Arezzo Indústria e Comércio S.A. Financial Statements with Report of Independent Auditors

Transcription

1 Arezzo Indústria e Comércio S.A. Financial Statements with Report of Independent Auditors December 31, 2009 and 2008

2 Arezzo Indústria e Comércio S.A. Balance sheets as of December 31, 2009 and 2008 (In thousands of Reais) 2009 (Restated) ASSETS 2008 (Reclassified) 2009 (Restated) 2008 (Reclassified) Notes Current assets Cash and cash equivalents Short-term investments Trade accounts receivable Inventories Recoverable taxes Other receivables Total current assets Non-current assets Long-term assets Financial investments Related parties Judicial deposits Recoverable taxes Deferred income taxes Other receivables Investments Property, plant and equipment Intangible assets Total non-current assets Total assets See accompanying notes to the financial statements. 2/33

3 Arezzo Indústria e Comércio S.A. Balance sheets as of December 31, 2009 and 2008 (In thousands of Reais) LIABILITIES AND SHAREHOLDERS' EQUITY Notes 2009 (Restated) (Restated) 2008 Current liabilities Loans and financing Trade accounts payable Tax and contributions Tax installments Labor liabilities Other liabilities Dividends and interest on shareholders' equity payable Total current liabilities Non-current liabilities Exigível a longo prazo Loans and financing Provision for contingencies Related parties Tax installments Advances from third parties Provision for losses in subsidiaries Other liabilities Total non-current liabilities Shareholders' equity Adiantamento para futuro aumento de capital Capital stock Capital reserve Legal reserve Income reserves Total liabilities and shareholders' equity See accompanying notes to the financial statements. 3/33

4 Arezzo Indústria e Comércio S.A. Statements of income for the years ended December 31, 2009 and 2008 (In thousands of Reais) Notes 2009 (Restated) (Restated) 2008 Revenue from sale of goods and services Deductions from revenue - taxes and others (87.619) (67.520) ( ) (92.483) Net operating revenue Cost of sales and services ( ) ( ) ( ) ( ) Gross profit Operating income (expenses): Selling (50.061) (39.354) (73.666) (57.754) General and administrative (37.464) (37.078) (39.717) (43.944) Financial expenses (12.301) (17.175) (16.549) (27.910) Financial income Equity results Other operating income, net (82.237) (78.839) ( ) ( ) Income before income taxes Income and social contribution taxes Current 15.2 (4.237) (7.244) (8.102) (11.055) Deferred Income for the period before reversal of interest on shareholders' equity Reversal of interest on shareholders' equity Net income for the year Earnings per share - R$ 2,49 1,14 See accompanying notes to the financial statements 4/33

5 Arezzo Indústria e Comércio S.A. Statements of changes in shareholders' equity for the years ended December 31, 2009 and 2008 (In thousands of Reais) Notes Capital stock Capital reserve Legal reserve Income reserve Retained earnings Total Balances at December 31, Adjustment from changes in accounting practices - impacts from Law No / (97) (46) (143) Capital increase Establishment of reserves Special premium reserve Result from merger with Schutz (27) (27) Income for the year Allocation: Interest on shareholders' equity (3.353) (3.353) Legal reserve (1.116) - Dividends proposed (7.180) (7.180) Retained earnings (10.609) - Balances at December 31, Net income for the year: Originally stated adjustments identified in Net income for the year - adjusted Capital increase Establishment of reserves Special premium reserve Extraordinary dividends paid (14.135) - (14.135) Prior year adjustments (444) (444) Allocation: Interest on shareholders' equity (4.618) (4.618) Legal reserve (2.286) - Dividends proposed (18.507) (18.507) Retained earnings (22.884) - Balances at December 31, restated See accompanying notes to the financial statements. 5/33

6 Arezzo Indústria e Comércio S.A. Statements of cash flows for the years ended December 31, 2009 and 2008 (In thousands of Reais) 2009 (Restated) 2008 (Reclassified) 2009 (Restated) 2008 (Reclassified) From operating activities Net income for the year Adjustments to reconcile with cash generated by operating activities Depreciation and amortization Tax use of premium Revenue from disposal of fixed assets Equity results (4.708) (4.404) - - Provision for contingencies Financial charges and foreign exchange variation on financing (7.634) (7.634) Deferred taxes (98) (760) (777) (760) Other (462) - (462) - Decrease/(increase) in assets Trade accounts receivable (17.863) (40.502) (13.218) (32.675) Inventories (1.069) (2.022) (6.914) (2.797) Recoverable taxes (2.948) (3.075) Prepaid expenses (36) (7) (43) (7) Changes in other current assets (2.096) (2.451) (2.344) (2.120) Related parties (7.070) (992) (328) Judicial deposits (1.070) (2.702) (1.382) (3.183) Long-term taxes recoverable (3.958) - (3.958) 187 Other accounts receivable 89 (116) (Decrease)/increase in liabilities Trade accounts payable (5.721) (7.667) Labor liabilities Tax liabilities Income and social contribution taxes Related parties - - (1) - Other current liabilities (104) Other non-current liabilities Other liabilities Net cash generated from operating activities (26.776) (8.699) From investment activities Additions to PP&E (1.905) (2.743) (11.170) (6.455) Mergers - (421) - (3.369) Short-term investments (5.779) - (5.779) - Additions to investments (17.836) Net cash used in investing activities (25.520) (1.698) (16.949) (8.424) From financing activities with third parties Long-term loans and financing Short-term loans and financing Repayment of loans and financing (43.012) (12.148) (44.254) (19.342) Net cash used in financing activities (13.279) (14.521) From financing activities with shareholders Interest on shareholders' equity (4.618) (3.353) (4.618) (3.353) Dividends (21.315) - (21.315) - Credit from shareholders (9.719) (11.841) (4.809) Capital increase Establishment of capital reserve Prior year adjustments (444) 22 (443) 83 Equity results - (119) - (120) Net cash used in financing activities (20.606) (22.727) Increase/(decrease) in cash and cash equivalents (15.885) (14.835) Cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Increase/(decrease) in cash and cash equivalents (15.885) (14.835) See accompanying notes to the financial statements. 6/33

