Initial Equity Offering Natura Cosméticos S.A.

Transcription

P r i v a t e a n d S t r i c t ly C o n f i d e n t i a l
O f fe r i n g M e m o r a n d u m
Initial Equity Offering
Natura Cosméticos S.A.
Initial Equity Offering Natura Cosméticos S.A.
bem estar bem
A c o m p a ny o r g a n i ze d u n d e r t h e l aw s o f B r a z i l
G lo b a l C o o rd in a to r a n d Jo in t Bo o k r u n n e r
UBS Investment Bank
Jo in t Bo o k r u n n e r s
Banco Itaú-BBA Banco Pactual
Su b c o n tr a cte d Ma n a g e r s
Merrill Lynch UNIBANCO
OFFERING MEMORANDUM
18,582,856 Common Shares
Offer Price: R$36.50 per Common Share
The selling shareholders are offering, to the public in Brazil and to institutional investors in the United States
and elsewhere, a total of 18,582,856 common shares of Natura Cosméticos S.A., a sociedade por ações
organized under the laws of Brazil. The 2,172,550 shares being sold by BNDES Participações S.A. –
BNDESPAR, or BNDESPAR, one of the selling shareholders, will be offered only in Brazil to Brazilian
persons.
We have registered this offering with the Comissão de Valores Mobiliários (the Brazilian Securities
Commission, or CVM). No market currently exists for our common shares. Our common shares have been
approved for listing and trading on the Novo Mercado segment of the Bolsa de Valores de São Paulo (the São
Paulo Stock Exchange, or BOVESPA) under the symbol “NATU3.” The ISIN number for our common shares
is “BRNATUACNOR6.” The CVM has not approved or disapproved of these securities or determined if this
offering memorandum (or the Portuguese language prospectus used in connection with the offering of our
common shares in Brazil) is truthful or complete.
The selling shareholders, other than BNDESPAR, have granted the underwriters an option for a period of 30
days to place up to an additional 2,461,545 common shares, to cover over-allotments.
Our common shares have not been and will not be registered under the U.S. Securities Act of 1933, as
amended, which we refer to as the Securities Act, or under any U.S. state securities laws. Accordingly, our
common shares are being offered in the United States only to qualified institutional buyers as defined under
Rule 144A under the Securities Act, which we refer to as Rule 144A, and outside the United States in
accordance with Regulation S under the Securities Act, which we refer to as Regulation S. See “Notice to
investors” on page 144 for a description of restrictions on transfers of our common shares.
Investors residing outside Brazil, including institutional investors, may purchase our common shares if they
comply with the registration requirements of CVM Instruction No. 325, dated January 27, 2000, and
Resolution No. 2,689, dated January 26, 2000, of the Brazilian National Monetary Council.
Investing in our common shares involves risks. See “Risk factors” beginning on page 17 for
a discussion of the factors you should consider before investing in our common shares.
Payment for our common shares will be required to be made to the selling shareholders through the facility of
the Companhia Brasileira de Liquidação e Custódia (the Brazilian Settlement and Custodial Company, or
CBLC), and the selling shareholders expect to deliver our common shares through the facility of the CBLC on
or about May 28, 2004. See “Trading, settlement and clearance.”
Global Coordinator and Joint Bookrunner
UBS Investment Bank
Joint Bookrunners
Banco Itaú-BBA
Banco Pactual
Subcontracted Managers
Merrill Lynch
UNIBANCO
The date of this offering memorandum is May 24, 2004
You should rely only on the information contained in this offering memorandum. Neither we, the selling
shareholders, the underwriters nor the agents appointed by the underwriters to facilitate the placement of
our common shares outside Brazil, which we refer to as the agents, have authorized anyone to provide
you with information different from that contained in this offering memorandum. Our common shares
are being offered, and the offers to buy are being sought, only in jurisdictions where offers and sales are
permitted. The information contained in this offering memorandum is accurate only as of the date of this
offering memorandum, regardless of the time of delivery of this offering memorandum or of any sale of
our common shares.
This offering memorandum is highly confidential, and we have prepared it for use solely in connection
with the proposed offering of our common shares. This offering memorandum is personal to the offeree
to whom it has been delivered by the agents and does not constitute an offer to any other person or to
the public in general to subscribe for or otherwise to acquire our common shares. Distribution of this
offering memorandum to any person other than the offeree and those persons, if any, retained to advise
that offeree with respect thereto is unauthorized, and any disclosure of any of its contents without our
prior written consent is prohibited. Each offeree, by accepting delivery of this offering memorandum,
agrees to the foregoing and agrees to make no photocopies of this offering memorandum.
Our common shares offered through this offering memorandum are subject to restrictions on
transferability and resale, and may not be transferred or resold in the United States except as permitted
under the Securities Act and applicable U.S. state securities laws pursuant to registration or exemption
from them. You should be aware that you may be required to bear the financial risks of this investment
for an indefinite period of time. See “Notice to investors.” In making an investment decision, you must
rely on your own examination of our business and the terms of this offering, including the merits and
risks involved.
You must comply with all applicable laws and regulations in force in any jurisdiction in which you
purchase, offer or sell our common shares or possess or distribute this offering memorandum and must
obtain any consent, approval or permission required for your purchase, offer or sale of our common
shares under the laws and regulations in force in any jurisdiction to which you are subject or in which
you make such purchases, offers or sales, and neither we, the selling shareholders, the underwriters nor
the agents will have any responsibility therefor.
The selling shareholders and the underwriters reserve the right to reject any offer to purchase, in whole
or in part, and for any reason, our common shares offered hereby. The selling shareholders and the
underwriters reserve the right to sell or place less than all of our common shares offered hereby.
This communication is directed only at persons who (i) are outside the United Kingdom or (ii) are
investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001 (the “Order”) or (iii) are persons falling within Article 49(2)(a) to (d)
(“high net worth companies, incorporated associations etc”) of the Order (all such persons together are
being referred to as “Relevant Persons”). This communication must not be acted on or relied on by
persons who are not relevant persons. Any investment or investment activity to which this
communication relates is available only to relevant persons and will be engaged in only with relevant
persons.
In this offering memorandum, the terms “Natura,” “we,” “our” and “us” refer to Natura Cosméticos
S.A., a Brazilian corporation, and its consolidated subsidiaries.
We make statements in this offering memorandum about our competitive position and market share in,
and the market size of, the cosmetics industry. We have made these statements on the basis of statistics
i
and other information from third-party sources that we believe are reliable. Although we have no reason
to believe that any of this information or these reports are inaccurate in any material respect, we have
not independently verified the competitive position, market share, production and market size or market
growth data provided by third parties or by industry or general publications.
Certain figures included in this document have been subject to rounding adjustments. Accordingly,
figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede
them.
This offering is being made in Brazil by a prospectus in Portuguese with the same date as this offering
memorandum. The Brazilian prospectus, which has been filed with the CVM, is in a format different
from that of this offering memorandum and contains information not generally included in documents
such as this one, including certain forward-looking information. This offering is made in the United
States and elsewhere outside Brazil solely on the basis of the information contained in this offering
memorandum. You should take this into account when making investment decisions.
In connection with this placement, Banco UBS S.A., acting through UBS Corretora de Câmbio e Valores
Mobiliários S.A., on behalf of the underwriters (the “stabilizing manager”) (or any person acting for the
stabilizing manager) may over-allot or effect transactions with a view to supporting the market price of
our common shares at a level higher than that which might otherwise prevail for a limited period.
However, there may be no obligation on the stabilizing manager (or any agent of the stabilizing
manager) to do this. Such stabilizing, if commenced, may be discontinued at any time and must be
brought to an end after a limited period. Such stabilizing shall be in compliance with all applicable laws,
regulations and rules. See “Plan of distribution.”
Notice to New Hampshire Residents Only
Neither the fact that a registration statement or an application for a license has been
filed under RSA 421-B with the State of New Hampshire nor the fact that a security is
effectively registered or a person is licensed in the State of New Hampshire implies that
any document filed under RSA 421-B is true, complete and not misleading. Neither any
such fact nor the fact that an exemption or exception is available for a security or a
transaction means that the Secretary of State of the State of New Hampshire has passed
in any way upon the merits or qualifications of, or recommended or given approval to,
any person, security or transaction. It is unlawful to make, or cause to be made, to any
prospective purchaser, customer or client any representation inconsistent with the
provisions of this paragraph.
ii
TABLE OF CONTENTS
Forward-looking statements ..........................
1
2
Cosmetics, fragrances and toiletries
industry....................................................
Presentation of financial information.............
76
Summary .......................................................
4
Description of our business..........................
83
The offering...................................................
10
Management................................................
110
Summary financial information .....................
12
Transactions with related parties .................
117
Risk factors ...................................................
17
Principal and selling shareholders ................
119
Enforcement of judgments .............................
26
Description of capital stock .........................
122
Exchange rate information ............................
27
Plan of distribution ......................................
137
Use of proceeds .............................................
29
Trading, settlement and clearance ................
141
Capitalization................................................
30
Notice to investors.......................................
144
Dilution.........................................................
32
Taxation ......................................................
146
Dividends ......................................................
33
Certain ERISA considerations ......................
152
Selected financial information........................
35
Legal matters ...............................................
153
Independent accountants .............................
154
Index to financial statements .......................
F-1
Management’s discussion and analysis of
financial condition and results of
operations..................................................
40
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Forward-looking statements
This offering memorandum includes forward-looking statements, principally in “Summary,” “Risk
factors,” “Management’s discussion and analysis of financial condition and results of operations,”
“Cosmetics, fragrances and toiletries industry” and “Description of our business.” We have based these
forward-looking statements largely on our current expectations and projections about future events and
financial trends affecting our business. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other things:
➤
general economic, political and business conditions, both in Brazil and in the rest of Latin America;
➤
changes in market prices, customer preferences and competitive conditions;
➤
anticipated trends in the cosmetics, fragrances and toiletries industry, including new technological
developments;
➤
our ability to develop innovative products and concepts and deliver our products on a timely basis;
➤
our ability to successfully compete;
➤
the continued retention and growth of our network of independent sales representatives;
➤
our ability to successfully undertake expansion projects and the costs involved in such projects;
➤
the absence of changes in tax, labor, environmental laws and regulations, or laws and regulations
regulating Brazilian biodiversity, that make our business model or products less attractive; and
➤
other risk factors as set forth under “Risk factors.”
The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and
similar words are intended to identify forward-looking statements. Forward-looking statements speak
only as of the date they were made, and we undertake no obligation to update publicly or revise any
forward-looking statements because of new information, future events or otherwise. In light of these
risks and uncertainties, the forward-looking information, events and circumstances discussed in this
offering memorandum might not occur. Any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Our actual results and performance could differ
substantially from those anticipated in our forward-looking statements, as a result of various factors.
1
Presentation of financial information
We prepare our financial statements using accounting practices in accordance with Law No. 6,404 of
December 15, 1976, as amended, or the Brazilian corporation law, and the standards and procedures
established by the CVM. Our financial statements are presented to comply with Articles 4 and 5 of Law
No. 9,249, of December 26, 1995, which eliminated monetary correction of financial statements starting
on January 1, 1996. We refer to these accounting practices, standards and procedures as Brazilian
generally accepted accounting principles, or Brazilian GAAP. Brazilian GAAP differs in significant
respects from generally accepted accounting principles in the United States, or U.S. GAAP. For a
discussion of these differences, please see note 23 to our audited consolidated financial statements
included in this offering memorandum.
The following financial statements are included in this offering memorandum:
➤
the audited consolidated financial statements of Natura Cosméticos S.A., our company, as of
December 31, 2003 and 2002 and for the three years in the period ended December 31, 2003;
➤
the audited consolidated financial statements of Natura Empreendimentos S.A., or Natura
Empreendimentos, our former parent company, as of and for the years ended December 31, 2003 and
2002 and as of and for the years ended December 31, 2002 and 2001; and
➤
the unaudited consolidated financial statements of Natura Cosméticos S.A. as of March 31, 2004 and
for the three-month periods ended March 31, 2004 and 2003, which have been the subject of a limited
review by Deloitte Touche Tohmatsu Auditores Independentes.
Deloitte Touche Tohmatsu Auditores Independentes issued an audit report for the audited consolidated
financial statements of our company at December 31, 2003 and 2002 and for the three years in the
period ended December 31, 2003 that contains an exception to the effect that the presentation and
treatment of net foreign exchange loss for 2001 was not in accordance with Brazilian GAAP. The audit
report explains that, as permitted by CVM Resolution No. 409/01 and Law No. 10,305/01, we exercised
the option to record in deferred assets the net foreign exchange losses incurred as a result of the
adjustment of assets and liabilities denominated in foreign currency for the year ended December 31,
2001. Brazilian GAAP requires the recognition of foreign exchange gains and losses in income in the
period in which they occur. Accordingly, for the year ended December 31, 2002, net income is
understated by R$7.6 million, and for the year ended December 31, 2001, net income, assets and
shareholders’ equity are overstated by R$11.4 million. In 2003, we amortized the remaining balance of
this deferred asset. The audited consolidated financial statements of Natura Empreendimentos as of and
for the years ended December 31, 2003 and 2002 and as of and for the years ended December 31, 2002
and 2001 contain similar exceptions with respect to the years ended December 31, 2001 and 2002.
On March 5, 2004, Natura Cosméticos S.A., or Natura Cosméticos, merged with its direct and indirect
parent companies Natura Empreendimentos and Natura Participações S.A., or Natura Participações, in
two sequential transactions (incorporações de empresas under Brazilian law) in which Natura
Cosméticos was the surviving company. Although Natura Cosméticos is the issuer of the common shares
offered in this offering, we are also including financial statements of Natura Empreendimentos in this
offering memorandum because the business of our company after the reorganization is substantially
similar to that of Natura Empreendimentos before the reorganization. We have substituted Natura
Empreendimentos as the holding company for all the operating companies of the Natura group while
continuing to be responsible for the same operations for which we were responsible before the
reorganization. We explain the reorganization in more detail in “Management’s discussion and analysis
2
Presentation of financial information
of financial condition and results of operations—Overview—Recent corporate reorganization” and
“Description of our business—History,” and we include charts in “Description of our business—
History” showing our corporate structure before and after the reorganization.
Our audited consolidated financial statements are similar in most respects to those historically published
by Natura Empreendimentos included in this offering memorandum, and we have highlighted the
principal differences between our financial statements and those of Natura Empreendimentos in
“Management’s discussion and analysis of financial condition and results of operations—Principal
differences between the financial statements of Natura Cosméticos and Natura Empreendimentos.”
The comparability of our financial statements for the year ended December 31, 2001 to those for the
years ended December 31, 2002 and 2003 is limited because of corporate transactions we undertook in
2001. The comparability of our financial statements for the three months ended March 31, 2004 to those
for the three months ended March 31, 2003 is limited because of the corporate reorganization we
describe in the preceding paragraphs. See “Management’s discussion and analysis of financial condition
and results of operations—Limits on comparability of our financial statements.”
In this offering memorandum, the term “Brazil” refers to the Federative Republic of Brazil, and the
phrase “Brazilian government” refers to the federal government of Brazil. The term “Central Bank”
refers to the Central Bank of Brazil. The terms “U.S. dollar” and “U.S. dollars” and the symbol “US$”
refer to the legal currency of the United States. The terms “real” and “reais” and the symbol “R$” refer
to the legal currency of Brazil.
This offering memorandum contains translations of various real amounts into U.S. dollars at specified
rates solely for your convenience. You should not construe these translations as representations by us
that the real amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars
at the rates indicated. Unless otherwise indicated, we have translated the real amounts for the year ended
December 31, 2003 using a rate of R$2.8892 to US$1.00, the rate of exchange as of December 31, 2003
published by the Central Bank on its electronic information system, SISBACEN, using transaction
PTAX 800, option 5, and we have translated the real amounts for the three months ended March 31,
2004 using a rate of R$2.9086 to US$1.00, the rate of exchange as of March 31, 2004 published by the
Central Bank on its electronic information system, SISBACEN, using transaction PTAX 800, option 5.
