de Produtos Ltda.
-
-
164
390
Flora Medicinal J. Monteiro da Silva Ltda.
- - 17 368
949,674 783,541 949,674 783,541
Service
Service
sales
purchases
2004
2003
2004
2003
Guarantees commission: (j)
Natura Empreendimentos S.A.
-
1,904
-
-
Natura Cosméticos S.A.
-
-
-
1,692
Indústria e Comércio de Cosméticos Natura Ltda.
-
-
-
201
Natura Logística e Serviços Ltda.
- - - 11
- 1,904 - 1,904
Administrative structure: (k)
Natura Logística e Serviços Ltda.
118,749
87,043
-
-
Natura Cosméticos S.A.
-
-
84,297
60,793
Indústria e Comércio de Cosméticos Natura Ltda.
-
-
24,355
17,671
Natura Inovação e Tecnologia de Produtos Ltda.
-
-
10,097
8,549
Flora Medicinal J. Monteiro da Silva Ltda.
- - - 30
118,749
87,043 118,749
87,043
Product research and development: (l)
Natura Inovação e Tecnologia de Produtos Ltda.
71,914
52,247
-
-
Natura Cosméticos S.A.
-
-
71,865
52,247
Ybios S.A.
- - 49 -
71,914 52,247 71,914 52,247
Lease of properties and common charges: (m)
Indústria e Comércio de Cosméticos Natura Ltda.
8,627
5,031
116
-
Natura Cosméticos S.A.
136
-
1,049
-
Natura Logística e Serviços Ltda.
-
-
5,804
3,238
Natura Inovação e Tecnologia de Produtos Ltda.
-
-
1,753
1,301
Natura Empreendimentos S.A.
-
-
27
323
Natura Participações S.A.
- - 14 169
8,763 5,031 8,763 5,031
Total service sales/purchases
199,426 146,225 199,426 146,225
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Natura Cosméticos S.A.
18
(a) Receivables from sales of Natura products to employees.
(b) Amount receivable due to the capital reduction made on January 30, 2004, approved by
the shareholders' meeting held on the same date.
(c)
Receivables from leases of properties as described in item (m).
(d)
Loan from Natura Cosméticos S.A.
(e) Cash contributions to Nova Flora Participações Ltda. mainly for maintenance of
working capital.
(f) On September 29, 2000, April 30, 2002, December 30, 2002 and January 5, 2004,
Natura Empreendimentos S.A. and Natura Participações S.A. issued restricted shares to
two of its principal Directors in exchange for financings totaling R$6,174, which accrue
interest at a 3% per year and mature between April 30, 2009 and September 30, 2010. In
the corporate restructuring completed in March 2004, these shares were exchanged for
common shares issued by Natura Cosméticos S.A. These financings, which amounted to
R$4,823 as of December 31, 2004 (R$5,492 in 2003,), are paid by dividends and
interest on capital on the restricted shares.
(g) Payables for the purchase of products. Prices and terms are within normal market
conditions.
(h) Payables for services described in item (k).
(i) Payables for services described in item (l).
(j) Guarantees of Natura Empreendimentos S.A. and Natura Participações S.A., merged
into the Company, as mentioned in Note 1.
(k)
Logistics and general administrative services.
(l)
Product and market research and development.
(m)
Rental of the industrial complex located in Cajamar and several units that compose
Natura's facilities.
The main intercompany balances as of December 31, 2004 and 2003, as well as the
intercompany transactions that affected the results for the years refer to transactions
between the Company and its subsidiaries, which were substantially carried out under usual
market conditions for each type of transaction.
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Natura Cosméticos S.A.
19
11.
INVESTMENTS
Investments are comprised of:
Company
Consolidated
2004
2003
2004
2003
Investments in subsidiaries
373,748 332,698
-
-
Goodwill on acquisition of investment - Nova Flora
(i)
-
- 8,015 8,015
Amortization of goodwill
-
- (5,487) (5,206)
Intangible recorded on acquisition of commercial
location - Natura Europa (ii)
- - 6,179 -
373,748 332,698 8,707 2,809
(i)
The goodwill on the acquisition made by the subsidiary Nova Flora Participações Ltda.
is being amortized on a straight-line basis over ten years and is supported by an
appraisal report issued by independent appraisers, based on the expectation of future
profitability as of December 31, 2003, which was reviewed and updated by the
Company's management.
(ii)
Represents an intangible recorded by the Company relating to the purchase of a
commercial location where Natura Europa SAS will operate.
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Natura Cosméticos S.A.
20
Investments in direct subsidiaries are as follows:
Indústria e
Natura
Comércio de
Natura
Natura
Natura
Natura Brasil Commodities Nova Flora Inovação e Natura
Cosméticos Cosméticos S.A. Cosméticos S.A. Cosméticos S.A. Cosmética Ltda. Trading S.A. Participações Tec. de Prod. Europa
Ltda. - Chile - Peru - Argentina - Portugal - Uruguai Ltda. Ltda.