7 Notes to financial statements for the years ended December 31, 2009 (restatement) and 2008 (Amounts stated in thousands of Reais) 1. Operations The business purpose of Arezzo Indústria e Comércio S.A. ( Arezzo or the ) is designing, molding and selling footwear, bags, belts and other items for the clothing industry. At December 31, 2009, the had 249 franchises and 23 own stores of its (221 and 9 at December 31, 2008, respectively) across Brazil. Corporate restructuring Over 2007, the performed a corporate restructuring, which involved the centralization of certain investments in certain stores and companies and the integration of its activities with ZZSAP Indústria e Comércio de Calçados Ltda. ( ZZSAP, formerly denominated SAP Schutz). The major events between 2007 and 2009 are described below: (i) Capital increase In accordance with the minutes of the General Shareholders Meeting held on November 8, 2007, the issued 3,203,808 new common shares, with no par value, at the total issue price of R$50,000. The s new shares were fully subscribed by BRICS Participações S.A. ( BRICS ) and paid in by FIGEAC Holdings S.A. when BRICS ceased to exist due to its downstream merger on June 1, The terms of the share subscription report are detailed as follows: Realized a) R$25,000 concurrently with the acquisition of shares, on November 8, 2007, of which R$2,500 was allocated to the capital increase and R$22,500 allocated to capital reserve; b) R$12,500 on November 18, 2008, of which R$1,250 was allocated to the capital increase and R$11,250 allocated to the establishment of a capital reserve, plus monetary indexation amounting to R$1,559; c) R$12,500 on November 6, 2009, of which R$1,250 was allocated to capital increase and R$11,250 allocated to the establishment of capital reserve, plus monetary indexation amounting to R$2,990. 7/33

8 (ii) Mergers of investees On June 1, 2008, the merged with its subsidiary Zeta Comercial de Calçados Ltda. ( Zeta ) and part of ZZSAP, as stated below, based on an accounting report issued by our independent auditors: On the same date, its subsidiary ZZAB Comércio de Calçados Ltda. ( ZZAB ), merged with the stores ZZSAP and Rubir, and began to operate all the stores in the Group. Shareholders equity in these companies was as follows: Current assets Noncurrent assets Current liabilities Non-current liabilities Net assets % Note Zeta 1, , (b) SAP Schutz 52,253 3,826 30,236 22,110 3, (a) Current assets Noncurrent assets Current liabilities Non-current liabilities Net assets % Note SAP Schutz 3,587 1,300 2,802-2, (a) Rubir , (b) Notes: a) SAP Schutz had its assets split into three distinct operations: (i) Sales: assets were merged with Arezzo, at the percentage stated in the table above (60.40%); (ii) Store: assets were merged with ZZAB, at the percentage stated in the table above (27.98%); (iii) Industrial: remains under the same corporate structure. b) Arezzo held 99.9% of equity interest in other subsidiaries; accordingly, there was no increase in its assets resulting from the merger. (iii) Merger of BRICS a) As mentioned in item (i), BRICS subscribed 25% of the Arezzo s shares. Accordingly, on the merger date (November 8, 2007), it recorded as investment the amount of R$13,167. The difference calculated on net assets amounting to R$13,936 relates to goodwill paid in the acquisition of the investment in Arezzo, based on future profitability, net of the provision set forth in Brazilian Securities Commission (CVM) Instruction No. 319/99, in order to reduce net assets to the amount of the tax credit. 8/33

9 The breakdown of payment on June 1, 2008 is as follows: Current assets R$ Cash and cash equivalents 1 Total 1 Permanent assets Investment 13,167 Goodwill 40,985 ( - ) Provision for goodwill (27,051) Total 27,101 Total net assets 27,102 ( - ) Investment (13,167) (=) Paid-in amount 13,935 b) On December 1, 2009, assets arising from Figeac Holding S.A. spin-off were merged into the paid-in amount, in accordance with the accounting valuation report comprising: Assets (Assets/rights) Deferred taxes 7,535 Investments (Arezzo) 33,141 Assets received 40,676 ( - ) Investment (33,141) (=) Paid-in amount 7,535 (iv) acquisition On July 21, 2008, the acquired another company named Shoes For U Comércio de Calçados e Acessórios Ltda., whose main place of business is in the city of São Paulo - SP, and whose activities include the sale of footwear, bags and belts on a retail basis, and is represented by one store. The amount paid was R$227, the same amount contained in the company s accounting valuation, generating no goodwill or negative goodwill. 9/33