3
Summary
This summary highlights information contained elsewhere in this offering memorandum. This summary
does not contain all of the information you should consider before investing in our common shares. You
should read this entire offering memorandum carefully, especially the risks of investing in our common
shares discussed under “Risk factors” beginning on page 17 and our consolidated financial statements
and related notes beginning on page F-1 before investing in our common shares.
THE COMPANY
We are a leading Brazilian cosmetics company and we distribute our products principally through direct
sales by independent sales representatives. We believe our distinctive corporate culture, which values our
relationships with consumers of our products, our independent sales representatives, our suppliers and
others, has been fundamental to our growth. We are an integrated developer, manufacturer, distributor
and seller of cosmetics, fragrances and toiletries, and our brand is one of the most recognized brands of
cosmetics, fragrances and toiletries in Brazil. We produced over 130 million individual items in 2003,
and we offer consumers a portfolio of over 510 varieties of products. Our products reach consumers in
over 5,000 Brazilian municipalities through our network of approximately 355,000 independent sales
representatives at December 2003, who are not our employees. We also have operations in Argentina,
Chile and Peru, and we distribute our products in Bolivia through an independent distributor.
The following table sets forth, for the periods indicated, some of our principal consolidated financial and
operational indicators:
Year ended December 31,
2001
2002
2003
Compound
annual
%
Three months ended
growth
change
March
31,
rate,
first quarter
2001-2003
2003
2004
2003-2004
(R$ millions, except percentages and independent sales representative data)
Gross operating revenues ............... 1,168.0 1,411.2 1,910.1
27.9%
344.9
475.6
37.9%
Net operating revenues ..................
23.2%
239.9
329.2
37.2%
Income before subordinated
debenture participation and
taxes...........................................
Net income ....................................
Adjusted EBITDA(1) ......................
Independent sales representatives
in Brazil (thousands at period
end)(2)........................................
875.5
993.1 1,328.9
73.3
9.5
120.3
126.6
21.7
199.2
231.9
63.9
295.7
77.9%
159.4%
56.8%
25.8
5.0
43.9
72.8
44.7
82.3
181.8%
786.4%
87.5%
287
307
355
11.2%
304
357
17.4%
(1) Adjusted EBITDA is earnings before net financial expenses, income and social contribution taxes,
depreciation, amortization, participations of subordinated debentures and minority interest.
Adjusted EBITDA is not a Brazilian GAAP measurement, does not represent cash flow for the
periods presented and should not be considered an alternative to net income as an indicator of our
operating performance or as an alternative to cash flow as an indicator of liquidity. See
“Management’s discussion and analysis of financial condition and results of operations—Results of
Operations” for a reconciliation of adjusted EBITDA to net income.
(2) Excludes independent sales representatives who have not placed at least one order in the three
previous three-week marketing cycles.
4
We offer a full range of cosmetics, fragrances and toiletries for women and men regardless of age,
including skin care products for face and body, hair care and treatment products, make-up, fragrances,
bath products, sun protection products, oral hygiene products and product lines for children. Our
product lines include the following brands, whose strong concepts express the values associated with our
corporate brand:
➤
our Chronos line of facial skin treatment products, an important brand in the Brazilian market, uses
specific formulas for women of different ages. This product line is linked to a brand concept of
challenging stereotypes about beauty and affirming the beauty of each woman.
➤
our Natura Ekos line of bath products and fragrances is a pioneer in the sustainable use of active
ingredients obtained from Brazil’s biodiversity. This line includes the recently launched fragrances
Perfume do Brasil and Água de Banho.
➤
our Mamãe e Bebê line of personal care products is designed to meet the special needs of pregnant
women and their babies. This product line is linked to a brand concept of the importance of the
mother-child bond in the development of balanced, complete individuals.
We believe that our principles and vision have been important in the development of our company and in
the development of our strong reputation in our 35 years of operations in the Brazilian market:
➤
Our principles: Our purpose is to create and sell products that promote “bem-estar/estar bem.”
“Bem-estar” is the concept of a healthy relationship with oneself and one’s body. “Estar bem” is the
concept of rewarding, empathetic relationships with others and with nature.
➤
Our vision: Through our business practices, the quality of our products and the relationships we
establish, we seek to make Natura a brand ultimately recognized around the world and identified with
a community of people who are committed to building a better world.
We believe these distinct principles and vision help us attract and retain our extensive network of
independent sales representatives and promote a corporate culture that produces innovative marketing
concepts and products. In addition, we believe these principles and vision increase the attractiveness of
our products among consumers and will be important in this regard as we expand our operations in
other geographic markets.
We strive to be innovative in all our activities, including:
➤
in developing our products and concepts,
➤
in using resources from Brazilian biodiversity in our Natura Ekos product line, stimulating the
sustainable development of local communities,
➤
in using advertising to promote not only our products but also socially conscious values, and
➤
in cultivating the quality of our business relationships.
Our operations are centered at our facility in Cajamar in the State of São Paulo, including state-of-the-art
research and development, manufacturing, storage and order sourcing facilities. We also have
commercial and distribution facilities in Itapecerica da Serra in the State of São Paulo and in Uberlândia
and Matias Barbosa in the State of Minas Gerais.
Brazil is a significant market for cosmetics, fragrances and toiletries, representing approximately US$6.3
billion in sales in 2002, compared to approximately US$17 billion in sales in Latin America as a whole in
that year, according to Euromonitor International. Brazil is our home market, and we believe that our
proximity to other countries in Latin America and our competitiveness offer opportunities for expansion
5
of our international operations, which currently represent 2.5% of our gross operating revenues. In
addition, we plan to begin testing receptivity to our products in the European market by opening a retail
store in Paris between late 2004 and early 2005, where we intend to sell products from our Natura Ekos
line.
Our principal subsidiaries are shown below.
We have taken several steps to prepare our company to be publicly traded in Brazil. In 1999, we enhanced
our corporate governance by creating a board of directors that includes non-management members, an
Audit and Risk Management Committee and a Human Resources Committee, as described in
“Management.” We initially established these institutions at the level of our former parent company
Natura Participações and have maintained them following a recent corporate reorganization in which we
merged with our parent holding companies. Our commitment to transparency and accountability to
shareholders is evidenced and formalized by our application to list our common shares on the Novo
Mercado segment of BOVESPA. Listing on the Novo Mercado segment requires adherence to the highest
corporate governance standards for publicly traded companies in Brazil.
OUR STRENGTHS
We believe that the following characteristics will aid us in maintaining our competitiveness and working
toward our strategic objectives:
6
➤
Strong corporate reputation. We believe the quality of our relationships with our independent sales
representatives, our consumers, our employees, our suppliers, the communities where we are present
and the environment is one of our primary strengths. The high value we place on these relationships,
as well as our commitment to social responsibility and sustainable development, have contributed to
making our company one of the most admired cosmetics companies in Brazil. We believe this
significantly enhances the reputation of our brands and improves our ability to recruit and retain
creative, talented and committed independent sales representatives and employees. Independent
surveys have consistently ranked us among the best Brazilian companies for which to work.
➤
Quality concepts and products. We offer high-quality products linked to concepts that reflect our
values and transcend the functions of those products, increasing their attractiveness and encouraging
loyalty to the Natura brand. Our Chronos brand, for example, is a line of innovative skin treatment
products that use formulas that take into account the different stages of aging of the skin. We promote
Chronos using images of Truly Beautiful Women (Mulheres Bonitas de Verdade)—actual users of
Chronos, not professional models, whose ages are given in our marketing materials. Our Natura Ekos
brand is associated with the sustainable use of Brazilian biodiversity, reflecting and reinforcing our
company’s socially and environmentally responsible image. According to market research that we
commissioned in 2003 and that covered all Brazilian social classes, our corporate brand had the
highest overall rank among several competing brands in Brazil, based on a number of brand attributes
we identified as important to our business.
➤
Financial strength and consistent cash flow generation. Our financial performance has been
consistent, enabling us to rely primarily on cash flow from operations to grow our business. We have
limited debt, as evidenced by our total loans and financing and provisions for losses on derivative
contracts, which, at March 31, 2004, exceeded by only R$21.5 million our consolidated cash and
banks and cash equivalents. Our consolidated net income was R$9.5 million in 2001, R$21.7 million
in 2002 and R$63.9 million in 2003. Our consolidated net income was R$44.7 million in the first
quarter of 2004, compared to R$5.0 million in the first quarter of 2003. Our adjusted EBITDA
(earnings before net financial expenses, income and social contribution taxes, depreciation,
amortization, participations of subordinated debentures and minority interest) was R$120.3 million in
2001, R$199.2 million in 2002 and R$295.7 million in 2003. Our adjusted EBITDA was R$82.5
million in the first quarter of 2004, compared to R$43.8 million in the first quarter of 2003. For a
reconciliation of adjusted EBITDA to net income, see “Management’s discussion and analysis of
financial condition and results of operations—Results of operations.”
➤
Ability to grow even in difficult economic circumstances. Our consolidated gross operating revenues
from the Brazilian market grew from R$1,140.3 million in 2001 to R$1,376.2 million in 2002 and
R$1,862.2 million in 2003, or 63% in two years, despite low economic growth rates during the period.
In Latin America, our consolidated gross operating revenues from outside Brazil grew from R$27.7
million in 2001 to R$35.0 million in 2002 and R$47.9 million in 2003, or 73% from 2001 to 2003,
despite the crisis in Argentina and the global economic downturn during that period. We believe that any
improvement in the macroeconomic environment in Brazil in 2004 would provide further opportunities
for us to grow.
➤
Focus on product innovation. We believe that the successful launch of our Chronos, Natura Ekos,
Vitaplant, Hidraplant, Tododia and other product lines demonstrates our skill in developing
innovative products and concepts. Our revenues from products that we consider innovative that were
launched in the previous 24 months represented 37.4% of our gross operating revenues in 2003, an
increase from 29.2% in 2002 and 28.6% in 2001. Our ability to continually refresh our portfolio with
these new products is a key feature of our strategy.
➤
Extensive and growing distribution network. Our direct sales network is the second largest in Brazil,
and we believe it is among the most productive in terms of sales per independent sales representative.
Productivity of our independent sales representatives who placed at least one order in the previous
three-week marketing cycle exceeded by more than 80% the average productivity of the rest of the
direct sales industry in Brazil in 2003, based on industry figures published by the Brazilian Association
of Direct Sales Companies. Our network in Brazil grew to approximately 355,000 independent sales
representatives at December 2003 who placed at least one order in the previous three full three-week
marketing cycles, compared to approximately 307,000 independent sales representatives at December
2002 and 286,600 independent sales representatives at December 2001. Our independent sales
representatives are independent contractors and are not our employees.
7
As direct sellers, we do not depend for distribution on large retailers with greater bargaining power,
and the structure of our direct sales network minimizes the effects of the loss of any one independent
sales representative. We believe we have distinctive expertise in recruiting, training and retaining
independent sales representatives that has enabled us to grow consistently throughout our history.
Because of the integration of our logistics and distribution operations without a dependence on large
retailers and wholesalers, we have greater autonomy in conducting our business than cosmetics
producers that sell their products through retailers.
➤
Efficient logistics. Our efficient logistics system in Cajamar enabled us to receive and process an
average of over 20,000 orders per day in 2003 and to ship products to over 5,000 municipalities in
Brazil. In 2003, approximately 98% of our orders were shipped within 24 hours after they were placed.
Our highly flexible ordering system permits our independent sales representatives to place orders on any
day of the week through our call center and twenty-four hours a day through the Internet.
➤
Recent infrastructure improvements with modular expansion capabilities. We recently invested
approximately R$200 million to build a state-of-the-art integrated development, manufacturing and
distribution site in Cajamar, which includes automated order sourcing and inventory management
systems. Our facilities in Cajamar, which were inaugurated in 2001, are designed to permit modular
expansion of our production lines so that we can add significantly to our sales volume without
requiring large incremental capital expenditures.
OUR STRATEGY
Our objective is for our consumers, independent sales representatives, employees, suppliers, shareholders
and other business partners to view our brand and our products as synonymous with quality, integrity,
innovation and socially conscious business practices. We are engaged in a permanent process of building
our brand as we continue to attain financial, social and environmental goals.
The following are the key elements of our strategy:
8
➤
Growth in the Brazilian market. We believe that the strength of our brand, the quality of our
relationships with our independent sales representatives and the differentiating characteristics of our
products place us in a favorable position to take advantage of what we believe to be the growth
potential of the Brazilian cosmetics market. The Brazilian market will continue to be the primary focus
of our expansion efforts.
➤
Growth elsewhere in the Latin American market. We believe that the widespread acceptance of
direct sales as a way to purchase cosmetics in Latin America, the increasing integration of Brazil with
other Latin American countries and our favorable growth rates in recent years in the Argentine,
Chilean and Peruvian markets offers expansion opportunities in Latin America outside Brazil over the
next decade.
➤
Growth of our network of independent sales representatives. We intend to provide our independent
sale representatives with opportunities for personal and professional development and economic
improvement and to continue to invest in training and relationship-building programs for our
independent sales representatives. We aim to maintain our emphasis on the value of our independent
sales representatives’ work and to encourage their sense of being part of a community committed to
the improvement of society. By pursuing these objectives, we believe we can grow our network and
maintain robust retention and attraction rates for independent sales representatives.
➤
Continuous refreshing of our portfolio. We believe that generating innovative products that express our
values and expand our product portfolio is important to our brand image, competitiveness and growth. We
will continue to invest in research, strengthening our commitment to the sustainable use of Brazil’s
biodiversity. At the same time, we intend to continue to expand our product offering at competitive prices,
where we can do so while maintaining our overall margins and the strength of our brands.
➤
Investments in operating efficiency. We are focused on continuing to obtain gains in operating
efficiency, both from our current infrastructure and increases in scale in the following years to help us
generate savings to support our strategy.
Our principal executive office is located at Rodovia Régis Bittencourt, s/n°, km 293, Bairro Potuverá,
Edifício I, Itapecerica da Serra, São Paulo, Brazil, and our telephone number is 011-55-11-4446-2701.
9
The offering
Securities offered ....................................................
A total of 18,582,856 common shares are being
offered by our selling shareholders:
➤ to the public in Brazil in reliance on
Regulation S;
➤ to institutions and investors outside the United
States and Brazil, in reliance on Regulation S;
and
➤ to qualified institutional buyers in the United
States in reliance on Rule 144A.
Selling shareholders ................................................
➤
Antonio Luiz da Cunha Seabra;
➤ Guilherme Peirão Leal;
➤ Pedro Luiz Barreiros Passos;
➤ Anizio Pinotti;
➤ Ronuel Macedo de Mattos; and
➤
BNDES Participações S.A. – BNDESPAR.
The 2,172,550 shares being sold by BNDESPAR
will be offered only in Brazil to Brazilian persons.
Our capital stock and shares outstanding after the
offering ..................................................................
Trading, settlement and clearance...........................
Our capital stock is divided into 85,438,611 shares
of common stock. Each share of common stock
represents the same rights and economic interest.
See “Description of capital stock.” Our
outstanding capital stock will not change after this
offering.
Payment for our common shares will be required
to be made to the selling shareholders in reais
through the facility of the CBLC, and the selling
shareholders expect our common shares to be
delivered through the facility of the CBLC on
May 28, 2004, the third business day after
May 25, 2004, the date of publication of the
offering in Brazil.
We expect our common shares to begin trading on
BOVESPA on May 26, 2004. Trades in our
common shares in BOVESPA will settle through
the facility of the CBLC.
Over-allotment option ............................................
10
The selling shareholders, other than BNDESPAR,
have granted Banco UBS S.A., Banco Itaú BBA S.A.
and Banco Pactual S.A. an option for a period of
30 days after the date of the final offering
memorandum relating to this offering to place up
to an additional 2,461,545 common shares to
cover over-allotments.
Transfer restrictions ...............................................
Our common shares have not been registered
under the Securities Act and are subject to U.S.
restrictions on transfers described in “Notice to
investors.” Transfers of common shares, including
by and between residents of jurisdictions outside
Brazil, may be effected only in Brazil. See
“Trading, settlement and clearance—Investment in
our common shares in Brazil by non-residents of
Brazil.”