SAS
Total
Shares of subsidiaries
328,992
43,780
22,016
65,285
18
297
2,413
5,008 14,115
Number of shares (common shares) held
328,202
43,762
21,983
65,278
18
297
2,413
5,008 14,115
Ownership interest - %
99.76%
99.96%
99.85%
99.99%
99.99%
100%
100%
100% 100%
Capital
328,992
43,780
22,016
65,285
18
297
2,413
5,008 14,115
Shareholders' equity of subsidiaries
349,223
346
2,940
2,966
(64)
20
1,028
8,214 9,854 374,527
Share in shareholders' equity
348,385
346
2,936
2,965
(64)
20
1,028
8,214 9,854 373,684
Net income (loss) of subsidiaries
19,859
(4,171)
(431)
(6,333)
(74)
(2)
(1,360)
9 (4,664)
2,833
Book value of Company investment:
Balances as of December 31, 2003
328,574
639
1,921
1,531
11
22
-
-
- 332,698
Increase in investments
-
3,876
1,445
7,766
-
-
9,503
- 14,518 37,108
Increase in investment due to the
merger of Natura Empreendimentos
S.A.
-
-
-
-
-
-
-
8,205
-
8,205
Equity in subsidiaries
19,811
(4,169)
(430)
(6,332)
(75)
(2)
(1,360)
9 (4,664)
2,788
Dilution of sharequotas of Natura
Cosméticos S.A.
-
-
-
-
-
-
(833)
-
-
(833)
Recognition (reversal) of provision for
losses
-
-
-
-
64
-
(6,282)
- - (6,218)
Balances as of December 31, 2004
348,385
346
2,936
2,965
-
20
1,028
8,214 9,854 373,748
Provision for losses in long-term
liabilities:
Balances as of December 31, 2003
-
-
-
-
-
-
(6,282)
-
- (6,282)
Reversal of provision
-
-
-
-
-
-
6,282
-
-
6,282
Recognition of provision
-
-
-
-
(64)
-
-
- - (64)
Balances as of December 31, 2004
-
-
-
-
(64)
-
-
- - (64)


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Natura Cosméticos S.A.
21
The provision for losses on investments, recognized due to the shareholders' deficit of the
subsidiary Nova Flora Participações Ltda., was reversed on January 31, 2004, as a result of
the capitalization of this company.
12.
PROPERTY, PLANT AND EQUIPMENT
Is comprised of:
Company
Annual
2004
2003
depreciation
Accumulated
Net book
Accumulated
Net book
rate - %
Cost
depreciation
value
Cost
depreciation
value
Machinery and equipment
10
960
610
350
888
700
188
Vehicles
20
13,071
4,788
8,283
9,143
3,577
5,566
Furniture and fixtures
10
3,929
3,031
898
3,844
2,726
1,118
IT equipment
20
6,868
5,624
1,244
6,497
5,006
1,491
Software licenses
20
3,079
1,226
1,853
2,578
704
1,874
Leasehold improvements
12
756
157
599
553
128
425
Advances to suppliers
-
-
-
-
78
-
78
Other
-
6
2
4
6
2
4
28,669
15,438
13,231
23,587
12,843
10,744
Consolidated
Annual
2004
2003
depreciation
Accumulated
Net book
Accumulated Net book
rate - % Cost
depreciation
value
Cost
depreciation
value
Buildings
4
126,990
19,166
107,824
126,925
14,165
112,760
Installations
10
64,486
24,757
39,729
62,809
18,872
43,937
Machinery and equipment
10
76,549
32,305
44,244
66,137
25,622
40,515
Vehicles
20
19,953
7,816
12,137
14,859
5,772
9,087
Molds
33
26,879
20,703
6,176
21,084
12,876
8,208
Furniture and fixtures
10
12,809
6,825
5,984
11,114
5,812
5,302
IT equipment
20
31,910
19,094
12,816
25,765
16,159
9,606
Software licenses
20
12,477
5,379
7,098
8,981
2,881
6,100
Leasehold improvements
12
774
175
599
571
147
424
Land
-
15,910
-
15,910
15,910
-
15,910
Advances to suppliers
-
19,742
-
19,742
1,534
-
1,534
Construction in progress
-
21,478
-
21,478
-
-
-
Other
-
9,856
4,771
5,085
5,147
4,791
356
439,813
140,991
298,822
360,836
107,097
253,739
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Natura Cosméticos S.A.
22
13.
DEFERRED CHARGES
As mentioned in Note 1, on March 5, 2004, Natura Participações S.A. and its wholly owned
subsidiary, Natura Empreendimentos S.A., were merged into the Company. Natura
Participações S.A. had recorded goodwill on the investment in Natura Empreendimentos
S.A. amounting to R$1,028,041 and a corresponding provision for maintenance of dividend
payment capacity. This goodwill arose from the merger of the shares of Natura
Empreendimentos S.A. into Natura Participações S.A. on December 27, 2000. This
restructuring was approved by the Extraordinary Shareholders' Meeting held on that date,
and the amounts are supported by a valuation report issued by independent experts.
The amounts are as follows
:
Company
2004
2003
Goodwill on investments
905,655
-
Provision for maintenance of dividend payment capacity
(905,655)
-
-
-
The provision for maintenance of dividend payment capacity will result in the recognition of
the goodwill amortization tax benefits for all of the Company's shareholders. The goodwill
amount is being amortized over a seven-year period.