10 2. Presentation of financial statements and significant accounting practices Restatement of the financial statements as of December 31, 2009 on December 08, 2010 After issuing the financial statements for the year ended December 31, 2009, published on April 15, 2010, the, in the regular course of its activities, revisited certain criteria used in the assessment and presentation of its assets and liabilities, and decided to restate its financial statements for the year then ended, whose impact on net income and shareholders equity for the referred to year totaled R$203, net of tax effects. The effects of such adjustments and reclassifications are as follows: Assets Published Restated Published Restated Cash and cash equivalents 40,420 34,519 44,892 38,991 Short-term investments - 5,901-5,901 Trade accounts receivable 93,508 94, , ,290 Inventories 5,666 5,666 21,385 21,205 Tax credits (non-current) 19,341 19,018 19,341 19,697 Investments 31,923 33, Liabilities Trade accounts payable 25,185 25,248 27,547 29,074 Provision for losses in subsidiaries - 2, Shareholders equity 119, , , ,532 Statement of income Revenue from sale of goods 466, , , ,122 Cost of products sold (249,520) (249,583) (252,325) (254,032) Equity results 5,132 4, Deferred income taxes Net income for the year 48,536 48,739 48,536 48,739 In addition, the statements of changes in shareholders equity and cash flows, as well as Notes 3, 4, 5, 8, 9, 12, 15 and 17, were restated to present accounting balances and disclosures adjusted as a result of the aforementioned restatements. 10/33

11 Restatement of financial statements for the year ended December 31, 2009 on January 10, 2011 After reissuing the financial statements for the year ended December 31, 2009, filed upon the application for initial registration of publicly-held company on December 8, 2010, the, in its ordinary course of business, revisited certain criteria adopted to present certain items of its consolidated financial statement, concluding that its consolidated financial statements for the year ended December 31, 2009 should be restated. The effects of these reclassifications shown below did not impact net income and shareholders equity for the year: Filed Restated Revenue from sale of goods 525, ,950 Deductions from revenues (104,269) (100,887) Cost of sales (254,032) (245,242) Gross profit 166, ,821 Additionally, Note 18 was updated to show the adjusted balances after the adjustments and reclassifications described above Basis of preparation The financial statements for the year ended December 31, 2009 were prepared in accordance with accounting practices adopted in Brazil, in light of the provisions contained in the Corporation Law (Law No. 6404/79), amended by Laws No /07 and No /09, of standards established by the Brazilian Securities Commission (CVM), of pronouncement, guidelines and interpretations issued by the Accounting Pronouncements Committee (CPC). Changes introduced by Law No had no significant effects on the financial statements for the year ended December 31, 2008, which allows the comparison between the years Accounting pronouncements with impacts on 2010 During 2009, the CPC issued several pronouncements mandatorily effective for 2010 and optional for early adoption in The has not decided for the early adoption of any accounting pronouncements issued by CPC and approved by the regulators. Upon preparing the financial statements for the year ending December 31, 2010, the 2009 financial statements, stated herein, will be restated so as to allow the comparison, as required by accounting practices adopted in Brazil. 11/33

12 The table below presents the main pronouncements that may have effects on the preparation of the 2010 financial statements: CPC CPC 15 - Business Combination CPC 16 - Inventories CPC 18 - Investments in Affiliates and Subsidiaries CPC 27 - Property, Plant and Equipment CPC 33 - Benefits to Employees Purpose Determines the accounting treatment in business combinations as for the recognition and measurement of assets acquired and liabilities assumed, goodwill for expected future profitability and minimum information should be disclosed by the Companies in these operations. Determine the cost value of inventory items and the recognition as an expense in the P&L, including any decreases in net realization value. Determines how investments in affiliates and subsidiaries should be recorded in the investor stand-alone and consolidated financial statements. Establishes the accounting treatment for property, plant and equipment items as far as recognition, measurement, depreciation and valuation losses are concerned. Establishes the accounting and disclosure of benefits granted to employees Significant accounting practices Profit and Losses Profit and losses from operations (revenues, cost and expenses) are computed on an accrual basis for the year. Revenues from product sales are recognized when they can be reliably measured and all risks and benefits are transferred to buyer Accounting estimates The financial statements include estimates and assumptions, such as the measurement of provisions for losses from credit operations, estimates of certain financial instruments fair value, provisions for contingent liabilities, estimates of certain asset items, useful lives and other. The effective results may be different from these estimates and assumptions Cash and cash equivalents Cash and cash equivalents include cash, bank accounts, highly liquid short-term investments with insignificant risk of change in their market value. The short-term investments are described in Note Trade accounts receivable Trade accounts receivable are stated at their present and realizable value; trade accounts receivable from customers abroad, where applicable, are translated based on the foreign exchange rate effective on the financial statements date. An allowance is set up by management in an amount considered sufficient to cover doubtful accounts. 12/33

13 Inventories Inventories are assessed at the average acquisition or production cost, not exceeding market value. Provisions for slow-moving or obsolete inventory items are recorded when considered necessary by management Investments Investments in subsidiaries and affiliates (on which the has significant influence) are recorded by the equity method. Other permanent investments are recorded at acquisition cost less valuation allowance, when applicable Property, plant and equipment Property, plant and equipment are recorded at acquisition cost. Depreciations are computed by the straight-line method, at rates informed in Note Lease transactions Finance lease agreements are recognized in property, plant and equipment, and in loans and financing, for the lower amount of present value of minimum compulsory contractual installments the asset fair value, plus direct initial costs incurred during the transactions, when applicable. The amount in property, plant and equipment are depreciated considering the estimated economic useful lives of the assets. Lease agreements of the s commercial units are classified as operating lease agreements, whose costs are recognized as operating expenses Intangible assets Intangible assets acquired separately are measured upon initial recognition at acquisition cost deducted by accumulated amortization, impairment are recorded, when applicable Impairment of assets Management reviews the net book value of assets in order to assess on an annual basis or whenever events or changes in operating, economic or technological circumstances that may indicate impairment. When such evidence is identified, and net book value exceeds recoverable value, a provision for impairment is established by adjusting net book value to recoverable value. 13/33