Lock-up agreements................................................
We, the selling shareholders other than
BNDESPAR, other shareholders controlled by the
selling shareholders, other than BNDESPAR, and
each of our other directors and officers have agreed,
subject to certain exceptions, not to issue or
transfer, until 180 days after the date of this
offering memorandum, any common shares or any
options or warrants to purchase any common
shares, or any securities convertible into, or
exchangeable for, or that represent the right to
receive, common shares of our company.
BNDESPAR has agreed, subject to certain
exceptions, not to transfer, until 90 days after the
date of this offering memorandum, any common
shares of our company, or any securities convertible
into, or exchangeable for, or that represent the right
to receive, common shares of our company.
See “Plan of distribution—Shares eligible for future
sale.”
Agents ....................................................................
Each underwriter has appointed its U.S. brokerdealer subsidiary to act as its respective agent to
facilitate the placement of our common shares
outside of Brazil. See “Plan of distribution.”
Risk factors ............................................................
See “Risk factors” beginning on page 17 and the
other information included in this offering
memorandum for a discussion of factors you
should consider before deciding to invest in our
common shares.
Use of proceeds ......................................................
Because the offering described in this offering
memorandum will be a secondary offering of our
common shares by the selling shareholders, we will
not receive any proceeds from this offering.
Listing ....................................................................
Our common shares have been approved for listing
and trading on the Novo Mercado segment of
BOVESPA under the symbol “NATU3.”
11
Summary financial information
The summary consolidated financial information as of and for the years ended December 31, 2001, 2002
and 2003 is derived from our audited consolidated financial statements audited by Deloitte Touche
Tohmatsu Auditores Independentes, included elsewhere in this offering memorandum, prepared in
accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. For a discussion
of these differences and a reconciliation between Brazilian GAAP and U.S. GAAP, see note 23 to our
audited consolidated financial statements included in this offering memorandum.
The summary consolidated financial information as of and for the three months ended March 31, 2003
and March 31, 2004 is prepared in accordance with Brazilian GAAP and is derived from our unaudited
consolidated financial statements included elsewhere in this offering memorandum, which have been
subject of a limited review by Deloitte Touche Tohmatsu Auditores Independentes and, in the opinion of
management, reflect a fair presentation of the results for such periods.
You should read the information below in conjunction with our consolidated financial statements and
the notes thereto included elsewhere in this offering memorandum, as well as “Management’s discussion
and analysis of financial condition and results of operations.”
years ended December 31, 2002 and 2003 is limited because of corporate reorganizations we undertook
in 2001. The comparability of our financial statements for the three months ended March 31, 2004 to
those for the three months ended March 31, 2003 is limited because of a corporate reorganization we
undertook in March 2004. See “Management’s discussion and analysis of financial condition and results
of operations—Limits on comparability of our financial statements” and “Description of our business—
History.”
12
Statements of income
2001
2002
2003
2003(1)
(R$ millions)
(US$
millions)
Three months
ended March 31,
2003
2004
2004(2)
(R$ millions)
(US$
millions)
Brazilian GAAP
Gross operating revenues......................... 1,168.0 1,411.2 1,910.1 661.1 344.9 475.7 163.5
Taxes on sales, returns and rebates... (292.5) (418.0) (581.2) (201.2) (105.0) (146.5) (50.4)
Net operating revenues............................
875.5
993.1 1,328.9 460.0 239.9 329.2 113.2
Cost of sales ............................................
Gross profit .............................................
Operating expenses:
Selling expenses................................
General and administrative
expenses .......................................
Employee profit sharing ...................
Management compensation..............
Equity in subsidiaries .......................
Income from operations before financial
(expenses) income ................................
Financial expenses............................
Financial income ..............................
Income from operations ..........................
(377.0) (345.3) (458.4) (158.7) (88.7) (108.4)
498.6
647.8
870.5 301.3 151.2 220.8
(37.3)
75.9
(275.0) (321.9) (403.0) (139.5)
(78.7) (103.9)
(35.7)
(105.1) (146.1) (182.9)
(8.7)
(11.5)
(20.5)
(2.0)
(2.8)
(3.6)
—
—
—
(63.3)
(7.1)
(1.2)
—
(29.8)
(3.8)
(1.3)
—
(37.0)
(4.8)
(1.9)
—
(12.7)
(1.7)
(0.7)
—
260.5
90.2
37.6
73.1
25.1
(64.4)
34.3
230.4
(22.3)
11.9
79.7
(25.5)
14.9
27.0
(14.1)
13.1
72.1
(4.8)
4.5
24.8
107.8
165.5
(65.3) (134.0)
29.8
89.7
72.3
121.1
Nonoperating income..............................
1.0
5.5
1.5
0.5
(1.2)
0.7
0.2
Income before subordinated debenture
participation and taxes ........................
73.3
126.6
231.9
80.3
25.8
72.8
25.0
Participations of subordinated
debentures (3)...............................
Income before taxes.................................
(42.3)
31.1
(75.8) (127.7)
50.8
104.2
(44.2)
36.1
(15.8)
10.0
(7.2)
65.6
(2.5)
22.6
Income and social contribution
taxes .............................................
Net income before minority interest ........
(21.9)
9.2
(29.1)
21.7
(40.4)
63.8
(14.0)
22.1
(5.0)
5.0
(20.9)
44.7
(7.2)
15.4
Minority interest ..............................
Net income..............................................
0.3
9.5
—
21.7
0.1
63.9
—
22.1
—
5.0
—
44.7
—
15.4
6.2
80.4
27.8
U.S. GAAP
Net income..............................................
(1) Translated solely for the convenience of the reader into U.S. dollars using a rate of R$2.8892 to
US$1.00, the rate of exchange as of December 31, 2003 published by the Central Bank on its
electronic information system, SISBACEN, using transaction PTAX 800, option 5.
US$1.00, the rate of exchange as of March 31, 2004 published by the Central Bank on its electronic
information system, SISBACEN, using transaction PTAX 800, option 5.
(3) We redeemed these subordinated debentures on March 2, 2004. The former holders of the
subordinated debentures made a capital contribution to our company in the form of the credits they
obtained from the redemption of the subordinated debentures and from the net remuneration on the
subordinated debentures through January 31, 2004 and received common shares in return.
13
Balance sheet data
2001
2002
2003
2003(1)
(R$ millions)
Three months
ended March 31,
2004
2004(2)
(US$
millions)
(R$ millions)
(US$
millions)
Brazilian GAAP
Cash and banks and cash equivalents..................
58.1
57.4
Other current assets ............................................ 211.7 288.2
Noncurrent assets ...............................................
46.2
29.3
Property, plant and equipment............................ 265.6 262.0
Other permanent assets.......................................
18.3
9.7
Total assets......................................................... 599.9 646.6
136.1
301.5
29.8
253.7
2.8
723.9
47.1
104.4
10.3
87.8
1.0
250.6
122.2
306.8
32.4
256.5
2.7
720.7
42.0
105.5
11.1
88.2
0.9
247.8
Short-term loans and financing ...........................
Other current liabilities.......................................
Long-term loans and financing ...........................
Subordinated debentures payable(3) ...................
Other long-term liabilities...................................
Minority interest.................................................
Shareholders’ equity............................................
Total liabilities and shareholders’ equity .............
75.1
333.6
33.0
130.7
30.2
—
121.3
723.9
26.0
115.5
11.4
45.2
10.5
—
42.0
250.6
39.7
184.5
101.2
—
43.7
—
351.6
720.7
13.6
63.4
34.8
—
15.0
—
120.9
247.8
85.0 145.5
50.4
103.1
140.3
134.2
130.7
13.6
(0.2)
78.2
599.9
104.3
202.9
99.8
130.7
17.6
0.1
91.2
646.6
U.S. GAAP
Shareholders’ equity............................................
obtained from the redemption of the subordinated debentures and from the net remuneration
payments on the subordinated debentures through January 31, 2004 and received common shares in
return.
14
Other financial data
Adjusted EBITDA(3).......................................
Net loans and financing(4)..............................
2001
2002
2003
2003(1)
Three months
ended March 31,
2003
2004 2004(2)
(R$ millions)
(US$
millions)
(R$ millions)
(US$
millions)
120.3 199.2 295.7
205.0 119.1 (19.0)
102.3
(6.6)
43.9
82.3
n.b.(5) 21.5
28.3
7.4
operating performance or as an alternative to cash flow as an indicator of liquidity. Adjusted
EBITDA does not have a standardized meaning, and our definition of adjusted EBITDA may not be
comparable to EBITDA or adjusted EBITDA used by other companies. Although adjusted EBITDA
does not provide a Brazilian GAAP measure of operating cash flows, our management uses it to
measure our operating performance. In addition, we understand that certain investors and financial
analysts use EBITDA and adjusted EBITDA as indicators of a company’s operating performance
and/or cash flow.
We exclude participations of subordinated debentures in calculating adjusted EBITDA because
participations of subordinated debentures are payments to holders of the subordinated debentures of
a portion of our income before taxes. In addition, we redeemed the subordinated debentures in
March 2004, and the former holders of the subordinated debentures made a capital contribution to
our company in the form of the credits they obtained from the redemption of the subordinated
debentures and from the net remuneration on the subordinated debentures through January 31,
2004 and received common shares in return. As a result, in future periods, amounts that would have
been paid to holders of subordinated debentures will not be subtracted from income before taxes
and will be included in calculations of EBITDA. We also exclude minority interest in calculating
adjusted EBITDA because it is not an operating expense.
A reconciliation of adjusted EBITDA to net income is set forth below.
2001
2002
2003
Three months
ended March 31,
2003
2004
(R$ millions)
Adjusted EBITDA .................................................................
(ⳮ) Depreciation and amortization ...............................
(ⳮ) Net financial expenses ............................................
(ⳮ) Participations of subordinated debentures ..............
(ⳮ) Income and social contribution taxes ......................
(ⳮ) Minority interest.....................................................
Net income ...........................................................................
120.3
11.5
35.4
42.3
21.9
(0.3)
9.5
199.2
28.3
44.3
75.8
29.1
—
21.7
295.7
33.7
30.1
127.7
40.4
(0.1)
63.9
43.9
7.5
10.6
15.8
5.0
—
5.0
82.3
8.5
1.0
7.2
20.9
—
44.7
(footnotes on following page)
15
(4) Net loans and financing is total loans and financing plus provisions for losses on derivative contracts
minus cash and banks, cash equivalents and credits on derivative contracts, without considering the
subordinated debentures that were redeemed and the credits for which were capitalized on March 2,
2004.
(5) For a discussion of the average number for the period, please see “Management’s discussion and
analysis of financial condition and results of operations—Results of operations—Three months
ended March 31, 2004 compared to three months ended March 31, 2003—Operating expenses.”
2001
2002
2003
Productivity information
Number of available independent sales representatives
(thousands)(1) .......................................................................
Number of active independent sales representatives
(thousands)(2) .......................................................................
Number of active sales representatives in the market
(thousands)(3) .......................................................................
Number of active sales representatives in the market excluding
Natura (thousands) ...............................................................
Sales volume of Natura (R$ millions)(4) ...................................
Sales volume of the market (R$ millions)(5)..............................
Sales volume of the market excluding Natura (R$ millions) ......
Productivity of our active independent sales representatives
(annual R$ per active independent sales representative) ........
Productivity of active independent sales representatives in the
market excluding Natura (annual R$ per active independent
sales representative) ..............................................................
Natura’s productivity / Market productivity excluding
Natura ..................................................................................
287
307
355
A
189
211
248
B
1,099
1,169
1,252
C=B–A
D
E
F=E–D
910
1,603
5,956
4,353
957
1,904
6,896
4,992
1,004
2,587
8,160
5,573
D/A
8,478
9,004
10,425
F/C
4,784
5,214
5,553
1.8x
1.7x
1.9x
Note: All information contained in the table above relates to our operations in Brazil only.
(2) Excludes independent sales representatives who have not placed at least one order during the month
of December. This number is the average of the number of active independent sales representatives
at the end of the period and at the end of the immediately preceding period.
(3) Source: Brazilian Association of Direct Sales Companies.
(4) Sales volume is the estimated total revenue of our independent sales representatives in Brazil,
including their estimated margins but excluding amounts relating to marketing material (e.g.,
samples and kits) for independent sales representatives.
(5) Total sales volume in the Brazilian direct sales market, as calculated by the Brazilian Association of
Direct Sales Companies.
16
Risk factors
Before making an investment decision, you should carefully consider all the information set forth in this
offering memorandum, particularly the risks described below. Our business, financial condition and
results of operations may be materially adversely affected by any of these risks. The market price of our
common shares may decrease due to any of these risks, and you may lose all or part of your investment.
RISKS RELATING TO BRAZIL
The Brazilian government has exercised, and continues to exercise, significant
influence over the Brazilian economy. Brazilian political and economic conditions have
a direct impact on our business, operations and the market price of our common
shares.
In the past, the Brazilian economy has experienced unstable economic cycles, and the Brazilian
government has frequently intervened in the Brazilian economy and occasionally made drastic changes in
monetary, credit and other policies. To influence the course of Brazil’s economy, control inflation and
effect other policies, the Brazilian government has taken various actions, including using wage and price
controls, currency devaluations, capital controls, limits on imports and freezing of bank accounts. We
have no control over, and cannot predict, what measures or policies the Brazilian government may take
in the future. Our business, financial condition, results of operations and the market price of our
common shares may be adversely affected by changes in government policies, as well as general economic
factors, including, without limitation:
➤
fluctuations in exchange rates;
➤
inflation;
➤
exchange control policies;
➤
domestic economic growth;
➤
social instability;
➤
liquidity of domestic capital and lending markets;
➤
price instability;
➤
energy shortages;
➤
interest rates;
➤
tax policies; and
➤
other political, diplomatic, social and economic developments in or affecting Brazil.
Luiz Inácio Lula da Silva of the Workers’ Party, known as President Lula, took office as President of
Brazil on January 1, 2003. In the period leading up to and following President Lula’s election, there was
substantial uncertainty regarding the policies that the new government would pursue, including the
potential implementation of macroeconomic policies that differed significantly from those of the prior
administration. This uncertainty resulted in a loss of confidence in the Brazilian capital markets and a
34% devaluation of the real against the U.S. dollar between April 2002 and February 2003. While
President Lula’s government has adopted economic measures that are more conservative than expected
by some observers, there is no certainty that these economic stabilization policies will continue. We
cannot predict what future fiscal, monetary, social security and other policies will be adopted by
President Lula’s administration and whether these policies will result in adverse consequences to the
economy and to our business, results of operations or financial condition.
17
Risk factors
Inflation and certain government measures to curb inflation may have adverse effects
on the Brazilian economy, the Brazilian securities market, our business and operations
and the market price of our common shares.
Brazil has historically experienced extremely high rates of inflation. Inflation and some of the Brazilian
government’s measures taken in an attempt to curb inflation have had significant negative effects on the
Brazilian economy. Since the introduction of the real in 1994, Brazil’s inflation rate has been
substantially lower than in previous periods. However, inflationary pressures persist, and actions taken
in an effort to curb inflation, coupled with speculation about possible future governmental actions, have
contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market.
According to the Índice Geral de Preços-Mercado, or IGP-M, a general price inflation index, the
Brazilian general price inflation rates were 10.4%, 25.3% and 8.7% in 2001, 2002 and 2003,
respectively. According to the Índice Nacional de Preços ao Consumidor Ampliado (National Extended
Consumer Price Index, or IPCA), published by the IBGE—Instituto Brasileiro de Geografia e Estatística
(Brazilian Institute of Geography and Statistics, or IBGE), the Brazilian price inflation rates were 7.7%,
12.5% and 9.3% in 2001, 2002 and 2003, respectively.
Brazil may experience high levels of inflation in the future. Inflationary pressures may lead to further
government intervention in the economy, including the introduction of government policies that could
adversely affect our results of operations and consequently the market price of our common shares.
Exchange rate instability may adversely affect our financial condition and results of
operations.