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Natura Cosméticos S.A.
23
14.
LOANS AND FINANCING
Company
Consolidated
Type
2004
2003
2004
2003
Maturity
Charges
Guarantees
Floating Rate Notes
-
58,989
-
58,989
March 2004
7.6% + exchange variation (dollar) Promissory notes and guarantee of
Natura Empreendimentos S.A. and
Natura Participações S.A.
FINEP (Financing Agency for Studies
and Projects)
-
-
36,545
- December 2008 Interest of 3.0% per year + TJLP
(long-term interest rate)
Guarantee, promissory notes and
receivables of Natura Cosméticos S.A.
BNDES
(Brazilian Bank for Economic
and Social Development)
31,131
42,294
31,131
42,294
August to
October 2007
73% (71% in 2003) - interest of
4.0% per year + TJLP
27% (29% in 2003) - interest of
4.0% per year + UMBNDES (**)
Mortgage and bank guarantee
Loans (onlending - IFC [International Finance
Corporation])
-
-
26,654
- December 2011 Semi-annual LIBOR + 6.1% per
year + exchange variation (dollar)
Promissory notes and guarantee of
Natura Cosméticos S.A.
Resolution No. 2.770 and overdraft account
-
-
27,828
-
March 2005
Interest of 105% of CDI
(interbank deposit rate)
Promissory notes and guarantee of
Natura Cosméticos S.A.
Loans - Argentina
-
-
6,706
- December 2005 Interest of 9.5% per year +
exchange variation (pesos)
Guarantee of Natura Cosméticos S.A.
BNDES-FINAME (Government Agency for
Machinery and Equipment Financing)
-
-
3,768
2,786
April 2005 and
June 2009
Interest of 5.2% per year + TJLP
Chattel mortgage and guarantee of
Natura Empreendimentos S.A. and
Natura Cosméticos S.A.
BNDES-Poc (*)
297
2,009
297
2,009
February 2005
Interest of 4.5 % per year + TJLP
Guarantee of Natura Cosméticos S.A.
BNDES
-
-
-
1,269
March 2004
Interest of 3.5% per year + TJLP
Chattel mortgage and guarantee of
Natura Empreendimentos S.A. and
Natura Cosméticos S.A.
Loans - France
-
-
1,088
-
March 2005
Euro Libor + 2.0% per year +
exchange variation (euro)
Guarantee of Natura Cosméticos S.A.
Loans - Chile
-
-
372
-
January 2005
Interest of 4.6% per year +
exchange variation (pesos)
Guarantee of Natura Cosméticos S.A.
ACE
(advance on export contracts)
-
-
-
741
December 2004 Interest of 2.8% per year +
exchange variation (dollar)
Promissory notes and guarantee of
Natura Empreendimentos S.A.
Total
31,428 103,292 134,389 108,088
Current
11,879 72,240
62,407 75,102
Long term
19,549 31,052 71,982 32,986
(*)
Poc - Proposal of Credit Operation
(**)
UMBNDES - BNDES monetary unit
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Natura Cosméticos S.A.
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Maturities of long-term debt are as follows:
Consolidated
2004
2003
2005
- 12,352
2006
25,359 11,572
2007
21,714
9,018
2008
13,470
44
2009
3,847
-
2010
3,790
-
2011
3,802 -
71,982 32,986
Financing in local currency from the BNDES is guaranteed mainly by the Cajamar unit.
Loans related to floating rate notes were represented by short-term credit lines, primarily for
maintenance of working capital, and were settled in March 2004.
15.
TAXES PAYABLE
Taxes payable are represented by:
Company
Consolidated
2004
2003
2004
2003
ICMS (state VAT)
48,640 30,922 48,650 34,008
IPI (federal VAT)
-
-
431
-
COFINS (tax on revenue)
382
284
4,424
6,159
PIS (tax on revenue)
84
88
960
1,386
Income tax
-
687
159
876
Social contribution tax
-
222
-
327
Withholding income tax
2,873 19,647
4,084 20,319
PIS/COFINS/CSLL (Law No. 10,633/03)
770
-
1,095
-
Other
27 - 2,579 1,222
52,776 51,850 62,382 64,297
In 2003, the balances recorded under the heading "Withholding income tax" referred mainly
to withholding income tax on debentures.
16.
RESERVE FOR CONTINGENCIES
The Company and its subsidiaries are parties to tax, labor and civil lawsuits and to tax
proceedings at the administrative level. Based on the opinion of its external legal counsel,
management believes that the reserve for contingencies is sufficient to cover probable losses
from unfavorable judgments.