14 Other assets and liabilities (current and non-current) Assets are recognized in the balance sheet when their future economic benefits are likely to be generated for the and their cost or value can be safely measured. Liabilities are recognized in the balance sheet when the has a legal or constructive obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits. Where applicable, their corresponding charges and monetary and foreign exchange variation incurred are included. Provisions are recorded based on the best estimates of the risk involved. Assets and liabilities are classified as current whenever their realization or settlement is likely to occur within the following twelve months. Otherwise, they are stated as non-current Adjustment to present value of assets and liabilities Monetary assets and liabilities are subject to the assessment of adjustments to present value when the transaction is initially recorded, taking into consideration the contractual cash flows and the explicit interest rate, implicit in certain cases, of the corresponding assets and liabilities, and market rates for similar transactions. Later, this interest will be relocated to financial income and expenses through the effective interest rate method in relation to the contractual cash flows. The regularly assesses the effect of this procedure, and in 2008 and 2009, did not carry out long-term transactions (or material short-term transactions) that needed to be adjusted Loans and financing Loans and financing are restated at monetary variations through the balance sheet date and their corresponding interest is accrued Interest on shareholders equity Interest on shareholders equity is calculated under the terms of Law No. 9249/95 and is recorded as financial expenses, as determined by tax legislation. For the purposes the financial statements, interest on shareholders equity is recorded as dividends presented against retained earnings Income and social contribution taxes The provision for income and social contribution taxes is recorded pursuant to the legislation in force, at the rate of 15%, plus a surtax of 10% on taxable profit exceeding the established tax limits, whereas social contribution tax is computed at the rate of 9% on adjusted taxable profit, pursuant to specific legislation. 14/33

15 Deferred income taxes on temporary differences are recorded at the balance sheet dates. The recovery is based on the projected budget, which foresees future profitability sufficient for its realization in a reasonable period of time Contingent assets and liabilities and legal obligations The accounting practices related to the recognition and disclosure of contingent assets and liabilities and legal obligations are as follows: (i) Contingent assets are only recognized in financial statements upon the existence of evidence or favorable judicial decisions, on which no further appeals can be filed. Contingent assets whose likelihood of a favorable outcome is rated as probable are only disclosed in the financial statements; (ii) contingent liabilities are provisioned when the likelihood of an unfavorable outcome is considered as probable, and the amounts involved can be reliably measured. Contingent liabilities whose likelihood of an unfavorable outcome is considered as possible are only disclosed in the financial statements, and those considered as remote are not provisioned neither disclosed; and (iii) legal obligations are recorded as payables of proceedings whereby the has challenged the unconstitutionality of taxes, irrespective of their likelihood of an unfavorable outcome Consolidation criteria Beginning in 2007, as a result of the mergers described in Note 1, the prepared its consolidated financial statements in accordance with accounting practices adopted in Brazil, including its subsidiaries and affiliates mentioned in Note 8. The transactions and balances between the consolidated companies arising from investment balances, equity interest, balances in assets and liabilities and revenues and expenses were eliminated. 15/33

16 3. Cash and cash equivalents and short-term investments Description 12/31/09 12/31/08 12/31/09 12/31/08 Cash and banks 12,334 7,514 16,118 9,777 Total cash 12,334 7,514 16,118 9,777 CDB/CDI fixed income 22,185 34,007 22,771 35,059 CDB/CDI - DI OVER - 8,883-8,883 CDI/swap Total cash equivalents 22,185 42,890 22,873 44,048 Total cash and cash equivalents 34,519 50,404 38,991 53,825 Short- term investments CDB/CDI fixed income 5,901-5,901 - Non-current Capitalization fund Total financial investments 5,928-6, Cash equivalents substantially correspond to investments bearing interest based on the Interbank Deposit Certificate (CDI). Agreed-upon interest rates, on which these investments bear interest, from 100% to 103% of CDI. 4. Trade accounts receivable Description 12/31/09 12/31/08 12/31/09 12/31/08 Trade accounts receivable 93,755 76,159 89,549 83,488 Checks , Credit cards 1, ,941 6,479 ( - ) Allowance for doubtful accounts (442) (442) (466) (499) Total 94,521 76, ,290 90,076 Sales to customers are subject to the credit policies established by management and aim to minimize problems, if any, arising from customer delinquency. The retail customers have their operations substantially represented by credit card transactions from commercial representations and vendors who maintain a structured relationship with the (franchises), represented by trade accounts receivables. 16/33