The Brazilian currency has been devalued frequently over the past four decades. Throughout this period,
the Brazilian government has implemented various economic plans and used various exchange rate
policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of
adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a
floating exchange rate system. From time to time, there have been significant fluctuations in the exchange
rate between the Brazilian currency and the U.S. dollar and other currencies. For example, the real
devalued against the U.S. dollar by 8.5% in 2000, 15.7% in 2001 and 34.3% in 2002. In 2003, the real
appreciated 22.3% against the U.S. dollar.
Devaluation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil
by generally increasing the price of imported products and requiring recessionary government policies to
curb aggregate demand. On the other hand, appreciation of the real against the U.S. dollar may lead to a
deterioration of the country’s current account and the balance of payments, as well as to a dampening of
export-driven growth.
Also, approximately 30% of our cost of sales is linked to the exchange rates of foreign currencies. Of this
foreign currency-linked amount, approximately 17% represented costs of imports of raw materials and
approximately 83% represented costs of domestic raw materials that are partially linked to the real/U.S.
dollar exchange rate. To the extent that the value of the real decreases relative to the U.S. dollar, it
becomes more costly for us to purchase these raw materials, which could materially adversely affect our
business.
Developments and the perception of risks in other countries, especially emerging
market countries, may adversely affect the Brazilian economy, our business and the
market price of Brazilian securities, including our common shares.
The market for securities issued by Brazilian companies is influenced by economic and market conditions
in Brazil and, to varying degrees, market conditions in other Latin American and emerging market
18
Risk factors
countries. Although economic conditions are different in each country, the reaction of investors to
developments in one country may cause the capital markets in other countries to fluctuate. Developments
or economic conditions in other emerging market countries have at times significantly affected the
availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines
in the amount of foreign currency invested in Brazil.
For example, in 2001, after a prolonged recession, followed by political instability, Argentina announced
that it would no longer continue to service its public debt. The situation in Argentina has negatively
affected investors’ perceptions towards Brazilian securities. Each such economic or political crisis in Latin
America has a lasting impact on perceptions of the risk inherent in investing in the region, including
Brazil. This factor could adversely affect the trading price of our common shares and could also make it
more difficult for us to access the capital markets and finance our operations in the future on acceptable
terms or at all.
RISKS RELATING TO OUR BUSINESS
We may not be able to execute fully our business strategy.
Our ability to implement the key growth initiatives of our business strategy is dependent upon a number
of factors, including our ability to:
➤
protect and strengthen our brands and their association with personal well-being, quality relationships
and innovation;
➤
achieve sustainable rates of growth and profitability in our current markets and successfully identify
opportunities in new markets;
➤
maintain our retention rates for our independent sales representatives and expand our network of
independent sales representatives in Brazil and the rest of Latin America;
➤
successfully develop new product concepts, identify new ingredients and technologies and produce
products that respond to current trends; and
➤
invest in operating efficiency based on our current infrastructure.
We cannot assure you that any of these goals will be successfully and fully executed.
A critical element of our strategy is our ability to maintain close relationships with our independent sales
representatives. One of the ways we maintain these relationships is by continuing to refresh our product
portfolio with innovative and exciting products that will keep our independent sales representatives
interested in our company and able to benefit financially and personally from reselling those products to
end customers. If we fail accurately to interpret market trends, if any of our products has quality
problems, if our competitors have protected intellectual property that prevent us from offering products
that would otherwise prove popular or if regulatory requirements limit the raw materials or technologies
we can employ, we may have difficulty producing products that are attractive to our independent sales
representatives and end customers. Any such impact on our portfolio could adversely affect our results of
operations.
We face aggressive competition both in the direct sales segment and in the marketing
of the products in our portfolio generally.
We face competition in direct sales of our products from Avon Products Inc., or Avon, which has a
strong presence in Brazil and other countries in Latin America. Avon offers a broad portfolio of
cosmetics, fragrances and toiletries that compete across most of our product lines. Our penetration and
coverage of the regions where we operate are not as extensive as Avon’s, and there are consumers that do
not have easy access to one of our independent sales representatives.
19
Risk factors
In addition to Avon, we face significant competition against specific types of products from a variety of
Brazilian and multinational producers that sell through retailers and franchises.
On a global scale, some of our competitors have substantially greater financial and marketing resources,
larger customer bases and greater breadth of product offerings than we do. If we are unable to remain
competitive with these producers in the future, our market share may decrease and it may adversely
affect our results of operations. Also, marketing through direct sales does not allow immediate
purchasing or impulse buying, nor does it allow a brand to be displayed as frequently as in retail sales.
In addition, consumers’ buying decisions are affected by such factors as brand recognition, product
quality, product performance, pricing and subjective consumer tastes. If our advertising, promotional or
merchandising strategies are not successful, if we are unable to deliver new products that respond to
current tastes, or represent marketable technological breakthroughs, if we do not successfully manage the
timing of new product introductions or the profitability of these efforts or if for other reasons our
independent sales representatives or end customers perceive competitors’ products as having greater
appeal than ours, then our sales, profitability and results of operations may be adversely affected.
If we are unable to continue to recruit and retain independent sales representatives,
our sales will suffer.
Independent sales representatives are our main sales channel. Our products are sold by approximately
355,000 independent sales representatives in Brazil and 19,580 independent sales representatives outside
of Brazil. Independent sales representatives are independent contractors who purchase products directly
from us and resell them to their clients.
There is no exclusivity agreement between us and our independent sales representatives, and the
contracts with our independent sales representatives do not require any minimum time of association
with us. As a result, we must continuously invest in training, innovation, quality improvements and
marketing to maintain and increase the attractiveness of our products and stimulate the productivity of
our independent sales representatives in order to encourage their loyalty to our company. In addition, we
depend on a steadily increasing number of independent sales representatives to grow our business. Our
success in recruiting and retaining independent sales representatives depends on a number of factors,
including the following:
➤
our ability to maintain close, quality relationships with our independent sales representatives;
➤
our ability continually to provide innovative, exciting products that will keep our independent sales
representatives interested in our company;
➤
public perception of our corporate brand and the brands of our products;
➤
competition for independent sales representatives from other direct sales companies; and
➤
general economic and business conditions.
If we are unable to continue to recruit new independent sales representatives, our business may not grow,
and if we are unable to retain our existing independent sales representatives, our results of operations
will be adversely affected.
Any adverse determination of the legal status of our independent sales
representatives could negatively affect our results of operations.
Under current Brazilian law, our independent sales representatives are not our employees, and we are not
required to contribute to the Brazilian social security system and other benefit programs on their behalf.
However, the Brazilian government could enact legislation or promulgate regulations characterizing our
independent sales representatives as employees or otherwise requiring us to make social benefit payments
20
Risk factors
on their behalf. Any regulatory change requiring the establishment of an employee relationship with our
independent sales representatives, numerous adverse court decisions finding that an employee
relationship existed or the obligation to make social benefit payments on behalf of our independent sales
representatives would result in substantial contributions and incremental costs that could cause us to
have to restructure our operations. Any change in the structure of our operations might have an adverse
effect on our results of operations.
Changes in tax laws and regulations could force us to raise our prices.
The Brazilian government is engaged in broad tax reform that affects several taxes imposed at various
stages of our operations. On December 19, 2003, the Brazilian Congress approved the first portion of a tax
reform bill that provides, among other changes, for the extension for an additional period of four years
until 2007 of the Contribuição Provisória sobre Movimentação Financeira (Provisional Contribution on
Financial Transfers, or CPMF), a temporary levy on financial transactions, as well as for the unification of
state laws governing the Imposto sobre a Circulação de Mercadorias e Serviços (Tax on the Circulation of
Goods and Services, or ICMS), a state tax on merchandise and services, beginning in 2005. Additional tax
reform measures have been proposed and are still subject to debate and approval by the Brazilian Congress,
including the proposed creation of a value-added tax to replace the ICMS, the Imposto sobre Produtos
Industrializados (Tax on Industrial Products, or IPI) and the Imposto sobre Serviços (Tax on Services, or
ISS). We cannot predict whether the proposed tax reforms will be approved or what form they will take.
These or other changes to the tax laws could increase the taxes we are required to pay.
The Brazilian Congress also recently amended the legislation on the Contribuição Social Destinada ao
Financiamento da Seguridade Social (Social Contribution for the Financing of Social Security, or
COFINS), a social security contribution, increasing its rate from 3% to 7.6%. We expect that our
suppliers of products and services will generally increase their prices.
In addition, we believe we are at higher risk than many other industries of incurring greater tax burdens
because the Brazilian federal and state governments have often historically viewed products like
cosmetics, alcoholic beverages and cigarettes as non-essential goods subject to higher taxes.
Although we generally rely on increases in our productivity to avoid passing all of the increases in our
costs of production on to consumers, we may have to pass all or a significant portion of these cost
increases on in the form of price increases. Any resulting increases in our prices could affect the demand
for our products and could have a material adverse effect on our results of operations.
In addition to our own tax obligations, we are required to withhold and pay the ICMS tax on behalf of
our independent sales representatives based on the margins at which the independent sales
representatives offer our products estimated by each Brazilian state. The ICMS withholding tax is
reflected in the price at which we sell our products to the independent sales representatives. If any state
were to increase the estimated profit margin of our independent sales representatives, we would be
required to withhold additional amounts on our independent sales representatives’ behalf, and we might
be forced to pass all or a portion of those increases on in the form of price increases. If any such price
increases are sufficiently high, our independent sales representatives may no longer find reselling our
products profitable. Any resulting impact on the rate of retention of our independent sales
representatives could adversely affect our results of operations.
Adverse decisions in one or more of the tax lawsuits to which we are party could
adversely affect our results of operations.
We were parties to 110 tax lawsuits at March 31, 2004, the total value of which was R$259.6 million.
We have established reserves on our balance sheet for R$29.9 million of this amount.
21
Risk factors
In particular, we are parties to one administrative proceeding in which R$33 million is at issue. This
proceeding relates to subordinated debentures we issued in 1998 that were fully subscribed by our
controlling shareholders. In 2003, the Brazilian tax authorities began an administrative proceeding
claiming that payments made in respect of our subordinated debentures were not deductible for income
and social contribution tax purposes for the fiscal year ended December 31, 1999. The tax authorities
based their claim on the fact that the debentures were subscribed by related parties, that the payments
therefore were not necessary and usual for our business and that the payments, consequently, were not
deductible in calculating income and social contribution taxes. We lost at the first hearing for this
proceeding and have appealed to the taxpayers’ council, a higher administrative body. We have made no
provision on our balance sheet for the amount at issue in this proceeding, and a final decision against us
would adversely affect us. In addition, the Brazilian tax authorities have not begun administrative
proceedings relating to any fiscal year after 1999, and we cannot predict whether they will do so in the
future. See “Description of our business—Legal proceedings.”
Changes in environmental laws and regulations may adversely affect our business.
Brazilian manufacturers, including us, are subject to stringent federal, state and local environmental laws
and regulations concerning, among other things, the disposal of solid waste and discharges into the water
supply, and we require permits from governmental agencies for some of our operations. If we violate or
fail to comply with these laws, regulations and permits, we could be fined or otherwise sanctioned, our
permits could be revoked or we could be subject to criminal sanctions (including members of our
management). We could also be responsible for substantial environmental remediation costs. Brazilian
governmental agencies or other authorities may also pass even more stringent new laws or regulations or
pursue stricter interpretations of existing laws and regulations requiring us to spend additional funds on
compliance with environmental rules and regulations. Any such actions by Brazilian governmental
agencies or other authorities could adversely affect our results of operations.
Changes in the legislation governing access to and the exploration of Brazil’s
biodiversity may affect our ability to develop new products.
Brazil’s current legal framework regarding biological diversity is still developing, and there is uncertainty
about many of its features. For a description of that legal framework, see “Description of our business—
Regulatory matters—Regulation of Brazilian biodiversity.” Particularly within our Natura Ekos line of
products, we increasingly use active ingredients extracted from Brazil’s biodiversity to enable us to
develop innovative and distinctive new products. This critical element of our strategy could be hindered
if any new legislation or regulations, or future interpretations of existing legislation and regulations, were
to place stricter controls on the use and exploration of Brazilian biodiversity. These factors could
negatively affect our results of operations and our image as a company that provides, among other
products, products developed based on resources from Brazilian biodiversity.
Any shifts in the soil underneath the vertical storage warehouse and order sourcing
line at our Cajamar facilities could require us to implement potentially costly
contingency measures.
During the construction of our manufacturing facilities in Cajamar in the State of São Paulo, we noticed
shifts in the foundations of our vertical storage warehouse and order sourcing line because of the
geological features of the underlying land. We store our inventory in our vertical storage warehouse, and
all products that we prepare for shipping pass through our order sourcing line. We could experience
similar shifts in the soil in the future. Because the automated systems in our warehouse and order
sourcing line are highly sensitive to changes in position, a sufficiently large shift in the soil in the future
could require us to make adjustments to those systems and could affect the efficiency of our product
22
Risk factors
delivery system. In such a case, we might have to incur costs to implement contingency measures, such as
hiring temporary workers to perform tasks usually performed by our automated systems until the
automated systems are fully operational again. These costs could negatively affect our results of
operations.
RISKS RELATING TO OUR COMMON SHARES
An active and liquid market for our common shares may not develop, which would
limit your ability to resell our common shares.
There is currently no public market for our common shares. We cannot predict the extent to which
investor interest in our company will lead to the development of a trading market for our common shares
on BOVESPA or how liquid that market might become.
The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile
than major securities markets in the United States. These features may substantially limit the ability to
sell our common shares at a price and time at which holders wish to do so. BOVESPA, on which our
common shares will be traded, had a market capitalization of US$210 billion as of April 30, 2004 and an
average monthly trading volume of approximately US$6.4 billion from January 2003 to April 2004. In
comparison, the New York Stock Exchange had a market capitalization of US$12.3 trillion as of
April 30, 2004 and an average monthly trading volume of approximately US$855.7 billion from January
2003 to April 2004.
There is also significantly greater concentration in the Brazilian securities market than in major securities
markets in the United States. The ten largest companies in terms of market capitalization represented
approximately 46% of the aggregate market capitalization of BOVESPA as of April 30, 2004. The top
ten stocks in terms of trading volume accounted for approximately 53% of all shares traded on
BOVESPA in April 2004.
The initial offering price for our common shares was determined after the completion of the book
building process and may not be indicative of prices that will prevail in the open market following this
offering.
Sales of a substantial number of our common shares after this offering may adversely
affect the price of our common shares, and the issuance of new shares will dilute all
other holdings.
Sales of a substantial number of shares of our common stock on BOVESPA following this offering, or the
perception that such sales could occur, could adversely affect the market price of our common shares.
Our controlling shareholders, who will hold 73.31% of our common shares after the completion of this
offering, assuming full exercise of the underwriters’ over-allotment option, are not subject to any
contractual or other restrictions on future sales of our common shares, except those described in
“Principal and selling shareholders—Shareholders’ agreement” and the short-term lock-up agreements
and other restrictions described in “Plan of distribution.”
We currently have 85,438,611 outstanding shares of common stock, of which the selling shareholders
are offering 18,582,856 shares in this offering, without considering any exercise of the underwriters’
over-allotment option, or 21,044,401 shares, assuming full exercise of the underwriters’ over-allotment
option. Our bylaws permit us to issue up to 2,823,414 common shares without further authorization
from our shareholders. Our controlling shareholders may also decide to authorize additional issuances of
common shares. Thus, we will have the ability to issue substantial amounts of common shares in the
future, which would dilute the ownership percentage held by investors who purchase our common shares
in this offering.
23
Risk factors
In addition, an exercise of outstanding stock options under our stock option plans for officers and other
eligible employees would have a dilutive effect on your ownership percentage.
The Brazilian government may impose exchange controls and significant restrictions
on remittances of reais abroad, which could adversely affect your ability to convert
and remit dividends, distributions or the proceeds from the sale of our common shares
and could reduce the market price of our common shares.