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The balances of contingencies are as follows:
Company
Consolidated
2004
2003
2004
2003
Tax
36,970 22,206 53,190 23,866
Labor
2,198
2,411
3,244
2,935
Civil
601 253 3,125 1,580
39,769 24,870 59,559 28,381
Tax contingencies
Accrued tax contingencies are comprised of the following proceedings:
Company
Consolidated
2004
2003
2004
2003
Deductibility of CSLL (social contribution tax) (Law
No. 9316/96) (a)
8,057
5,223
8,057
5,223
Monetary restatement of federal taxes (IRPJ/
CSLL/ILL) according to the UFIR (fiscal reference
unit) (b)
4,694
4,753
4,814
4,874
Tax assessment - INSS (social security contribution) (c)
4,371
3,836
4,371
3,836
IPI (federal VAT) - Tax collection lawsuit (d)
3,353
2,954
3,353
2,954
PIS (tax on revenue) - Semiannual - Decree-laws No.
2445/88 and 2449/88 (e)
11,039
- 12,370
-
IPI - zero rate (f)
-
- 13,604
-
Attorneys' fees and other
5,456 5,440 6,621 6,979
36,970 22,206 53,190 23,866
(a) Refers to social contribution tax that was addressed by a mandate that questions the
constitutionality of Law No. 9316/96, which prohibited the deduction of CSLL from its
own tax basis and the IRPJ (corporate income tax) basis. A portion of this contingency,
in the amount of R$ 3,245, is still deposited in escrow at December 31, 2004.
(b) Refers to the monetary restatement of federal taxes (IRPJ/CSLL/ILL) related to 1991
based on the UFIR, discussed in a mandate. An escrow deposit has been made for the
amount involved in this contingency.
(c) Refers to the social security contribution (INSS) required by tax assessments issued by
the National Institute of Social Security as a result of an inspection. The Company, as a
taxpayer having joint liability for tax payment, is required to pay INSS on services
provided by third parties. The amounts are discussed in court through a tax debt
annulment action and are deposited in escrow.
(d) Refers to a tax collection lawsuit seeking to collect the IPI related to July 1989, when
wholesale establishments began to be considered equivalent to industrial establishments
under Law No. 7798/89. The amounts involved in this tax collection lawsuit are
guaranteed through the blocking of an affiliated company's bank account.
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Natura Cosméticos S.A.
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(e) Refers to the offset of PIS paid as per decree-laws Nos. 2445/88 and 2449/88, in the
period from 1988 to 1995, against federal taxes due in 2003 and 2004.
(f) Refers to IPI tax credits on raw materials and packing materials purchased at a zero tax
rate. The Company filed for a mandate and was granted an injunction for the right to the
credit.
Labor contingencies
As of December 31, 2004, the Company and its subsidiaries are parties to 163 labor lawsuits
filed by former employees and third parties (168 in 2003), claiming the payment of
severance amounts, salary premiums, overtime and other amounts due, as a result of joint
liability.
Civil contingencies
As of December 31, 2004, the Company and its subsidiaries are parties to 571 lawsuits (263
in 2003) at the civil court, special civil court and Procon (Consumer Protection Agency),
filed by beauty consultants, consumers and former employees, mostly related to indemnity
claims.
Escrow deposits
Escrow deposits, which represent the Company's restricted assets, refer to amounts
deposited in court until litigation is resolved. The balance of these deposits as of December
31, 2004 was R$ 24,256 (R$ 14,595 in 2003) - Consolidated, and is classified under the
heading Escrow Deposits in long-term assets.
Possible losses
The Company and its subsidiaries are parties to tax, civil and labor lawsuits, for which the
risk of loss is considered possible by management and its legal counsel. These lawsuits, for
which the Company did not record any reserve, are as follows:
Company
Consolidated
2004
2003
2004
2003
Tax:
IPI credit on purchases of fixed assets (a)
-
-
9,245
4,702
INSS debt annulment action (b)
4,199
3,686
4,199
3,686
Tax assessment - transfer pricing on loan
agreements (c)
1,707
-
1,707
-
ICMS tax collection lawsuit - Pernambuco State (d)
-
1,043
-
1,043
Tax assessment - PIS debt (e)
-
2,042
-
2,042
Other
2,388 2,288 2,860 2,664
8,294
9,059 18,011 14,137
Civil
6,109
5,462
7,799
9,438
Labor
7,933 2,216 19,094 3,296
Total
22.336 16.737 44.904 26.871
(a)
The subsidiary Indústria e Comércio de Cosméticos Natura Ltda. is discussing through
mandates, the right to the IPI credit on purchases of fixed assets and consumption
materials.
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Natura Cosméticos S.A.
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(b)
Lawsuit filed by the Company seeking the annulment of the tax demanded by the INSS
through a tax assessment notice issued for purposes of collecting the social security
contribution on the allowance for vehicle maintenance paid to sales promotors.
(c)
Refers to a tax assessment notice whereby the Federal Revenue Service is demanding
the payment of IRPJ and CSLL on the difference of interest on loan agreements with
foreign related parties. On July 12, 2004, an administrative defense was filed and is still
being judged.
(d)
Refers to an ICMS tax collection lawsuit whereby the State Finance Department
intended to collect amounts that have already been paid by the Company. After proof of
tax payment was presented, the State Finance Department requested, on November 3,
2004, the dismissal of the lawsuit without sentencing the Company to pay court costs
and legal fees.