17 5. Inventories Description 12/31/09 12/31/08 12/31/09 12/31/08 Warehouse 1, ,061 2,994 Finished goods with third parties 269-2,029 1,083 Goods in progress - - 5,256 1,947 Finished goods 3,678 4,150 9,886 8,294 ( - ) Provision for losses (27) (27) (27) (27) Total 5,666 4,597 21,205 14,291 Products held in warehouse refer to raw materials mainly intended for the development of new collections. Inventories are annually scanned for obsolete items, which are then incinerated and the loss is recorded in the results. 6. Recoverable taxes Description 12/31/09 12/31/08 12/31/09 12/31/08 ICMS recoverable 6,291 4,002 6,366 4,041 IRPJ prepayment CSLL prepayment Other Total 7,376 5,273 7,729 5,919 Current 3,065 4,920 3,418 5,566 Non-current 4, , Other receivables Description 12/31/09 12/31/08 12/31/09 12/31/08 Prepaid expenses Advances to employees Advances to suppliers 1,678 1,171 2,844 2,102 Advances for business travel Advance for advertising fund 5,397 3,004 5,397 3,004 Other receivables 122 1, ,234 Total 8,366 6,349 10,092 7,729 Current 8,302 6,171 10,018 7,244 Non-current /33

18 Advertising fund In order to advertise and promote Arezzo Franchising nationally, the franchisee agrees to allocate 4.1% of their total purchases to a national advertising fund, named Arezzo Network s Cooperative Advertising and Promotion Fund. The amounts corresponding to this percentage are deposited by the franchisees on a monthly basis and are then allocated to the development of marketing and publicity strategies, including advertising and promotion of Arezzo Franchise, and to the payment of campaign designers and developers and any other advertising- and promotion-related activity nationally. The amounts received are managed by the franchisor and the accounts of their allocation are rendered on an annual basis. Over the year, Arezzo makes prepayments to honor its advertising fund commitments. 8. Investments in subsidiary and affiliate companies Investment Equity pickup Description % - Interest 12/31/09 12/31/08 12/31/09 12/31/08 Zeta Comercial de Calçados Ltda Organização Rubir Ltda ZZAB Comércio de Calçados Ltda ,468 4,546 2,623 1,275 Allmaness Calçados Ltda (2) 52 ZZSAP Indústria e Comércio de Calçados Ltda ,948 3,646 3,302 3,890 ZZARIO Comércio de Calçados Ltda , (288) 207 ZZAF Ind. e Com. de Calçados Ltda , , ZZCAPRI Comércio de Calçados Ltda , (1,122) (131) ZZAH Comércio de Calçados Ltda (34) - ZZAIBI Comércio de Calçados Ltda ,141 - (29) - Investments 33,788 9,984 5,720 5,695 Schutz Shoes Design Exp. e Imp. De Calç. Ltda (285) (284) (1) (221) Schutz International Corporation (1,612) (745) (868) (1,070) Shoes For U Com. de Calçados e Acessórios Ltda (392) - (143) - Provision for capital deficiency (2,289) (1029) (1,012) (1,291) Total 31,499 8,955 4,708 4,404 a) ZZAB Comércio de Calçados Ltda. (ZZAB) Footwear, bag and belt retailer. 18/33

19 b) ZZSAP Indústria e Comércio de Calçados Ltda. (ZZSAP) The corporate name of the company changed, on June 1, 2008 and, it was spun off, part of its assets was transferred to Arezzo Indústria e Comércio Ltda. (product development and commercial) and to ZZAB Comércio de Calçados Ltda. (own stores), and part was kept by the company, mainly the activity of manufacturing and selling leather footwear, bags and belts, footwear components, clothing items, fashion accessories, import and export activities. c) Allmaness Calçados Ltda. (Allmaness) Manufacturing and sale of leather footwear, bags and belts, footwear parts, clothing items, fashion accessories, import and export and franchising and royalty services to other companies. d) Schutz Shoes Design Exportação e Importação de Calçados Ltda. (Schutz Shoes) Manufacturing and sale of leather footwear, bags and belts, footwear parts, clothing items, fashion accessories, import and export and franchising and royalty services to other companies. e) Schutz International Corporation (Shutz Int.) Sale of footwear and business intermediation. f) ZZARIO Comércio de Calçados Ltda. (ZZARIO) A company organized in September 2008 with the purpose of retailing footwear, bags and belts. g) ZZAF Indústria e Comércio de Calçados Ltda. (ZZAF) A company organized in November 2008 with the purpose of manufacturing and selling leather footwear, bags and belts, footwear parts, clothing items, fashion accessories, importing and exporting. h) ZZCAPRI Comércio de Calçados Ltda. (ZZCAPRI) A company organized in November 2008 with the purpose of retailing footwear, bags and belts. i) ZZAH Comércio de Calçados Ltda. ( ZZAH ) and ZZAIBI Comércio de Calçados Ltda. (ZZAIBI) Both companies started up their activities in February 2009 with the purpose of retailing footwear, bags and belts. j) Shoes For U Comércio de Calçados e Acessórios Ltda. (Shoes For U) A company acquired on July 21, 2008, with the purpose of retailing footwear, bags, belts and accessories. 19/33