You may be adversely affected if the Brazilian government imposes restrictions on the remittance abroad
of the proceeds of investments in Brazil and the conversion of the real into foreign currencies. The
Brazilian government last imposed remittance restrictions for a brief period in 1989 and early 1990. We
cannot assure you that the government will not take similar measures in the future. Reimposition of such
restrictions would hinder or prevent your ability to convert dividends, distributions or the proceeds from
any sale of our common shares into U.S. dollars and to remit the U.S. dollars abroad. The imposition of
these restrictions would almost certainly have a material adverse effect on the market price of our
common shares.
Our board of directors may decide at any time to change our existing policy of paying
dividends.
Our existing policy of paying dividends and/or interest on capital and our historical payment of
dividends is no guarantee that we will pay dividends in the future. Our board of directors can change our
dividend policy by a simple majority vote, and you may not receive dividends or interest on capital in the
future.
Anti-takeover provisions of our bylaws could prevent or delay transactions that you
may favor.
Our bylaws contains provisions that have the effect of making more difficult attempts to acquire our
company without negotiating with our controlling shareholders. One of these provisions requires any
shareholder (other than our current controlling shareholders and other investors who become our
shareholders in certain transactions specified in our bylaws) that becomes the holder of 15% or more of
our capital stock to conduct a public tender offer in accordance with CVM regulations for our common
shares at a significant premium. Our bylaws contains further a limitation on acquisitions of our shares in
excess of 30% of our free float. These provisions may have anti-takeover effects and may discourage,
delay or prevent a merger or acquisition that our controlling shareholders consider unfavorable,
including transactions in which you might otherwise receive a premium for your shares.
We will continue to be controlled by our controlling shareholders, whose interests may
differ from those of our other shareholders.
Upon completion of this offering the selling shareholders, other than BNDESPAR, will own or control
shares representing, in the aggregate, 73.31% of our voting capital stock, assuming full exercise of the
underwriters’ over-allotment option. If the underwriters’ over-allotment option is not exercised, the
selling shareholders, other than BNDESPAR, will own or control shares representing, in the aggregate,
76.19% of our voting capital stock. These shares are subject to a shareholders’ agreement dated April
26, 2004, which requires the selling shareholders, other than BNDESPAR, to vote as a group with
respect to all matters submitted to our shareholders.
24
Risk factors
As long as the selling shareholders, other than BNDESPAR, continue to own or control a significant
block of voting rights, they will control us. This will enable them, without the consent of the other
shareholders, to:
➤
elect the majority of our board of directors and remove directors;
➤
control our management and policies;
➤
determine the outcome of most corporate transactions or other matters submitted to the shareholders
for approval, including mergers, amalgamations and the sale of all or substantially all of our assets;
and
➤
act in their own interest as controlling shareholders, which may conflict with or not be the same as the
interests of other shareholders.
We may need additional capital in the future, which may not be available to us. The
raising of additional capital may dilute your ownership in us.
We may need to raise additional funds through public or private debt or equity financings. Any
additional capital raised through the sale of equity may dilute your ownership percentage in us.
Furthermore, any additional financing we may need may not be available on terms favorable to us, or at
all.
It is expected that non-corporate United States shareholders will be ineligible for the
favorable United States federal income tax treatment that applies to dividend income
received from certain corporations.
Dividends received before January 1, 2009 by non-corporate United States shareholders on shares of
certain foreign corporations will be subject to United States federal income tax at lower rates than other
types of ordinary income if certain conditions are met. However, because our common shares are not
readily tradable on an established securities market in the United States and there is no income tax treaty
between Brazil and the United States, we currently do not expect that those conditions will be met. As a
result, distributions on our common shares paid out of our current or accumulated earnings and profits,
as determined under United States federal income tax principles, will generally be taxable as ordinary
income to United States shareholders and will not be entitled to a reduced rate of taxation. See
“Taxation—United States—Taxation of Dividends.”
25
Enforcement of judgments
We are incorporated under the laws of Brazil. All of our directors and officers named in this offering
memorandum reside in Brazil. Substantially all our assets and those of these other persons are located in
Brazil. As a result, you may not be able to effect service of process upon us or these other persons within
the United States or to enforce against us or these other persons judgments obtained in U.S. courts
predicated upon the civil liability provisions of the federal securities laws of the United States.
Judgments of United States courts for civil liabilities based on the federal securities laws of the United
States may, subject to the requirements described below, be enforced in Brazil. A judgment obtained
outside Brazil against us or our directors and officers named in this offering memorandum will be
enforceable in Brazil without reconsideration of the merits upon confirmation of that judgment by the
Brazilian Federal Supreme Court. That confirmation will occur if the foreign judgment:
➤
fulfills all formalities required for its enforceability under the laws of the country where the foreign
judgment is granted;
➤
is for a payment of a certain sum of money;
➤
is issued by a competent court after proper service of process is made or after sufficient evidence of the
party’s absence has been given in accordance with Brazilian law;
➤
is not subject to appeal;
➤
is authenticated by a Brazilian consular office in the country where the foreign judgment is issued and
is accompanied by a sworn translation into Portuguese; and
➤
is not contrary to Brazilian national sovereignty, public policy or public morality.
Notwithstanding the foregoing, we cannot assure you that confirmation will be obtained, that the
process described above will be conducted in a timely manner or that Brazilian courts will enforce a
monetary judgment for violation of the U.S. securities laws with respect to our common shares.
In addition:
➤
original actions based on the federal securities laws of the United States may be brought in Brazilian
courts and, subject to applicable law, Brazilian courts may enforce liabilities in such actions against us,
our directors and our executive officers named in this offering memorandum; and
➤
the ability of a judgment creditor to satisfy a judgment by attaching certain assets of ours is limited by
provisions of Brazilian law.
A plaintiff, whether Brazilian or non-Brazilian, who resides outside Brazil during the course of litigation
in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real
property in Brazil that could secure that payment. The bond must have a value sufficient to satisfy the
payment of court fees and the defendant’s attorneys’ fees, as determined by a Brazilian judge.
26
Exchange rate information
There are two legal foreign exchange markets in Brazil:
➤
the commercial rate exchange market; and
➤
the floating rate exchange market.
Each of these markets is separately regulated. Most trade and financial foreign-exchange transactions are
carried out on the commercial rate exchange market. These transactions include the purchase and sale of
ordinary shares and the payment of dividends and other distributions with respect to them.
Foreign currencies may be purchased only through a Brazilian bank authorized to operate in these
markets. In 1999, the Brazilian government unified operational limits imposed on Brazilian banks with
respect to both markets, which caused a reduction in the difference between their respective rates. In
both markets, rates are still freely negotiated but may be strongly influenced by Central Bank
intervention.
From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the real
against the U.S. dollar under an exchange rate policy that established a band within which the real/U.S.
dollar exchange rate could fluctuate. Responding to pressure on the real, on January 13, 1999, the
Central Bank widened the foreign exchange rate band. Because the pressure did not ease, on January 15,
1999, the Central Bank abolished the band system and allowed the real to float freely.
Since the beginning of 2001, the Brazilian exchange market has been increasingly volatile, and, until
early 2003, the value of the real declined relative to the U.S. dollar, primarily due to financial and
political instability in Brazil and Argentina. Although the Central Bank has intervened occasionally to
control unstable movements in the foreign exchange rates, the exchange market may continue to be
volatile as a result of this instability or other factors, and, therefore, the real may substantially decline or
appreciate in value in relation to the U.S. dollar in the future.
The tables below show the commercial selling rates in reais for U.S. dollars for the periods indicated, as
published by the Central Bank.
1999 ...........................................................................................................
2000 ...........................................................................................................
2001 ...........................................................................................................
2002 ...........................................................................................................
2003 ...........................................................................................................
2004 (through May 24, 2004) ....................................................................
Reais per US$1.00
Average(1)
High
Low
1.8169
1.8295
2.3522
2.9309
3.0715
2.9285
2.1647
1.9847
2.8007
3.9552
3.6623
3.2051
1.2095
1.7234
1.9357
2.2709
2.8219
2.8022
27
Exchange rate information
Last six months
November 2003..........................................................................................
December 2003...........................................................................................
January 2004 ..............................................................................................
February 2004 ............................................................................................
March 2004................................................................................................
April 2004 ..................................................................................................
May 2004 (through May 24, 2004) ............................................................
Reais per US$1.00
Average(1)
High
Low
2.9138
2.9253
2.8518
2.9303
2.9055
2.9060
3.0885
2.9546
2.9434
2.9409
2.9878
2.9410
2.9522
3.2051
2.8559
2.8883
2.8022
2.9042
2.8752
2.8743
2.9569
Source: U.S. dollar selling rate as published by the Central Bank on its electronic information system,
SISBACEN, using transaction PTAX 800 Option 5.
(1) The average of the exchange rates during the period.
On May 24, 2004, the commercial selling rate was R$3.1798 per US$1.00.
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares
on BOVESPA as well as the U.S. dollar equivalent of any distributions we make with respect to our
common shares, which will be made in reais. Exchange rate fluctuations may also affect our financial
condition. See “Risk factors—Risks related to Brazil—Exchange rate instability may adversely affect our
financial condition and results of operations.”
28
Use of proceeds
Because the offering described in this offering memorandum will be a secondary offering of our common
shares by the selling shareholders, we will not receive any proceeds from the offering. The selling
shareholders will receive all net proceeds from the sale of our common shares in this offering.
29
Capitalization
The following table sets forth our cash and banks, cash equivalents, short-term and long-term debt and
capitalization as of March 31, 2004. The information set forth in the table below is derived from our
unaudited consolidated financial statements as of and for the three months ended March 31, 2004
prepared in accordance with Brazilian GAAP. You should read this table in conjunction with “Selected
financial information,” “Management’s discussion and analysis of financial condition and results of
operations” and our unaudited consolidated financial statements included elsewhere in this offering
memorandum.
At March 31, 2004
(R$ millions)
Cash and banks and cash equivalents .............................................................................
122.2
Short-term debt:(1)(2)
Real-denominated(3)...............................................................................................
Foreign currency-denominated ................................................................................
20.1
0.0
Total short-term debt .......................................................................................
20.1
Long-term debt:(2)
0.9
0.5
Current portion of long-term debt....................................................................
1.4
55.0
29.1
Total long-term debt excluding current portion................................................
84.1
Total long-term debt ........................................................................................
85.5
Convertible debentures payable(4) .................................................................................
35.3
Shareholders’ equity:(5)
Capital(4)................................................................................................................
Capital reserves .......................................................................................................
Treasury shares .......................................................................................................
Profits reserves ........................................................................................................
Accumulated profits ................................................................................................
Total shareholders’ equity ................................................................................
196.4
110.7
(3.8)
3.6
44.7
351.6
Total capitalization (long-term debt (less current portion), convertible debentures
payable and shareholders’ equity) ...............................................................................
471.1
(1) Excludes current portion of long-term debt.
(2) A portion of our short-term debt and long-term debt is secured by property, plant and equipment or
promissory notes.
(3) Our real-denominated debt shown in the table above includes the portion of our financing from
BNDES that bears interest at the UMBNDES currency basket rate, a rate based on the average cost
incurred by BNDES to borrow in foreign currency. This portion represented 25.6% and 15.0% of
our total real-denominated indebtedness on December 31, 2003 and March 31, 2004, respectively.
(footnotes continued on following page)
30
Capitalization
For a description of this financing from BNDES please see “Management’s discussion and analysis
of financial condition and results of operations—Liquidity and capital resources—Debt.”
(4) On May 24, 2004, BNDESPAR converted all the convertible debentures of our company that it
held into 2,172,550 common shares, representing 2.54% of our capital stock. As a result, our
convertible debentures payable were reduced from R$35.3 million to R$0 and our capital stock
increased from R$196.4 million to R$230.8 million.
(5) For more information about shareholders’ equity, see note 4 to our unaudited consolidated financial
statements at March 31, 2004 and for the three months ended March 31, 2004 and 2003.
31
Dilution
We have stock option plans under which our board of directors may grant stock options to our executive
officers and certain other eligible employees of our company and of our subsidiaries, subject to the
aggregate limit of 3% of our common shares. At March 31, 2004, the total number of options
outstanding was 1,882,639, or 2.21% of our capital stock if all options were exercised, and these
options were held by approximately 53 persons. See “Management—Compensation.”
In the U.S. market, dilution is usually presented as the amount by which the offering price paid by the
purchasers of the common shares to be sold in this offering will exceed the net tangible book value per
common share of our capital stock after this offering. The net tangible book value per share is equal to
the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by
the number of common shares outstanding at April 30, 2004. Because the offering is entirely of
secondary shares (common shares already held by our existing shareholders before this offering), the
number of shares outstanding does not increase as a result of this offering. In addition, because the net
proceeds of this offering are paid entirely to the selling shareholders, the net tangible book value does not
increase as a result of this offering. Our net tangible book value as of December 31, 2003 was R$111.8
million, or R$1.34 per share. The offering price per share is R$36.50. This represents an immediate
dilution of R$35.16 per share in the value paid per share by new investors purchasing at the offering
price relative to the net tangible book value of our company. For additional information about our
intangible assets, see note 24(b) to our consolidated financial statements.
Brazilian market practice is to disclose shareholders’ equity per share, calculated as our shareholders’
equity at March 31, 2004 divided by 83,266,061, the total number of our common shares at March 31,
2004. At March 31, 2004, we had shareholders’ equity of R$351.6 million, or R$4.22 per share. This
calculation does not consider the effects of the conversion on May 24, 2004 of convertible debentures of
our company held by BNDESPAR. On May 24, 2004, BNDESPAR converted these debentures into
2,172,550 common shares of our company, representing 2.54% of our capital stock, subscribing for
these shares at an issue price of R$15.83 per share. See “Management’s discussion and analysis of
financial condition and results of operations—Liquidity and capital resources—Debt—BNDESPAR
debentures.”
The calculations above assume no exercise of outstanding options.
32
Dividends
The Brazilian corporation law and our bylaws require that we distribute annually to our shareholders a
mandatory minimum distribution, which we refer to as the mandatory distribution, equal to a minimum
percentage of our net income for the prior year, as that amount may be adjusted in certain circumstances
permitted by the Brazilian corporation law. The Brazilian corporation law requires that this minimum
percentage be at least 25%, and our bylaws establish the minimum percentage at 30%, as that amount
may be adjusted in accordance with the Brazilian corporation law. See “Description of capital stock—
Allocation of net income and distribution of dividends” for more information regarding the calculation
of the amount to be distributed to our shareholders. The mandatory distribution may be made in the
form of dividends or interest on capital, whose value, net of income tax payable on that amount by the
recipient, may be allocated to the mandatory distribution and deducted by us in calculating our income
and social contribution tax obligations.
The following table shows the amounts of dividends declared and interest on capital for the periods
indicated. These amounts do not necessarily represent actual cash payments since a portion of them were
made in the form of shareholder credits in certain fiscal years.
1999 2000 2001 2002 2003
(R$ millions)
Dividends declared .................................................................................. 52.7
Interest on capital.................................................................................... 11.5
4.5
6.5
3.0
0.0
5.4
3.9
23.7
10.1
However, the amounts shown in this table are not comparable to amounts that may be paid in future
periods because:
➤
on March 2, 2004, we redeemed outstanding debentures previously held by our controlling
shareholders in the aggregate principal amount of R$130.7 million. The former holders of the
debentures made a capital contribution to our company in the form of the credits obtained from the
redemption of the debentures and from the net remuneration on the debentures through January 31,
2004 and received common shares of our company in return, increasing our share capital by R$138.6
million and our capital reserves by R$100.0 million. In the future, profit sharing payments under the
debentures will no longer be payable, and the common shares received by the former holders of the
debentures will be entitled to a pro rata portion of any future dividends or interest on capital; and
➤
the amounts in this table reflect the amounts we paid to Natura Empreendimentos, our parent company
at the time, and do not reflect the corporate reorganization that occurred on March 5, 2004 described in
“Description of our business—History.” Natura Empreendimentos did not declare dividends in 2001 but
declared dividends and interest on capital of R$16.0 million and R$3.9 million, respectively, in 2002,
and declared dividends of R$64.6 million in 2003. However, these amounts should not be viewed as
indicative of amounts of dividends and/or interest on capital that we may pay in the future.