(e)
Tax assessment notice for collection of PIS on differences between the tax bases as per
Complementary Law No. 7/70 and Decree-laws No. 2445/88 and No. 2449/88. In view
of former decisions by both the Board of Tax Appeals and the Federal Supreme Court,
the Company and its legal counsel understand that the risk of loss for 2004 is remote.
17.
MANAGEMENT AND EMPLOYEE PROFIT SHARING
The Company and its subsidiaries pay its employees and management a share of their
profits, which is tied to operational and other specific targets, and approved at the beginning
of each year. As of December 31, 2004, this profit sharing was recorded in the amount of
R$34,990 (R$20,466 in 2003) under the heading "Salaries, profit sharing and related
charges" in Consolidated and "Operating expenses" in the statements of income.
The portion related to management profit sharing is R$5,758 as of December 31, 2004
(R$3,776 in 2003).
18.
DEBENTURES
Consolidated
2004
2003
Current liabilities-
Debentures
- 102,170
Long-term liabilities-
Debentures
- 130,656
The Extraordinary Shareholders' Meeting on April 14, 1998 authorized the issue of
140,000,000 registered, endorsable and nonconvertible debentures in the amount of
R$140,000, with no predetermined maturity date, for the indirect controlling shareholders of
the Company. From 1998 to 2003, 130,656,000 debentures were subscribed, totaling
R$130,656.
Authorized debentures entitle their holders to a yield based on the amount of debentures
issued of up to 70% of income before provision for income tax as of March 31, June 30,
September 30, September 30 and December 31 of each year.
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Starting in 2002, the method of calculating debentures is represented by the share of
debentures on shareholders' equity and the value of the debentures, applied on the issuer's
income before provision for income tax as of June 30, and December 31, of each year.
At the Extraordinary Shareholders' Meeting held on March 2, 2004, after approval by the
debenture holders at the Debenture Holders' Meeting held on February 27, 2004, it was
decided that 130,656,000 debentures issued by the Company, corresponding to R$238,569
(R$130,656 - principal of the debentures, and R$107,913 - debentures payable, as of
January 31, 2004, net of withholding income tax - the effect on net income for the period
was R$7,178), would be capitalized by the Company in the form of a capital increase of
R$138,569, representing 3,299 common shares, and the recognition of a capital reserve
amounting to R$100,000. The effects of this corporate act are discussed in Note 19.b).
19.
SHAREHOLDERS' EQUITY
a)
Merger of companies
At the Extraordinary Shareholders' Meeting held on March 5, 2004, the Company's
shareholders approved the merger of Natura Empreendimentos S.A. and Natura
Participações S.A. into the Company based on an accounting valuation supported by a
valuation report issued by independent experts.
The net assets merged into the Company were R$104,951 for Natura Empreendimentos
S.A. and R$75,716 for Natura Participações S.A., based on the book values of these
companies.
b)
Capital
As of December 31, 2003, the Company's capital was R$56,387, divided into 25,000
common shares without par value and 10,955 preferred shares without par value.
On March 2, 2004, the shareholders decided at an Extraordinary Shareholders' Meeting
to: (i) capitalize the credits arising from the redemption of the subordinated debentures
held by them and from the net remuneration on the debentures through January 31,
2004; and (ii) split the shares issued by the Company in the proportion of 2,099 new
shares for each existing share. The total amount of the capitalized credits was
R$238,569, and was allocated to a capital reserve in the amount of R$100,000 and a
capital increase in the amount of R$138,569, representing 3,299 new common shares at
an issuance price of R$72,300 per share. These shares were subsequently split in the
proportion of 2,099 new shares for each existing share, resulting in capital of
R$194,956, divided into 59,399,601 common shares and 22,994,545 preferred shares. In
the Shareholders' Meeting held on March 5, 2004, the shareholders approved, among
other matters:
b.1) Merging Natura Participações S.A. and Natura Empreendimentos S.A., into the
Company.
b.2) Canceling the Company shares held by the merged parent companies.
b.3) Amending the bylaws to R$196,371, represented by 83,266,061 shares.
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Natura Cosméticos S.A.
29
On May 24, 2004, the Board of Directors' Meeting approved an increase in the
Company's capital within the limit of authorized capital, due to the exercise of the right
to convert the debentures issued by the Company and fully subscribed by BNDES
Participações S.A. into common shares of the Company, as allowed by the Private
Indenture of Issuance of Registered Debentures Convertible into Common Shares, dated
February 23, 2001.
Consequently, 2,172,550 registered common shares without par value, totaling
R$34,391, were subscribed, and the Company's capital was changed from R$196,371,
represented by 83,266,061 common shares, to R$230,762, represented by 85,438,611
common shares.
As of December 31, 2004, the Company's capital is R$230,762. The subscribed and
paid-up capital is represented by 85,438,611 common shares without par value.
c)
Receivables from management
In 2004, the amount of R$3,029 was reclassified from the heading "Receivables from
shareholder" to the heading "Capital reserve" until it is paid up. Details are disclosed in
Note 10.f.
d)
Interest on capital
The Company's management proposed in an executive board meeting the payment of
interest on capital pursuant to its bylaws, CVM Resolution No. 207/86 and Law No.