20 9. Deferred income taxes 12/31/09 12/31/08 12/31/09 12/31/08 Tax credits - resulting from merger (1) 13,935 13,935 13,935 13,935 ( - ) Amortization (4,413) (1,625) (4,413) (1,625) Tax credits - resulting from merger (2) 7,535-7,535 - ( - ) Amortization Deferred income and social contribution taxes on temporary differences (3) 1,961 1,862 2,640 1,862 Total 19,018 14,172 19,697 14,172 (1) The goodwill from the capital increase that BRICS made in Arezzo. As a result of the merger of BRICS by Arezzo and the goodwill was recognized net of the provision provided by CVM Instruction No. 319/99 that in essence represents the benefit from the tax deductibility of that goodwill. The merged net assets will be amortized over an estimated period of five years and will be matched against a special goodwill reserve to be transferred to the parent company s capital account upon total realization of the tax benefit; (2) The goodwill from the assets incorporated by Arezzo due to FIGEAC s spin-off, net of the provision set forth in CVM Instruction No. 319/99 which in essence represents the benefit mainly related to from the tax deductibility of that goodwill. The merged net assets will be amortized over an estimated period of five years and will be matched against a special goodwill reserve to be transferred to the parent company s capital account upon total realization of the tax benefit; (3) Tax credit on temporarily deductible differences, particularly on provisions for contingencies. 20/33

21 10. Property, plant and equipment and intangible assets Property, plant and equipment Description % - Depreciation rate 12/31/09 12/31/08 12/31/09 12/31/08 Computers and peripherals 20 2,521 2,132 2,914 2,370 Furniture and fixtures 10 1,426 1,364 2,926 2,365 Machinery and equipment ,414 4,144 Facilities and showroom 10 1,862 1,548 7,601 3,498 Vehicles Building ,021 1,035 Total 6,750 5,898 18,999 13,535 Accumulated depreciation (3,690) (3,173) (6,596) (5,334) PP&E, net 3,060 2,725 12,403 8,201 Intangible assets Description % - Amortization rate 12/31/09 12/31/08 12/31/09 12/31/08 Software use rights 20 5,583 4,672 5,827 4,796 Trademarks and patents - 2,513 2,404 2,610 2,501 Stores use rights ,514 1,978 Total intangible assets 8,221 7,200 14,951 9,275 Accumulated amortization (3,876) (3,459) (3,918) (3,535) Intangible assets, net 4,345 3,741 11,033 5,740 21/33

22 11. Loans and financing Description 12/31/09 12/31/08 12/31/09 12/31/08 Working capital Banco do Brasil (FINEME) 30 9, ,851 Banco Votorantin S/A 3,624 5,059 3,624 5,059 Banco Santander S/A 3,902 5,053 3,902 5,129 Banco Itaú S/A 4,181 5,012 4,181 5,012 BNDES - HSBC Bamerindus 5,341 6,688 5,341 6,688 Santander leasing Advance on Exchange Contract (ACC) 10,743 28,407 10,743 29,390 Financing Agency for Projects and Studies (FINEP) 11,497-11,497 - Total 39,318 60,231 39,318 61,473 Current 24,583 42,359 24,583 43,601 Non-current 14,735 17,872 14,735 17,872 Loans are guaranteed by warranties and surety from controlling shareholders. The interest rate and charges levied on loans are: Working capital: between TJLP + 1% p.a. and 8.25% p.a.; BNDES: TJLP + 3% p.a. (20% discount for no late payment); Leasing: 1.37% p.m.; Advance on Export Contract (ACC): stated in US dollars, plus average Libor rate of 6.9% p.a. Loan agreement maturities Banco do Brasil S/A: monthly installments maturing in October 2012; Banco Votorantim S/A: maturing on November 29, 2011; Banco Santander S/A: maturing on March 3, 2011; Banco Itaú S/A: maturing on March 15, 2011; HSBC Bamerindus - BNDES: maturing on June 15, 2011; Leasing: 36-month period beginning September 26, 2007; FINEP: maturing in August Other guarantees and commitments The has a technical and financial cooperation agreement with Banco do Nordeste do Brasil S/A, in order to maintain credit lines intended for Arezzo franchisees in business ventures within the bank s area of operations. Using funds of the Constitutional Fund to Finance the North East Region (FNE) for financing used in the modernization of its stores (third parties), in accordance with the standards established by the as well as for costs associated with its operations and working capital requirements, if necessary. The is guarantor of these transactions through a bank guarantee letter issued by Banco ABN AMRO Real S/A. At December 31, 2009, the amount guaranteed by the in relation to this agreement is R$782 (R$1,256 on December 31, 2008). 22/33

23 12. Trade accounts payable Description 12/31/09 12/31/08 12/31/09 12/31/08 Domestic suppliers 25,105 6,357 28,931 15,765 Foreign suppliers Total 25,248 7,185 29,074 16, Installment payment program The subsidiary SAP Schutz subscribed to the Special Installment Payment Program (PAES), governed by Law No dated May 30, 2003, subscribing a substantial part of tax debits maturing up to July 15, In accordance with that legislation companies that subscribed to the program must make regular payments of monthly installments and may be excluded from the program if these payments are delayed for three consecutive months or six alternate months, whichever occurs first. The agreed installments are being paid on time. Accordingly, SAP Schutz has monthly expenses of approximately R$19, thereby making payments in accordance with the conditions provided for in the special installment payment program. The breakdown of Special Installment Payment Program amounts are as follows: Description 12/31/09 12/31/08 PAES - tax payment in installments 746 1,041 Current Non-current /33