We intend to pay dividends and/or interest on capital net of income tax in the amount of approximately
45% of our net income for each fiscal year, as that amount may be adjusted in accordance with the
Brazilian corporation law. However, our board of directors may change this policy at any time in their
sole discretion by a simple majority vote, and we cannot guarantee that we will pay you any dividends or
shareholders’ equity in the future.
Although we intend to follow this dividend policy, you should be aware that the declaration of annual
dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of a
33
Dividends
majority of the holders of our common shares at a general shareholders’ meeting and will depend on
many factors. These factors include our results of operations, financial condition, cash requirements,
future prospects and other factors deemed relevant by our shareholders. As part of our tax planning, we
may in the future determine that it is to our benefit to distribute interest on capital.
Dividends received before January 1, 2009 by non-corporate United States shareholders on shares of
certain foreign corporations will be subject to United States federal income tax at lower rates than other
types of ordinary income if certain conditions are met. However, because our common shares are not
readily tradable on an established securities market in the United States and there is no income tax treaty
between Brazil and the United States, we currently do not expect that those conditions will be met. As a
result, distributions on our common shares paid out of our current or accumulated earnings and profits,
as determined under United States federal income tax principles, will generally be taxable as ordinary
income to United States shareholders and will not be entitled to a reduced rate of taxation. See
“Taxation—United States—Taxation of Dividends.”
34
Selected financial information
The following selected consolidated financial information as of and for the years ended December 31,
2001, 2002 and 2003 has been derived from our audited consolidated financial statements audited by
Deloitte Touche Tohmatsu Auditores Independentes, included elsewhere in this offering memorandum,
prepared in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. For a
discussion of these differences and a reconciliation between Brazilian GAAP and U.S. GAAP, please see
note 23 to our audited consolidated financial statements included in this offering memorandum.
The following selected consolidated financial information as of and for the three months ended March
31, 2003 and 2004 is prepared in accordance with Brazilian GAAP and is derived from our unaudited
consolidated financial statements included elsewhere in this offering memorandum, which have been
subject of a limited review by Deloitte Touche Tohmatsu Auditores Independentes and, in the opinion of
management, reflect a fair presentation of the results for such periods.
You should read the information below in conjunction with our consolidated financial statements and
the notes thereto included elsewhere in this offering memorandum, as well as “Management’s discussion
and analysis of financial condition and results of operations.”
years ended December 31, 2002 and 2003 is limited because of corporate transactions we undertook in
2001. The comparability of our financial statements for the three months ended March 31, 2004 to those
for the three months ended March 31, 2003 is limited because of a corporate reorganization we
undertook in March 2004. See “Management’s discussion and analysis of financial condition and results
of operations—Limits on comparability of our financial statements” and “Description of our business—
History.”
35
Statements of income
2001
2002
2003
2003(1)
(R$ millions)
(US$
millions)
Three months
ended March 31,
2003
2004
2004(2)
(R$ millions)
(US$
millions)
Brazilian GAAP
Gross operating revenues ................................ 1,168.0 1,411.2 1,910.1 661.1 344.9 475.7 163.5
Taxes on sales, returns and rebates.............. (292.5) (418.0) (581.2) (201.2) (105.0) (146.5) (50.4)
Net operating revenues ................................... 875.5 993.1 1,328.9 460.0 239.9 329.2 113.2
Cost of sales.................................................... (377.0) (345.3) (458.4) (158.7) (88.7) (108.4) (37.3)
Gross profit .................................................... 498.6 647.8 870.5 301.3 151.2 220.8 75.9
Operating expenses:
Selling expenses ........................................... (275.0) (321.9) (403.0) (139.5) (78.7) (103.9) (35.7)
General and administrative expenses ........... (105.1) (146.1) (182.9) (63.3) (29.8) (37.0) (12.7)
Employee profit sharing ..............................
(8.7) (11.5) (20.5) (7.1) (3.8) (4.8) (1.7)
Management compensation .........................
(2.0)
(2.8)
(3.6) (1.2) (1.3) (1.9) (0.7)
Equity in subsidiaries...................................
—
—
—
—
—
—
—
Income from operations before financial
(expenses) income........................................ 107.8 165.5 260.5
90.2
37.6 73.1 25.1
Financial expenses .......................................
Financial income .........................................
Income from operations ..................................
(65.3) (134.0)
29.8
89.7
72.3 121.1
(64.4) (22.3) (25.5) (14.1)
34.3
11.9
14.9 13.1
230.4
79.7
27.0 72.1
(4.8)
4.5
24.8
Nonoperating income .....................................
1.0
5.5
1.5
0.5
(1.2)
0.7
0.2
Income before subordinated debenture
participation and taxes ................................
73.3
126.6
231.9
80.3
25.8
72.8
25.0
debentures(3) ...........................................
Income before taxes ........................................
(42.3)
31.1
(75.8) (127.7) (44.2) (15.8)
50.8 104.2
36.1
10.0
(7.2)
65.6
(2.5)
22.6
Income and social contribution taxes...........
Net income before minority interest ................
(21.9)
9.2
(29.1)
21.7
(5.0) (20.9)
5.0 44.7
(7.2)
15.4
Minority interest .........................................
Net income .....................................................
0.3
9.5
—
21.7
0.1
63.9
—
22.1
—
5.0
—
15.4
6.2
80.4
27.8
U.S. GAAP
Net income .....................................................
(40.4) (14.0)
63.8
22.1
—
44.7
36
2001
2002
2003
2003(1)
Balance sheet data
(R$ millions)
Three months
ended March 31,
2004
2004(2)
(US$
millions)
(R$
millions)
(US$
millions)
Brazilian GAAP
Cash and banks and cash equivalents.......................
58.1
57.4
Other current assets ................................................. 211.7 288.2
Noncurrent assets ....................................................
46.2
29.3
Property, plant and equipment................................. 265.6 262.0
Other permanent assets............................................
18.3
9.7
Total assets .............................................................. 599.9 646.6
136.1
301.5
29.8
253.7
2.8
723.9
47.1
104.4
10.3
87.8
1.0
250.6
122.2
306.8
32.4
256.5
2.7
720.7
42.0
105.5
11.1
88.2
0.9
247.8
Short-term loans and financing ................................
Other current liabilities............................................
Long-term loans and financing.................................
Subordinated debentures payable(3) ........................
Other long-term liabilities........................................
Minority interest......................................................
Shareholders’ equity.................................................
Total liabilities and shareholders’ equity ..................
75.1
333.6
33.0
130.7
30.2
—
121.3
723.9
26.0
115.5
11.4
45.2
10.5
—
42.0
250.6
39.7
184.6
101.2
—
43.7
—
351.6
720.7
13.6
63.4
34.8
—
15.0
—
120.9
247.8
85.0 145.5
50.4
103.1
140.3
134.2
130.7
13.6
(0.2)
78.2
599.9
104.3
202.9
99.8
130.7
17.6
0.1
91.2
646.6
U.S. GAAP
Shareholders’ equity.................................................
Other financial data
2001
2002
2003
2003(1)
(R$ millions)
Adjusted EBITDA(3) ...................................... 120.3 199.2 295.7
Net loans and financing(4) ............................. 205.0 119.1 (19.0)
Three months
ended March 31,
2003
2004
2004(2)
(US$
millions)
(R$ millions)
(US$
millions)
102.3
(6.6)
43.9
82.3
n.b.(5) 21.5
28.3
7.4
(footnotes continued on following page)
37
and/or cash flow.
March 2004, and the former holders of the subordinated debentures made a capital contribution to
our company in the form of the credits they obtained from the redemption of the subordinated
debentures and from the net remuneration on the subordinated debentures through January 31,
2004 and received common shares in return. As a result, in future periods, amounts that would have
been paid to holders of subordinated debentures will not be subtracted from income before taxes
and will be included in calculations of EBITDA. We also exclude minority interest in calculating
adjusted EBITDA because it is not an operating expense.
Three months
Year ended December 31, ended March 31,
2001
2002
2003
2003
2004
(R$ millions)
Adjusted EBITDA ........................................................................ 120.3 199.2 295.7 43.9
(ⳮ) Depreciation and amortization.......................................
11.5
28.3
33.7
7.5
(ⳮ) Net financial expenses ...................................................
35.4
44.3
30.1 10.6
(ⳮ) Participations of subordinated debentures......................
42.3
75.8 127.7 15.8
(ⳮ) Income and social contribution taxes .............................
21.9
29.1
40.4
5.0
(ⳮ) Minority interest............................................................
(0.3)
—
(0.1) —
Net income ..................................................................................
9.5
21.7
63.9
5.0
82.3
8.5
1.0
7.2
20.9
—
44.7
(4) Net loans and financing is total loans and financing plus provisions for losses on derivative contracts
minus cash and banks, cash equivalents and credits on derivative contracts, without considering the
subordinated debentures that were redeemed and the credits for which were capitalized on March 2,
2004.
(5) For a discussion of the average number for the period, please see “Management’s discussion and
analysis of financial condition and results of operations—Results of operations—Three months
ended March 31, 2004 compared to three months ended March 31, 2003—Operating expenses.”
38
2001
2002
2003
Productivity information
(thousands)(1) .........................................................................
(thousands)(2) .........................................................................
(thousands)(3) .........................................................................
Natura (thousands)..................................................................
Sales volume of Natura (R$ millions)(4)......................................
Sales volume of the market (R$ millions)(5) ................................
Sales volume of the market excluding Natura (R$ millions) ........
Productivity of our active independent sales representatives
(annual R$ per active independent sales representative) ...........
sales representative) .................................................................
Natura’s productivity / Market productivity excluding Natura....
287
307
355
A
189
211
248
B
1,099
1,169
1,252
C=BⳮA
D
E
F=EⳮD
910
1,603
5,956
4,353
957
1,904
6,896
4,992
1,004
2,587
8,160
5,573
D/A
8,478
9,004
10,425
F/C
4,784 5,214
1.8x
1.7x
5,553
1.9x
Note: All information contained in the table above relates to our operations in Brazil only.
including their estimated margins but excluding amounts relating to marketing material (e.g.
39
Management’s discussion and analysis of financial condition
and results of operations
The following discussion should be read in conjunction with our consolidated financial statements and
the notes thereto, which are included elsewhere in this offering memorandum and have been prepared in
accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP.
OVERVIEW
We are the largest Brazilian-owned cosmetics company, and we distribute our products principally
through direct sales by independent sales representatives who have no employment relationship with us.
We are an integrated developer, manufacturer, distributor and seller of cosmetics, fragrances and toiletry
products, producing over 130 million individual items in 2003 and offering a portfolio of approximately
510 stock keeping units, or SKUs. A “stock keeping unit” is a measure used in our industry to count each
individual variety of a product. Our products reach end consumers in over 5,000 Brazilian municipalities
through our direct sales network of approximately 355,000 independent sales representatives at
December 2003. We believe that Brazil will remain our principal market. However, we intend to
continue our expansion efforts elsewhere in Latin America, building on our operations in Argentina,
Chile and Peru.
We also conduct our business through our subsidiaries. Natura Inovação e Tecnologia de Produtos Ltda.,
or Natura Inovação, which became our subsidiary in the corporate reorganization described in “—Recent
corporate reorganization,” is responsible for research and development of innovative products and
concepts. Indústria e Comércio de Cosméticos Natura Ltda., or Natura Indústria, manufactures our
products, and Natura Logística e Serviços Ltda., or Natura Logística, handles delivery of our products and
renders financial management and information technology services. Our operations in Argentina, Chile and
Peru are undertaken by our subsidiaries Natura Cosméticos S.A.—Argentina, Natura Cosméticos S.A.—
Chile and Natura Cosméticos S.A.—Peru. We also offer phytotherapeutic products through our indirect
subsidiary Flora Medicinal J. Monteiro da Silva Ltda. In addition to being the parent company of these
subsidiaries, our company, Natura Cosméticos, is responsible for marketing and distributing our products.
Prices and cosmetics industry conditions
Please see “Cosmetics, fragrances and toiletries industry,” for information about the global, Latin
American and Brazilian markets for cosmetics, fragrances and toiletries.
Prices in our industry have gradually increased over time, primarily due to (1) increases in costs of
production and (2) evolving demand for higher value-added products. Consistent gains in productivity in
the industry have enabled manufacturers to avoid passing on to consumers all their increases in costs. In
addition, increases in costs of raw materials are minimized due to the low level of concentration of
suppliers in the industry.
We expect that consumer prices will continue to increase gradually and that companies will continue to
use productivity gains to avoid passing on the full increase in costs to consumers.
Overview of Brazilian macroeconomic conditions
Except for the year 2000, the Brazilian economy has grown at a rate lower than two percent in each of
the last five years, and the economy contracted 0.2% in 2003. The Brazilian economy has been affected
by adverse factors, including:
➤
40
the 2001 energy crisis and the measures taken by the Brazilian government to reduce electricity
consumption;
Management’s discussion and analysis of financial condition and results of operations
➤
uncertainty about Brazil’s political and economic future in the period before and immediately after
Brazil’s presidential elections in October 2002;
➤
the continuing economic and political uncertainties in Argentina and Venezuela; and
➤
the recent global economic downturn, the impact of the war in Iraq and the weakness of the U.S.
dollar against other currencies.
The sharp devaluation of the real that occurred in the second half of 2002 heightened concerns over a
return to high inflation. The monetary authorities under the former government and the current
government acted quickly to increase interest rates through the end of 2002, which restricted credit
available to the economy and, consequently, its growth. In 2003, the depreciation of the U.S. dollar
against other currencies, as well as the conservative monetary and fiscal policies of the current
government, led to an appreciation of the real in relation to the U.S. dollar. See the table in the following
section for more information regarding recent inflation rates and real-U.S. dollar exchange rates.
Effects of exchange variations and inflation on results of operations and financial
condition
The table below shows Brazilian inflation as measured by the IPCA and IGP-M, the fluctuation of the
real against the U.S. dollar and the period-end and average daily exchange rates for the periods indicated.
1999
2000
2001
2002
2003
Inflation (IPCA)(1) ......................................................
8.9%
6.0%
7.7% 12.5%
9.3%
Inflation (IGP-M)(2) ....................................................
20.1% 10.0% 10.4% 25.3%
8.7%
Devaluation (appreciation) of the real vs. U.S. dollar...
32.4%
8.5% 15.7% 34.3% (22.3)%
Period-end exchange rate—US$1.00 ............................ R$1.79 R$1.96 R$2.33 R$3.53 R$ 2.90
Average (daily) exchange rate(3)—US$1.00................. R$1.82 R$1.83 R$2.35 R$2.92 R$ 3.08
(1) The IPCA is published by the IBGE and is the official consumer price index used by the Brazilian
government.
(2) The IGP-M is a broader index of inflation than the IPCA that gives varying weights to consumer
prices, wholesale prices and construction prices. The IGP-M is published by the Fundação Getúlio
Vargas (Getúlio Vargas Foundation), a private foundation.
(3) The average (daily) exchange rate is the sum of the daily exchange rates based on PTAX 800 Option
5, divided by the number of business days in the period.
Sources: IBGE, Fundação Getúlio Vargas and the Central Bank.
Our results of operations and financial condition, as reported in our financial statements, have been
affected by the rate of Brazilian inflation. Our costs and expenses are largely incurred in reais and are
adjusted when our suppliers and service providers adjust their prices. Our service providers generally use
the IPCA in adjusting their prices, and our suppliers generally use the IPCA, IGP-M and the variation in
certain commodity prices in adjusting their prices for inflation. Our gross operating revenues is also
partially affected by inflation because we have generally passed a portion of our increased costs on to
consumers through increases in prices. In recent years, economies of scale have enabled us to increase
individual product prices less than the inflation of our costs. We cannot predict whether these
productivity gains will continue or whether we will be able to pass the increases in costs on to consumers
in the future.