9,249/95. As of December 31, 2004, the gross amount of interest on capital is R$ 29,442
(R$10,049 in 2003) and was calculated in accordance with statutory limits, also with
respect to the mandatory minimum dividend of 30% (25% in 2003) in accordance with
article 203 of Law No. 6404/76 and the Company's bylaws.
Income tax was withheld and paid by the Company.
e)
Dividend payment policy
Each year, shareholders are entitled to a minimum dividend equivalent to 30% (25% in
2003) of net income for the year, considering principally the following adjustments:
·
The increase in the amounts resulting from the reversal, in the year, of reserves for
contingencies, recognized previously.
·
The decrease in the amounts intended for the recognition, in the year, of the legal
reserve and reserve for contingencies.
The bylaws allow the Company to prepare semi-annual and interim balance sheets, and
based on these balance sheets, authorize the payment of dividends upon approval by the
Board of Directors.
The Company paid, in August 2004, dividends and interest on capital in the amounts of
R$73,266 and R$11,403, respectively, for the first half of the year. The remaining
balance of dividends and interest on capital, in the amounts of R$113,644 and R$13,623,
respectively, will be paid in 2005.
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Natura Cosméticos S.A.
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Dividends were calculated as follows:
Company
2004
2003
Net income
300,411 65,162
Profit reserve - legal
(15,021) (3,258)
Calculation basis for minimum dividends
285,390 61,904
Mandatory minimum dividends
30%
25%
Annual minimum dividends
85,617 15,476
Supplementary dividends
-
3,668
Proposed dividends
186,910 20,000
Interest on capital, net of withholding income tax
25,026
8,542
Withholding income tax
4,416 1,507
Total interest on capital and dividends
216,352 33,717
Amount exceeding the mandatory minimum dividend
130,735 18,241
Dividends per share - R$
2.204
0.658
Interest on capital per share - R$
0.347
0.279
f)
Treasury shares
As of December 31, 2004, common shares in treasury totaled 651,849, at an average
cost of R$1.6970.
g)
Share premium
Refers to the goodwill generated on the issuance of 3,299 common shares resulting from
the capitalization of debentures in the amount of R$100,000, as further detailed in item
b) above.
h)
Reserve for profit retention
As of December 31, 2004 and 2003, this reserve was recorded in accordance with article
196 of Law No. 6,404/76 to be used in future investments, in the amounts of R$76,024
and R$31,855, respectively. The reserve recorded in 2003 was used on March 5, 2004
for absorbing excess liabilities arising from the merger of the companies Natura
Empreendimentos S.A. and Natura Participações S.A. See details in item b) above.
20.
STOCK OPTION PROGRAM
In 1998, the extinguished Natura Empreendimentos S.A. approved an incentive policy for
certain directors and managers of the group's companies, through which they would be
entitled to purchase shares. Subsequently, this Program was also assumed by the
extinguished Natura Participações S.A., and the general bases of the Stock Option Grant
Program (the "Program") remained unchanged.
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Natura Cosméticos S.A.
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On March 5, 2004, the Shareholders' Meeting of Natura Cosméticos S.A. approved the
merger of Natura Empreendimentos S.A. and Natura Participações S.A. into the Company,
at which time the Company assumed the Program. On March 25, 2004, the Company
completed an initial public offering in Brazil and modified the Program to remove the
Company's obligation to re-purchase the shares subject to the plan and change the basis for
determination of the stock option strike price.
The Board of Directors meets once a year for the purpose of, within the Program's general
bases, establishing the Plan, indicating the directors and managers who will receive the
options and the total amount to be paid.
Before the Company completed its initial public offering, the amount established for
exercising the options was updated according to inflation levels as measured by the
Extended Consumer Price Index (IPC-A), and the Company had the obligation to
repurchase the shares. The plans for 2000, 2001, 2002, 2003 and 2004 were approved under
these rules.
The plans for 2000 and 2001 have a 3-year time span for exercising the options, that is, the
right to exercise options will be based on 1/3 per year. The plans for 2002, 2003 and 2004
have a four-year time span for exercising the options, and the exercise rights are 50% at the
end of the third year and 50% at the end of the fourth year.
Subsequent to the Company's initial public offering, the Company's management, in a
meeting held on April 26, 2004, changed these Programs to remove the requirement of the
Company to re-purchase shares pursuant to the Program, and modified the criteria for
determining the purchase or subscription price of the shares, which became the average
market price of the Company's common shares at BOVESPA over the last ten sessions. The
option strike price is still updated based on the IPC-A inflation index. The deadline for
exercising the options received is two years, counted from the date when all the holder's
options have matured (became exercisable).
The information related to the stock option plans is summarized as follows:
Number of stock options (in shares):
Balance of options as of February 1, 2004 (after merger of Natura
Participações S.A.)
2,476,351
Cancelled options
(75,146)
Exercised options (*)
(985,877)
Distributed options
380,292
Balance of options as of December 31, 2004
1,795,620
(*)Breakdown of exercised options through December 31, 2004.
Options converted into shares and sold
841,064
Options converted into shares and held
144,813
Total options exercised
985,877
Options converted into shares and sold generated a cash disbursement in the amount of R$
11,086, resulting from the difference between the amount paid by option holders in the
amount of R$16,574 and the amount of R$27,660 paid by Natura Cosméticos S.A. in the
repurchase.