24 14. Judicial deposits and provisions for contingencies Based on advice from its legal counsel, management records a provision in an amount considered sufficient to cover probable losses with ongoing legal proceedings classified under non-current liabilities: 12/31/09 12/31/08 Provision for Judicial contingencies deposits Provision for contingencies Judicial deposits Description Tax claims - Service Tax (ISSQN) (1) 4,581 4,389 3,987 3,854 Labor and civil claims 1,419 1,468 1, Total 6,000 5,857 5,406 4,789 12/31/09 12/31/08 Provision for contingencie Judicial s deposits Provision for contingencie s Judicial deposits Description Tax claims - Service Tax (ISSQN) (1) 4,581 4,389 3,987 3,854 Labor and civil claims 3,385 2,264 3,163 1,418 Total 7,966 6,653 7,150 5,272 (1) Refers to claims in which the is challenging the payment of ISSQN tax on royalties. The is party to legal proceedings from the normal course of its business. Management monitors the progress of these proceedings and, based on the opinion of its legal counsel, records a provision for losses for those assessed as involving probable unfavorable outcome. In accordance with tax legislation in force, the s accounting, tax, labor and social security records for the past five years, and thirty years for the Government Severance and Indemnity Fund for Employees (FGTS), were available should inspection by tax authorities take place. The s management believes that should such inspection take place, there would not be any inquiries involving significant amounts. 24/33

25 Possible contingent losses by risk type: The is also party to various proceedings assessed as involving possible risk of loss in the opinion of legal counsel. The did not record a provision for the amounts involved in these proceedings, as follows: Type Balance - 12/31/09 Labor 386 Civil 2,322 Tax 486 Total 3, Income and social contribution taxes Reconciliation between nominal and effective rates The reconciliation between income and social contribution tax expenses at nominal and effective rates is stated below: Description Income before income and social contribution taxes 48,260 51,446 Income and social contribution taxes statutory rates - 34% (16,408) (17,492) Adjustments for calculation using the effective rate benefit from expenses with research and technology innovation - Law nº /05 8,509 8,509 Equity results 1,601 - Goodwill tax allocation 1,839 1,839 Difference between taxation types (*) - (834) Other permanent differences Temporary differences (199) 145 Income and social contribution taxes in statements of income for the year (4,139) (7,325 Current (4,237) (8,102) Deferred (4,139) (7,325) (*) Some subsidiaries are subject to taxation on presumed profit computed as a percentage of the 's gross revenue. 25/33

26 16. Advances from third parties The company entered into an agreement with Banco Santander awarding exclusivity with banking services particularly for the payment of salaries of its employees through accounts opened for that purpose. Due to this agreement, Arezzo received the equivalent of R$1,700, through a deposit in its current account in April The effective period of the agreement is 60 months from the date of the deposit (first processing of salaries deposited), which is being realized in this period. Up to December 31, 2009, R$935 (R$595 up to December 31, 2008) had been recognized. In the event the agreement is terminated within 24 months the shall return the total amount received. After this period, the shall refund the amount proportional to the exclusivity period, plus a fine of 10% of the amount to be refunded. 17. Shareholders equity Capital At December 31, 2009, total subscribed and paid-in capital comprises 19,562,073 shares (the same number in 2008). Summary of recent capitalization processes At December 31, 2006, fully subscribed and paid-in capital comprised 11,946,000 units of interest, at the R$1.00 each. On August 30, 2007, the increased capital in the amount of R$4,412, in net assets (see Note 1). On November 8, 2007, the issue of 3,203,808 new common registered shares, with no par value, was approved by the. Such shares were fully subscribed by BRICS Participações S.A. and will be paid in according to the terms of the share Subscription Report. In 2007, R$25,000 was paid in, of which R$2,500 represented capital increase and R$22,500 represented capital reserve (see Note 1). On November 18, 2008, the first installment in the amount of R$12,500 was paid in, of which R$1,250 was allocated to capital increase and R$11,250 to the establishment of capital reserve, plus monetary indexation in the amount of R$1,559 (see Note 1). On November 6, 2009, the second installment in the amount of R$12,500 was paid in, of which R$1,250 was allocated to capital increase and R$11,250 was allocated to the establishment of capital reserve, plus monetary indexation in the amount of R$ 2,990 (see Note 1). 26/33

27 17.2. Establishment of capital reserve The special goodwill reserve was recorded due to the corporate restructuring process described in Note 1 against the merged net assets and representing the future tax benefit from the amortization of merger goodwill. The special goodwill reserve corresponds to the benefit that may be capitalized at the end of each financial year to the benefit of shareholders, with the issue of new shares, as provided for in CVM Instruction No. 319/ Dividends In accordance with the s Articles of Incorporation a minimum of 50% of annual net income is allocated as dividends to shareholders. When calculated, interest on equity is considered as dividends in order to determine the minimum dividend to be distributed. To validate the dividend calculation base, the allows for the allocation of 5% to the legal reserve, up to the limit of 20% of paid-in capital. Dividends proposal approved by shareholders in the general shareholders meeting, calculated under the terms of laws, particularly in relation to articles 196 and 197, in 2008 is stated as follows: 12/31/09 12/31/08 s net income for the year - originally stated 48,536 22,331 Legal reserve allocation (2,286) (1,116) 46,250 21,215 Interest on shareholders equity (4,618) (3,353) Dividends proposed (18,507) (7,180) (=) Total dividends 23,125 10,682 Prior year adjustments (444) (73) 2009 adjustments identified in Income reserve 22,884 10,609 Up to December 31, 2008, interest on shareholders equity was made available in the amount of R$3,353, minimum dividends of R$7,180 and, later, retained profit in the amount of R$14,135, which was approved in the General Shareholders Meeting held on April 30, 2009 and paid on May 7 and 28, 2009, respectively. Prior year adjustment in the amount of R$444 is related to 2008 results for the period of Shoes for U Comércio de Calçados e Acessórios Ltda., a company acquired on July 21, Given the nature and time, the amount of R$203 will be allocated together with net income for During 2009, in addition to interest on shareholders equity in the amount of R$4,618, dividends amounting to R$18,507 (in accordance with statutory expectation of 50%), an allocation to legal reserve of R$2,286 and to an income reserve of R$22,884, will be submitted to approval at the General Shareholders Meeting. 27/33