Our results of operations and financial condition are also affected by the real-U.S. dollar exchange rate
and, to a lesser degree, the real-euro exchange rate. In 2003, approximately 30% of our costs of sales
41
were linked to foreign currency exchange rates. Of this foreign currency-linked amount, approximately
17% represented costs of imports of raw materials (approximately 70% of which were in euros and 30%
of which were in U.S. dollars) and approximately 83% represented costs of domestic raw materials that
were partially tied to the real-U.S. dollar exchange rate. In addition, we had US$20.7 million in U.S.
dollar-denominated indebtedness at December 31, 2003 and US$10.1 million of U.S. dollar-denominated
indebtedness at March 31, 2004. In September 2001, we adopted a policy of minimizing our U.S. dollar
debt exposure through cashless swap transactions in which we swap liabilities denominated in U.S.
dollars for liabilities denominated in reais that bear interest at the Certificado Depositário Interbancário
(Interbank Deposit Certificate, or CDI) rate, an interbank rate. From January through August 2001,
however, portions of our U.S. dollar-denominated indebtedness were unhedged.
Our international operations in Argentina, Chile and Peru are undertaken by our subsidiaries in each of
those countries that purchase products from our company at prices denominated in reais for sale in those
countries. The results of operations of these subsidiaries, when consolidated with our results of
operations, are therefore directly affected by exchange rate variations between the real and the local
currencies (the Argentine peso, the Chilean peso and the Peruvian sole). Our gross operating revenues
from these subsidiaries represented approximately 2.4% of our gross operating revenues in 2003.
Gross operating revenues
Nearly all of our gross operating revenues (97.5% in 2003) are in reais and are from the sale of our
products to our independent sales representatives in Brazil. We receive revenues in foreign currency only
from the sale of our products in Argentina, Chile, Peru and Bolivia, and these revenues totaled R$47.9
million in 2003, or 2.5% of our gross operating revenues. We operate in Argentina, Chile and Peru
through subsidiaries, and in Bolivia we sell products to a distributor with whom we have had a long-term
partnership. Among the primary drivers of our gross operating revenues are the number of independent
sales representatives and their productivity. See “Description of our business—Distribution of our
products—Productivity of our independent sales representatives” for historical measures of our
productivity and the number of our sales representatives.
The following table sets forth the gross operating revenues of the Natura group over the periods
indicated.
Gross operating revenues(1)
(R$ millions, except growth rate)
1995 ...........................................................................................................
1996 ...........................................................................................................
1997 ...........................................................................................................
1998 ...........................................................................................................
1999 ...........................................................................................................
2000 ...........................................................................................................
2001 ...........................................................................................................
2002 ...........................................................................................................
2003 ...........................................................................................................
Compound annual growth rate ...................................................................
429.2
587.1
687.8
806.3
832.6
1,015.7
1,168.0
1,411.2
1,910.1
20.5% per annum
(1) Gross operating revenues for 1999 and 2000 are for Natura Empreendimentos (which are similar to
gross operating revenues of Natura Cosméticos but are not identical). Gross operating revenues for
all other years are for Natura Cosméticos.
Our consolidated financial statements are similar in most respects to those historically published by
Natura Empreendimentos but are not identical. See “—Principal differences between the financial
42
statements of Natura Cosméticos and Natura Empreendimentos” for an explanation of principal
differences as they relate to the years ended December 31, 2001, 2002 and 2003.
Taxes on sales, returns and rebates
In addition to income taxes, which are described below under “—Income taxes,” we and our subsidiaries
are subject to a number of taxes assessed on our operating revenues. We discuss below the taxes on sales,
returns and rebates applicable to our company and to our subsidiaries.
➤
Natura Indústria.
Natura Indústria is subject to the following taxes:
Š PIS/COFINS. The Programa de Integração Social (Social Integration Program, or PIS) and
Contribuição para o Financiamento da Seguridade Social (Contribution for the Financing of Social
Security, or COFINS) taxes are federal social contribution taxes assessed on gross operating
revenues. Approximately 90% of the products produced by Natura Indústria are classified as
“monophase” products subject to tax at a total rate of 12.5% for PIS and COFINS. The remaining
10% of the products are subject to tax at each stage in the production chain at a different rate from
that applicable to “monophase” products. Natura Indústria is permitted to offset against its PIS and
COFINS tax obligations the amount of any PIS and COFINS taxes paid by our suppliers on raw
materials that are used to produce “monophase” and “multi-phase” products. Beginning in February
2004, the combined PIS and COFINS tax rate for “multi-phase” products increased to 9.25% from
4.65% in 2003.
Š IPI. The Imposto Sobre Produtos Industrializados (Tax on Industrial Products, or IPI) is a federal
tax on industrial products whose rate varies depending on the product. The IPI tax that Natura
Indústria pays is assessed on its gross operating revenues from the products it sells to our company,
Natura Cosméticos. The tax rate varies from 5% to 40%, depending on the type of product. Natura
Indústria’s average IPI rate in 2003 was 7%. Natura Indústria is permitted to offset against its IPI
tax obligations any IPI taxes paid by our suppliers on raw materials and packaging used in our
products.
Š ICMS. The Imposto Sobre Circulação de Mercadorias e Serviços (Tax on the Circulation of Goods
and Services, or ICMS) is a state tax on value added that is assessed on gross operating revenues at
each stage of the production and marketing chain at rates that vary depending on the product and
the Brazilian state in which the product is sold. Natura Indústria is permitted to offset against its
ICMS tax obligations any ICMS tax paid by our suppliers on raw materials and packaging used in
our products.
➤
Natura Cosméticos.
Natura Cosméticos is subject to the following taxes:
Š PIS/COFINS. Natura Cosméticos pays PIS and COFINS taxes only on products that are not
“monophase” products. Natura Cosméticos is permitted to offset against its PIS and COFINS
obligations the PIS and COFINS taxes paid by Natura Indústria on products sold to Natura
Cosméticos that are not “monophase” products.
Š ICMS. Natura Cosméticos pays ICMS tax on its gross operating revenues in the same manner as
Natura Indústria. Natura Cosméticos is permitted to offset against its ICMS tax obligations any
ICMS tax paid by Natura Indústria on products sold to Natura Cosméticos.
Š ICMS withholding tax. Our independent sales representatives are also subject to ICMS tax on the
margin on the sale of our products to end consumers. The Brazilian tax authorities in each state
require us to withhold and pay this tax on behalf of our independent sales representatives as
substitute taxpayers. Because determining the exact margin charged by each independent sales
representative on each resale would be administratively impractical, each state estimates a margin on
which the ICMS is calculated. The amount we withhold takes into account that our independent
43
sales representatives are permitted to offset against their ICMS tax obligations the amount of ICMS
tax that Natura Cosméticos paid on products purchased by those independent sales representatives.
➤
Natura Logística and Natura Inovação. Natura Logística and Natura Inovação are subject to the
following taxes:
Š PIS/COFINS. Natura Logística and Natura Inovação pay PIS and COFINS taxes on their gross
operating revenues from services provided. The combined PIS and COFINS tax rate applicable to
Natura Logística and Natura Inovação increased to 9.25% beginning in February 2004. Natura
Logística and Natura Inovação are permitted to offset against its PIS and COFINS obligations the
PIS and COFINS taxes paid on certain services rendered to them.
Š ISS. The Imposto Sobre Serviços (Tax on Services, or ISS) is a municipal tax assessed at a rate of
2% on gross operating revenues from services. Natura Logística and Natura Inovação pay ISS tax
on their gross operating revenues from services provided to Natura Indústria, to Natura Cosméticos
and to each other.
All these taxes are reflected in the taxes on sales, returns and rebates line of our financial statements.
Returns and rebates represented 0.7% of our taxes on sales, returns and rebates in 2003.
Costs and operating expenses
Our costs and operating expenses consist of cost of sales, selling expenses, general and administrative
expenses, employee profit sharing, management compensation and net financial expenses (income).
Cost of sales. Our cost of sales is comprised of production costs and the expenses of our engineering
and procurement departments. Our production costs are principally comprised of the cost of raw
materials, labor and depreciation. The following table shows the percentage of production costs that
each component represents.
Approximate components of production costs
2003
Raw materials for products and packaging(1)...............................................................................
Labor............................................................................................................................................
Depreciation .................................................................................................................................
Other............................................................................................................................................
80%
8%
4%
8%
Total .....................................................................................................................................
100%
(1) Principally plastics, chemicals and fragrances.
Selling expenses. The following table shows the principal components of our selling expenses in 2003
and their relative importance in relation to total selling expenses.
Approximate components of selling expenses
2003
Sales force and communication with sales channel........................................................................
Receipt, order sourcing and delivery of orders ..............................................................................
Other............................................................................................................................................
40%
37%
23%
Total .....................................................................................................................................
100%
The expenses for our sales force and communication with our sales channel consist of the salaries of our
sales promoters and sales managers and the cost of communicating with our independent sales
representatives (e.g., the printing and distribution of the Vitrine Natura catalog and expenses for special
events). Our expenses for the receipt, sourcing and delivery of orders consist of the expenses of receiving
44
product orders through the call center and the Internet, expenses of separating products for delivery and
delivery of products to our independent sales representatives. Our other expenses include advertising
expenses, expenses of our international operations and expenses for new product launch events.
General and administrative expenses. The following table shows the principal components of our
general and administrative expenses in 2003 and their relative importance in relation to total general and
administrative expenses.
Approximate components of general and administrative expenses
2003
Services contracted from Natura Inovação....................................................................................
Administrative personnel expenses................................................................................................
CPMF tax and provisions for contingent tax liabilities .................................................................
Services contracted from third parties ...........................................................................................
Depreciation(1).............................................................................................................................
Other............................................................................................................................................
29%
18%
12%
12%
4%
25%
Total .....................................................................................................................................
100%
(1) Includes depreciation of software and information technology equipment.
Our services contracted from Natura Inovação are research and product development services. Because
Natura Inovação became our subsidiary in March 2004 in the reorganization described in “—Recent
corporate reorganization,” the full gross operating revenues of Natura Inovação will not be included in
our general and administrative expenses in future periods. Our contracted services include services such
as cleaning and consulting services. The following taxes are included in general and administrative
expenses:
➤
CPMF. The Contribuição Provisória Sobre Movimentação Financeira (Provisional Contribution on
Financial Transfers, or CPMF) is a federal tax that is assessed at a rate of 0.38% each time there is a
debit from a bank account. In December 2003, this tax was extended through December 2007. In
Brazil, all those who have a bank account, whether legal persons or natural persons, are required to
pay CPMF tax every time they transfer or withdraw money from their bank accounts.
➤
ISS. Natura Inovação pays ISS tax on its gross operating revenues from services provided to Natura
Cosméticos.
➤
PIS/COFINS. Natura Inovação pays PIS and COFINS taxes on its gross operating revenues. The
combined PIS and COFINS tax rate applicable to Natura Inovação has been 9.25% since February
2004. Natura Inovação is permitted to offset against its PIS and COFINS obligations PIS and COFINS
taxes paid by service providers to Natura Inovação.
Our other general and administrative expenses include expenses on social action programs of the type
described in “Description of our business—Corporate responsibility,” insurance expenses and expenses
for the international launch of our Natura Ekos line.
Employee profit sharing and management compensation. All our employees participate in the profits of
our company according to the annual performance of our company as a whole and to the performance of
the specific groups in which they employee work. Certain terms of our profit sharing plan are negotiated
with labor unions. For managers and executive officers, participation in profits also depends on the
achievement of individual goals. Our profit sharing payments were R$20.5 million in 2003, R$11.5
million in 2002 and R$8.7 million in 2001. Members of our management received compensation in the
aggregate amount of R$3.6 million in 2003, R$2.8 million in 2002 and R$2.0 million in 2001, in
addition to profit sharing payments.
45
Net financial expenses (income). Our financial expenses and income reflect primarily (1) the cost of
long-term and short-term debt, (2) income from financial investments, (3) gains and losses on derivative
transactions, (4) exchange variation relating to debt denominated in foreign currency, (5) PIS and
COFINS taxes on our financial income and (6) other charges paid to financial institutions. Our financial
expenses include non-cash items, such as the effects of exchange rate variations on the outstanding
balances of loans denominated in foreign currencies and our currency derivative transactions. For a
description of our indebtedness, see “—Liquidity and capital resources—Debt.”
Participations of subordinated debentures
Until March 2004, our controlling shareholders held subordinated debentures of our company in the
aggregate principal amount of R$130.7 million at December 31, 2003 that gave their holders the right to
participate in profits during each fiscal year. We redeemed these debentures on March 2, 2004. The
former holders of these debentures made a capital contribution to our company in the form of the credits
obtained from the redemption of the debentures and from the net remuneration on the debentures
through January 31, 2004 and received common shares issued by us in return. As a result, our share
capital increased by R$138.6 million, and our capital reserves increased by R$100.0 million.
Income taxes
We are subject to income and social contribution taxes on net income that, in the aggregate, amount to a
maximum of approximately 34% of our net income. The breakdown of this tax and social contribution
is as follows: (1) ordinary income tax, levied at a rate of 15%, (2) an incremental percentage over the
ordinary income tax, applicable to the portion of income that exceeds R$240,000 per annum, levied at a
rate of 10% and (3) the Contribuição Social Sobre Lucro Líquido (Social Contribution on Net Income,
or social contribution), an additional tax on net income, levied at a rate of 9%.
Our income tax payments are also subject to the following deductions:
Interest on capital. Brazilian tax law permits a corporation to deduct interest on capital (juros sobre o
capital próprio) in calculating taxable income. Interest on capital is interest paid or credited to
shareholders at the Taxa de Juros de Longo Prazo (Long-Term Interest Rate, or TJLP, as published
periodically by the Central Bank) on shareholders’ equity and is subject to limits imposed by law. For
more information on interest on capital, see “Description of capital stock—Allocation of net income and
distribution of dividends—Payment of dividends and interest on capital.”
Tax loss carryforwards. One of our subsidiaries had accumulated tax losses of R$19.0 million at
December 31, 2003 and R$14.0 million at March 31, 2004. At current rates, the deduction of these
losses would reduce our income and social contribution tax obligations in subsequent years by
approximately R$6.5 million.
Amortization of goodwill. On December 27, 2000, Natura Empreendimentos became a wholly owned
subsidiary of Natura Participações in a merger of shares, or incorporacão de ações, under Brazilian law,
through which the shareholders of Natura Empreendimentos (other than Natura Participações) increased
the share capital of Natura Participações by contributing their Natura Empreendimentos shares based on
their economic value. The economic value of the shares was calculated by an independent appraiser
based on the discounted cash flow of Natura Empreendimentos projected over a ten-year period. Natura
Participações issued new shares to the former shareholders of Natura Empreendimentos and recorded
goodwill equal to the difference between the book value and economic value of the incorporated Natura
Empreendimentos shares.
46
On March 5, 2004, we merged with Natura Empreendimentos and then merged with Natura
Participações in two sequential transactions in which our company, Natura Cosméticos, was the
surviving company. These transactions will, under Brazilian tax law, allow us to amortize for tax
purposes the goodwill originally recorded by Natura Participações when Natura Empreendimentos
became its wholly owned subsidiary and thereby to reduce our income and social contribution tax
obligations. On January 31, 2004, before its merger with our company, Natura Participações recorded a
provision to maintain the shareholders’ equity capacity to distribute future dividends, in accordance with
CVM Instruction No. 349 of March 6, 2001, that offsets the full amount of the goodwill recorded. We
expect to deduct for tax purposes portions of the goodwill in the amount of R$125.4 million in 2004
and of R$150.4 million per year thereafter through 2010.
Discussion of critical accounting policies
Critical accounting policies are those that both are important to the portrayal of our financial conditions
and results of operations and that require the most difficult, subjective or complex judgements, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. As the
number of variables and assumptions affecting the possible future resolution of the uncertainties
increases, those judgements become even more subjective and complex. In order to provide an
understanding about how our management forms its judgements about future events, including the
variables and assumptions underlying the estimates and the sensitivity of those judgements to different
circumstances, we have identified the following critical accounting policies:
➤
Property, plant and equipment. We state our property, plant and equipment at the cost of
acquisition or construction, monetarily restated to December 31, 1995, plus capitalized interest. We
generally use the minimum depreciation levels permitted under Brazilian tax regulations, which we
believe approximate the useful lives of our assets. However, we use a different practice in depreciating
our vehicles. In this case, the tax regulations provide that vehicles be depreciated over five years.