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Natura Cosméticos S.A.
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Balance of call options by plan:
Number of
call options
(in shares)
Amount for the
year updated
according to the
IPCA through
December 31, 2004
2000
10,348
17.65
2001
84,513
18.51
2002
585,786
25.69
2003
743,439
14.39
2004
371,534
35.41
Total
1,795,620
As mentioned above, as from the Company's initial public offering, the Company is no
longer required to repurchase the shares subject to the Program, and, since the recording of
the provision related to the stock option program as set forth in CVM Official Circular No.
01/2004 is no longer mandatory and is not a practice adopted by publicly-traded companies
in Brazil, the amount of R$9,564 related to this provision was reversed as of June 30, 2004,
against the administrative expenses account, in the amount of R$2,578, and retained
earnings, in the amount of R$6,986. The amount of R$6,986 recorded in the retained
earnings account is due to the fact that the provision was originated in the company Natura
Participações S/A and received by Natura Cosméticos S/A as net assets in the merger
process of March 2004, as disclosed in Note 1, and therefore had no effect on the income of
Natura Cosméticos S/A.
As of December 31, 2004, had the Company's management opted to record the effects of
the Program based on the intrinsic value of the options (the difference between market price
as of December 31, 2004 and the option value updated according to the IPC-A) recorded
over their related vesting period, the pro forma consolidated net income for the year ended
December 31, 2004 would have been R$242,981, as shown below:
2004
Net income - Company
300,294
Effect of plans considering maturity period
(57,313)
Net income - pro forma
242,981
The pro forma net income includes all estimated effects for the shareholders arising from
the probable exercise of the options.
As of December 31, 2004, the market price of the Company's shares was R$77.50.
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Natura Cosméticos S.A.
33
21.
PENSION PLAN
On August 1, 2004, the Company implemented a supplementary defined contribution plan
for all employees of Natura and its subsidiaries. According to the terms of this plan, the cost
is shared between the employer and the employees, so that the Company's share is
equivalent to 60% of the employee's contribution according to a contribution scale based on
salary ranges from 1.0% to 5.0% of the employee's compensation. The plan is managed by
Brasilprev Seguros e Previdência S.A. and the Company's contributions for the year ended
December 31, 2004 totaled R$1,313.
22.
FINANCIAL INSTRUMENTS
a) General conditions
The Company and its subsidiaries enter into transactions involving financial instruments,
all recorded in balance sheet accounts, to meet their own needs, and reduce exposure to
market, currency, and interest rate risks. These risks and the respective financial
instruments are managed through the definition of strategies, establishment of control
systems, and determination of exchange exposure limits.
Temporary cash investments are mainly made at negotiated rates of return, since the
Companies intend to hold these investments to redemption. These investments reflect
market conditions at the balance sheet dates.
Loans and financing are recorded at the contractual interest rates of each transaction.
b) Exchange risk
The Company has entered into swap and forward transactions to hedge against exchange
variation on its liabilities resulting from financing agreements. According to the
Company's policy, swap transactions must be contracted for all debts that may expose
the Company to exchange risks. These transactions consist of swaps between two
variable rates: foreign currency and CDI (interbank deposit rate).
As of December 31, 2004 and 2003, the Company had swap and forward transactions
with financial institutions in the amounts of R$74,007 and R$65,558, respectively.
These transactions generated losses of R$6,138 and R$9,012 respectively, recorded in
current liabilities. The exchange exposure is substantially indexed to the U.S. dollar.
The Company and its subsidiaries do not have derivative financial instruments.
c) Interest rate risk
The Company and its subsidiaries are exposed to fluctuations in the long-term interest
rate (TJLP) due to the financing agreements entered into with the BNDES.
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Natura Cosméticos S.A.
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d) Fair values
As of December 31, 2004 and 2003, the fair values of cash and banks, temporary cash
investments, and accounts receivable and payable approximate the amounts recorded in
the financial statements due to their short term. The fair values of loans and financing
substantially approximate the amounts recorded in the financial statements since these
financial instruments have variable interest rates. As of December 31, 2003, the fair
values of debentures were equivalent to those recorded in the financial statements, since
the Company had the option to pay these debentures at any moment at book value. As
mentioned in Note 18, in March 2004, as part of the corporate restructuring, the
debentures were transferred to the Company's shareholders' equity.
The book and fair values of swap and forward transactions are as follows:
Consolidated
2004
2003
Book
value
Fair
value
Book
value
Fair
value
Swap and forward transactions
6,138
6,494
9,012
6,783
e) Credit risk
The Company's sales are made to a large number of beauty consultants. The Company
manages the credit risk through a strict credit granting process.
23.