28 17.4. Interest on shareholders equity The decided to record interest on shareholders equity in the amount of R$4,618 at December 31, 2009 (R$3,353 at December 31, 2008), recorded in Financial Expenses in order to meet tax requirements. To prepare these financial statements, such interest was reversed from the results and recorded as dividends against retained earnings, as determined by accounting practices adopted in Brazil. Withholding income tax at the rate of 15% is levied thereon. 28/33

29 18. Related-party transactions Current assets Accounts receivable Non-current assets 12/31/09 Current liabilities Non-current liabilities Financial (income) 12-month period ended Dec/2009 Current assets Accounts receivable expenses expenses Intercompany Suppliers Intercompany Intercompany Suppliers Intercompany With consolidated companies Loans Loans Loan Loans Allmaness Calcados Ltda Schutz Shoes Design (Liberty Calçados Ltda.) (25) - - Shoes For U Comércio de Calçados e Acessórios Ltda. (1) ZZAB Comércio de Calçados Ltda. 3, , , , ZZAF Indústria e Comércio de Calçados Ltda , , ,134 ZZAH Comércio de Calçados Ltda ZZAIBI Comércio de Calçados Ltda (0) ZZARIO Comércio de Calçados Ltda. 2, (38) 5,037-1,430 1, ,870 - ZZCAPRI Comércio de Calçados Ltda ZZSAP Indústria e Comércio de Calçados Ltda. (30) - 7, (475) , ,595 1, ,953 Schutz International Corporation 1, (3) 1, (17) 9-7,729 1,173 9, (387) 24, ,405 2,874 7,070 1, ,665 40,260 With non-consolidated companies Xamma Indústria e Comércio de Calçados Ltda ,847 Members (4,825) ,143 (4,225) - Income Purchases Non-current assets Current liabilities Non-current liabilities (4,825) ,143 (4,190) 68 21,847 7,729 2,090 9, (5,212) 24, ,432 2,877 7,070 1,782 10,376 (4,096) 13,734 62,106 12/31/08 Financial (income) 12-month period ended Dec/2008 income Purchase The maintains transactions with related parties which are carried out under regular commercial and financial conditions established between the parties. The most common transaction is the sale by Arezzo (parent company) of footwear and accessories to stores (ZZAIBI, ZZAH, ZZAB, Shoes For U and ZZARIO) and the acquisition of the footwear from the manufacturer (ZZAF and ZZSAP). Price is marked to market. Related-party receivables, except for intercompany loan balances, mature at specific dates. Intercompany receivables are monetary restated by applying TJLP plus interest of 2.5% p.a., as well as dividends payable. 29/33

30 19. Insurance coverage The has insurance coverage with some major insurance companies in Brazil, and takes into consideration the degree of risk involved. At December 31, 2009, the had insurance coverage against fire and miscellaneous risks to its property, plant and equipment and inventories at amounts considered sufficient by management to cover possible losses. Assumptions on risks adopted, given their nature, do not form part of the scope for auditing financial statements; as such, they were not examined by our independent auditors. 20. Financial instruments Book values of short-term investments and trade accounts receivable in the balance sheet, when compared to amounts that may have been obtained in their negotiation with third parties or, in the absence of third parties, when compared to net present value adjusted based on market interest rates, substantially approximate their corresponding market values. During this period, the did not perform operations with derivatives. Financial instrument market value Market values were calculated considering the present value of financial instruments, allowing for the market interest rate for operations with similar risks and terms. Credit risk concentration Trade accounts receivable are significantly widespread and correspond to a high number of clients. Accordingly, these are not concentrated on a low number of customers, which minimizes credit risk together with control procedures. Doubtful accounts are fairly covered by an allowance in the event of losses. 30/33

31 21. Other operating income, net Description 31/12/09 31/12/08 31/12/09 31/12/08 Franchising fees Refund of expenses from returns Recovery of expenses Sundry expenses ,070 Revenue from disposal of fixed assets 1,126-1,159 - Total 2,398 2,237 2,653 2, Statutory management fees Directors receive management fees, up to the annual limit of R$2,180, established in the agreement with shareholders. 23. Operating lease agreements - store lease At December 31, 2009, the had lease agreements entered into with third parties. Such agreements were reviewed by management which concluded that they could be classified as operating lease agreements. The average monthly expense with lease payments is R$314 (R$115 in 2008). The effective terms of the referred to lease agreements range between four and six years, subject to renewal. At the year ended December 31, 2009, lease expenses, net of recoverable taxes, totaled R$3,770 (R$1,375 in 2008). The Lease Payable balance is R$291 (R$162 in 2008). A substantial portion of lease agreements is related to the billing of stores, with a minimum established amount. In addition, the agreement grace period is not significant to meet the provision for expense alignment. 31/33