INSURANCE
The Company and its subsidiaries contract insurance based principally on risk concentration
and significance, at amounts considered by management to be sufficient, taking into
consideration the nature of its activities and opinion of its insurance advisors. As of
December 31, 2004, the insurance coverage was as follows:
Items
Coverage
Insured amount
Industrial complex/inventories
Any material damages to buildings,
installations and machinery and
equipment
384,862
Vehicles
Fire, theft and collision for 816 vehicles
16,891
Loss of profits
Nonrealization of profits arising from
material damages to installations,
buildings and production machinery
and equipment
558,270


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ATTACHMENT I
(Convenience Translation into English from the Original Previously Issued in Portuguese)
NATURA COSMÉTICOS S.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$)
2004
2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
300,294
63,884
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
34,340
33,673
Monetary and exchange variations, net
7,353
(14,076)
Reserve for losses on swap contracts
4,243
36,581
Reserve for contingencies
33,052
16,551
Reserve for obsolete inventories
7,007
588
Other reserves
1,420
2,762
Deferred income and social contribution taxes
(9,634)
(3,528)
Disposal of permanent assets
1,828
1,596
Debentures participation, net of taxes
5,743
102,170
Minority interest
(1)
(60)
385,645
240,141
(INCREASE) DECREASE IN ASSETS
Current assets:
Accounts receivable
(68,455)
(23,042)
Inventories
(49,715)
(5,406)
Other receivables
532
1,304
Long-term assets:
Escrow deposits
(9,073)
(11,296)
Other receivables
115
3,934
Subtotal
(126,596)
(34,506)
INCREASE (DECREASE) IN LIABILITIES
Current liabilities:
Suppliers
19,099
4,417
Payroll and related charges
21,691
8,498
Taxes payable
(20,705)
6,183
Other payables
8,517
(21,769)
Long-term liabilities:
Other payables
(1,448)
(1,432)
Subtotal
27,154
(4,103)
NET CASH PROVIDED BY OPERATING ACTIVITIES
286,203
201,532
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment
(76,886)
(23,891)
Investments
(6,179)
-
NET CASH USED IN INVESTING ACTIVITIES
(83,065)
(23,891)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in current and long-term loans
(9,130)
(82,458)
Payment of dividends
(130,003)
(9,103)
Payment of interest on capital
(11,403)
(3,292)
Payment of debentures
-
(4,080)
Sale of treasury shares
630
-
NET CASH USED IN FINANCING ACTIVITIES
(149,906)
(98,933)
Merger of Natura Empreendimentos S.A. and Natura Participações S.A. net assets
42,269
-
NET INCREASE IN CASH AND BANKS
95,501
78,708
Cash and banks at beginning of year
136,111
57,403
Cash and banks at end of year
231,612
136,111
CHANGE IN CASH AND BANKS
95,501
78,708
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Income and social contribution taxes paid
84,378
13,468
Interest paid on loans and financing
12,061
9,657
Swap contracts paid
9,170
8,134
* * * * *
Consolidated
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ATTACHMENT II
2004
2003
REVENUES
2,509,073
1,879,961
Sales of goods, products and services
2,533,614
1,904,835
Allowance for doubtful accounts - reversal/recognition
(23,673)
(26,329)
Nonoperating
(868)
1,455
INPUTS PURCHASED FROM THIRD PARTIES
(1,365,906)
(942,240)
Cost of sales and services
(852,405)
(555,757)
Materials, energy, outside services and other
(513,501)
(386,483)
GROSS VALUE ADDED
1,143,167
937,721
RETENTIONS
(34,340)
(33,673)
Depreciation and amortization
(34,340)
(33,673)
VALUE ADDED GENERATED BY THE COMPANY
1,108,827
904,048
VALUE ADDED RECEIVED IN TRANSFER
35,414
34,339
Financial income
35,414
34,339
TOTAL VALUE ADDED TO BE DISTRIBUTED
1,144,241
938,387
DISTRIBUTION OF VALUE ADDED
(1,144,241)
100%
(938,387)
100%
Payroll and related charges
(247,291)
21%
(177,783)
19%
Taxes and contributions
(547,804)
48%
(502,084)
53%
Financial expenses and rents
(41,675)
4%
(66,987)
7%
Debentures participation
(7,178)
1%
(127,709)
14%
Dividends
(186,910)
17%
(23,668)
3%
Interest on capital
(29,442)
2%
(10,049)
1%
Minority interest
1
0%
60
0%
Retained earnings (*)
(83,942)
7%
(30,167)
3%
(*) excludes unrealized profit from subsidiaries.
Supplementary information on the statements of value added
* * * * *
Consolidated
NATURA COSMÉTICOS S.A.
STATEMENTS OF VALUE ADDED
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(In thousands of Brazilian reais - R$)
Of the amounts recorded under "Taxes and contributions" in 2004 and 2003, the amounts of R$296,892 and R$224,160,
respectively, refer to ICMS (state VAT) under the taxpayers' substitution regime levied on the estimated profit margin defined by the
State Finance Secretariats obtained from sales made by Natura beauty consultants to final consumers.
In order to analyze this tax impact on the statements of value added, these amounts should be deducted from the amounts recorded
under "Sales of goods, products and services" and "Taxes and contributions", since sales revenues do not include the estimated profit
attributable to Natura beauty consultants upon the sale of products, in the amounts of R$1,059,324 and R$795,764 in 2004 and
2003, respectively, considering an estimated profit margin of 30%.