However, for purposes of our financial statements, we depreciate our vehicles based on a useful life of
three years because most of our vehicles are for the use of our sales promoters as an incentive for the
achievement of specific objectives and are generally traded in every three years. This accounting policy
is in accordance with Brazilian GAAP, and for tax purposes we make appropriate adjustments in our
annual calculation of our income and social contribution taxes for this difference.
➤
Derivative contracts. We record our derivative contracts at their historical cost and subsequently
revalue them according to their contractual terms to reflect amounts accrued through the applicable
balance sheet date. We do not mark our derivative contracts to market.
➤
Provisions. We establish provisions on our balance sheet when we determine, taking into
consideration the opinion of our legal advisors, that a loss is probable in one of the labor, tax or civil
cases to which we are party. We establish provisions for doubtful accounts based on our estimate of
probable losses on the realization of receivables in light of historical payment default rates. We analyze
our accounts receivable and the probability of collection each month. We also record provisions for
probable losses from (1) inventory for products that have been discontinued or that we expect to
discontinue, (2) excessive stocks of raw materials in relation to projected sales over the following 24
months of the products in which they are used and (3) inventory whose expiration date will pass
before it can be sold. We update those provisions to the date of the applicable balance sheet.
➤
Stock option plans. When options vest under our stock option plans in the future, we plan to record
an expense in general and administrative expenses in the amount of the difference between the exercise
price of the option and the closing market price of the common shares. We will determine the market
price with reference to an average of the closing prices of our common shares on BOVESPA on the
date of the applicable balance sheet.
47
Limits on comparability of our financial statements
The comparability of our financial statements for the year ended December 31, 2001 to the years ended
December 31, 2002 and 2003 is limited because:
➤
Natura Indústria was a direct subsidiary of Natura Empreendimentos before December 2001 and was
transferred by Natura Empreendimentos to Natura Cosméticos in late November 2001;
➤
Natura Empreendimentos created Natura Inovação in February 2001 to undertake the research,
product development and concept development activities of Natura. Since its creation, Natura
Inovação has billed Natura Cosméticos for its research and development services; and
➤
Natura Empreendimentos transferred the logistics, delivery and administrative services operations of
our group to Natura Logística in April 2001, a direct subsidiary of Natura Indústria. Since November
2001, Natura Logística has been an indirect subsidiary of Natura Cosméticos.
These corporate changes affect comparability of taxes on sales, returns and rebates, cost of sales, general
and administrative expenses and net financial expenses. The effects of these corporate changes are
eliminated in the financial statements of Natura Empreendimentos because it was the parent company of
Natura Cosméticos, Natura Indústria, Natura Inovação and Natura Logística during those periods. Some
of these effects are also eliminated in the audited consolidated financial statements of Natura
Cosméticos. The principal differences between the financial statements of Natura Cosméticos and the
financial statements of Natura Empreendimentos are explained below in “—Principal differences
between the financial statements of Natura Cosméticos and Natura Empreendimentos.”
Recent corporate reorganization
On March 5, 2004, we completed a corporate reorganization in which Natura Cosméticos merged with
Natura Empreendimentos and then merged with Natura Participações in two sequential transactions in
which Natura Cosméticos was the surviving company. We undertook this reorganization primarily to
simplify our corporate structure in preparation for this offering by eliminating our former holding
companies and bringing Natura Inovação under our company. For diagrams showing our corporate
structure before and after this transaction, see “Description of our business—History.”
Natura Cosméticos is the issuer of the common shares offered in this offering, and the primary financial
statements included in this offering memorandum are those of Natura Cosméticos. However, we have
also included financial statements of Natura Empreendimentos in this offering memorandum because the
business of our company after the reorganization is substantially similar to that of Natura
Empreendimentos before the reorganization. We have substituted Natura Empreendimentos as the
holding company for all the operating companies in the Natura group while continuing to be responsible
for the same operations for which we were responsible before the reorganization. Our audited
consolidated financial statements are similar in most respects to those historically published by Natura
Empreendimentos included in this offering memorandum, and we have highlighted the principal
differences between our financial statements and those of Natura Empreendimentos in “—Principal
differences between the financial statements of Natura Cosméticos and Natura Empreendimentos.”
Unless expressly noted, all other information regarding the financial condition and results of operations
of our company in this offering memorandum is for Natura Cosméticos.
Principal differences between the financial statements of Natura Cosméticos and
Natura Empreendimentos
The discussion below highlights the principal differences between the financial statements of Natura
Cosméticos, the issuer of the common shares offered in this offering, and its former parent Natura
Empreendimentos for the three years ended December 31, 2003.
48
The table below compares certain measures of the results of Natura Cosméticos and Natura
Empreendimentos for the periods indicated. In all the tables in this section, “NC” refers to Natura
Cosméticos and “NE” refers to Natura Empreendimentos.
2001
NE
NC
2002
NE
NC
2003
NE
NC
(R$ millions)
Gross operating revenue ................................ 1,172.6 1,168.0 1,403.6 1,411.2 1,901.2 1,910.1
Taxes on sales, returns and rebates................
(359.5) (292.5) (420.1) (418.0) (584.2) (581.2)
Net operating revenue ...................................
813.1
875.5
983.4
993.1 1,316.9 1,328.9
Cost of sales ..................................................
(293.0) (377.0) (345.0) (345.3) (458.1) (458.4)
Gross profit...................................................
520.1
498.6
638.4
647.8
858.9
870.5
Operating expenses:
Selling expenses......................................
(275.0) (275.0) (321.9) (321.9) (403.0) (403.0)
General and administrative expenses ......
(120.4) (105.1) (121.6) (146.1) (164.1) (182.9)
Net financial expenses............................
(72.4)
(35.4)
(44.4)
(44.3)
(34.2)
(30.1)
Adjusted EBITDA(1) .....................................
134.7
120.3
210.8
199.2
297.5
295.7
and/or cash flow.
March 2004, as described in “—Participations of subordinated debentures.” As a result, in future
periods, amounts that would have been paid to holders of debentures will not be subtracted from
income before taxes and will be included in calculations of EBITDA. We also exclude minority
interest in calculating adjusted EBITDA because it is not an operating expense.
49
2001
NE
2002
NC
NE
2003
NC
NE
NC
(R$ millions)
Adjusted EBITDA ........................................................... 134.7 120.3 210.8 199.2 297.5 295.7
(ⳮ) Depreciation .....................................................
25.1
11.5
28.8
28.3
34.3
33.7
(ⳮ) Net financial expenses.......................................
72.4
35.4
44.4
44.3
34.2
30.1
(ⳮ) Participations of subordinated debentures .........
42.3
42.3
75.8
75.8 127.7 127.7
(ⳮ) Income and social contribution taxes ................
9.9
21.9
32.9
29.1
42.9
40.4
(ⳮ) Minority interest ...............................................
(0.3) (0.3)
—
—
(0.1) (0.1)
Net income ..................................................................... (14.7)
9.5
28.9
21.7
58.5
63.9
The principal differences between the financial statements of Natura Cosméticos and Natura
Empreendimentos occur in taxes on sales, returns and rebates, cost of sales, general and administrative
expenses and net financial expenses for the reasons outlined in “—Overview—Limits on comparability of
our financial statements.”
Taxes on sales, returns and rebates. Natura Cosméticos had taxes on sales, returns and rebates of
R$(292.5) million in 2001, compared to R$(359.5) million in 2001 for Natura Empreendimentos,
primarily because the IPI, PIS and COFINS taxes assessed on sales by Natura Indústria to Natura
Cosméticos for the period from January through November 2001 were recorded in cost of sales by
Natura Cosméticos but were recorded in taxes on sales, returns and rebates by Natura
Empreendimentos. The value of these taxes for the period from January through November 2001 was
R$63.5 million. The differences in the two companies’ taxes on sales, returns and rebates in 2002 and
2003 were not material.
Cost of sales. Natura Cosméticos had cost of sales of R$(377.0) million in 2001, compared to
R$(293.0) million in 2001 for Natura Empreendimentos, primarily because the gross operating revenues,
net of ICMS taxes, of Natura Indústria from products sold to Natura Cosméticos for the period from
January through November 2001 were recorded in cost of sales by Natura Cosméticos but were
eliminated in the financial statements of Natura Empreendimentos. In the financial statements of Natura
Empreendimentos, cost of sales reflects only the production costs of Natura Indústria and excludes
Natura Indústria’s gross margin and taxes on sales, returns and rebates. However, the cost of sales of
Natura Empreendimentos includes costs incurred by Natura Indústria in sales to third parties for the
period from January through November 2001, which costs are not included in cost of sales of Natura
Cosméticos. The aggregate effect of these events had an additional impact of R$83.9 million on the cost
of sales of Natura Cosméticos. The differences in the two companies’ cost of sales in 2002 and 2003
were not material.
General and administrative expenses. For the period from January through November 2001, the
general and administrative expenses of Natura Indústria are reflected in cost of sales of Natura
Cosméticos because Natura Cosméticos recorded the gross operating revenues, net of ICMS taxes, of
Natura Indústria in cost of sales. In the financial statements of Natura Empreendimentos, these expenses
are reflected in general and administrative expenses. The value of these expenses for the period from
January through November 2001 was R$20.8 million.
An additional difference between the financial statements of Natura Cosméticos and Natura
Empreendimentos occurs in 2001, 2002 and 2003 because the gross operating revenues of Natura
50
Inovação obtained from services rendered to Natura Cosméticos are reflected in general and
administrative expenses of Natura Cosméticos, but only the general and administrative expenses of
Natura Inovação are reflected in general and administrative expenses of Natura Empreendimentos. This
difference consists of the gross margin and taxes on sales, returns and rebates of Natura Inovação. In
addition, during this period the effects of services rendered by Natura Logística to Natura Inovação were
eliminated in the financial statements of Natura Empreendimentos the services rendered by Natura
Logística to Natura Inovação. The revenue from these services is recorded in general and administrative
expenses of Natura Inovação and in consolidated gross operating revenues of Natura Cosméticos (for the
period in which Natura Logística became a subsidiary of Natura Cosméticos).
Net financial expenses. Natura Cosméticos had net financial expenses of R$(35.5) million in 2001,
compared to R$(72.5) million for Natura Empreendimentos, primarily because the financial expenses
relating to loans and financing contracted by Natura Indústria during the period from January through
November 2001 are reflected only in the Natura Empreendimentos financial statements.
The small difference between net financial expenses of Natura Cosméticos of R$(30.1) and net financial
expenses of Natura Empreendimentos of R$(34.1) in 2003 was primarily due to financial expenses of
Natura Empreendimentos under debentures issued to BNDESPAR (which were converted into common
shares of our company on May 24, 2004) and financial expenses of Natura Inovação under financing
from FINEP, which more than offset the additional financial income from marketable securities of
Natura Empreendimentos (the parent company) and Natura Inovação. For a description of this
indebtedness, see “—Liquidity and capital resources—Debt.”
51
RESULTS OF OPERATIONS
General
The following table sets forth, for the periods indicated, certain items derived from our statements of
income:
Statement of income
Gross operating revenues ................
Taxes on sales, returns and
rebates .................................
Net operating revenues ...................
2001
2002
2003
2003
(R$ millions)
(US$
millions)
1,168.0 1,411.2 1,910.1
661.1
Three months
ended March 31,
2003
2004
(R$ millions)
344.9
475.7
2004
(US$
millions)
163.5
(292.5)
875.5
(418.0) (581.2) (201.2) (105.0) (146.5)
993.1 1,328.9
460.0
239.9 329.2
(50.4)
113.2
(377.0)
498.6
(345.3)
647.8
(458.4) (158.7)
870.5
301.3
(88.7) (108.4)
151.2 220.8
(37.3)
75.9
(275.0)
(321.9)
(403.0) (403.0)
(78.7) (103.9)
(35.7)
(105.1)
(8.7)
(2.0)
(146.1)
(11.5)
(2.8)
(182.9) (182.9)
(20.5) (20.5)
(3.6)
(3.6)
(29.8)
(3.8)
(1.3)
(37.0)
(4.8)
(1.9)
(12.7)
(1.7)
(0.7)
107.8
165.5
260.5
90.2
37.6
73.1
25.1
Financial expenses ...................
Financial income......................
Income from operations ..................
(65.3)
29.8
72.3
(134.0)
89.7
121.1
(64.4)
34.3
230.4
(22.3)
11.9
79.7
(25.5)
14.9
27.0
(14.1)
13.1
72.1
(4.8)
4.5
24.8
Nonoperating income .....................
taxes............................................
1.0
5.5
1.5
0.5
(1.2)
0.7
0.2
73.3
126.6
231.9
80.3
25.8
72.8
25.0
debentures(1) .......................
Income before taxes ........................
(42.3)
31.1
(75.8)
50.8
(127.7)
104.2
(44.2)
36.1
(15.8)
10.0
(7.2)
65.6
(2.5)
22.6
(21.9)
(29.1)
(40.4)
(14.0)
(5.0)
(20.9)
(7.2)
9.2
21.7
63.8
22.1
5.0
44.7
15.4
0.3
9.5
—
21.7
0.1
63.9
—
22.1
—
5.0
—
44.7
—
15.4
Cost of sales....................................
Gross profit ....................................
Operating expenses
Selling expenses .......................
General and administrative
expenses...............................
Employee profit sharing...........
Management compensation .....
Income from operations before
financial (expenses) income .........
Income tax and social
contribution .........................
Net income before minority
interest ........................................
Minority interest......................
Net income .....................................
debentures made a capital contribution to our company in the form of the credits they obtained
from the redemption of the debentures and from net remuneration on the debentures through
January 31, 2004 and received common shares in return.
52
Three months ended March 31, 2004 compared to three months ended March 31, 2003
Our gross operating revenues increased 37.9% to R$475.7 million in the first three months of 2004 from
R$344.9 million in the first three months of 2003.
Sales to domestic market. The increase of our revenues from sales to the domestic market of 37.7% can
be broken down into an increase of approximately 28.8% in the quantity of items sold (which reached
37.4 million items in the first three months of 2004 from 29.0 million items in the first three months of
2003) and an increase in our average prices of 12.1% at the end of March 2003, which was fully
reflected in our sales in the first three months of 2004 and had an immaterial effect in our sales in the
first three months of 2003.
The increase in the number of items sold was primarily due to a 16.5% increase in the number of our
average independent sales representatives, to better results of our marketing strategy (promotions and
advertising) and new product launches.
A breakdown of our gross operating revenues by groups of products is set forth below.
Gross operating revenue breakdown
Three months
ended March 31,
2003
2004
(R$ millions)
From sales to domestic market—cosmetics and fragrances(1)............................................ 222.8 302.1
From sales to domestic market—toiletries(2) .....................................................................
97.3 146.0
Other products(3) .............................................................................................................
15.7
14.0
From sales to foreign market(4) ........................................................................................
9.1
13.5
(1) Fragrances, make-up, creams, lotions and sun protection products.
(2) Hair care products, soaps, deodorants, shaving products and oral hygiene.
(3) Primarily resale promotional material (e.g., kits), samples, testers and accessories (e.g., cosmetics
bags).
(4) Sales from our subsidiaries in Argentina, Chile and Peru and to our distributor in Bolivia.
Revenues from sales of our toiletries increased 50.1% in the first three months of 2004 compared to the
first three months of 2003, which was higher than our average revenue growth, due to more new product
launches in this category.
Sales to foreign market. Revenues from sales to the foreign market increased 49.3% to R$13.5 million
in the first three months of 2004 from R$9.1 million in the first three months of 2003. In local currency
terms, our sales increased 64.3% in Argentina, 52.7% in Peru and 52.5% in Chile, comparing the first
three months of 2004 to the first three months of 2003. This increase was mainly due to the consistent
increase in the number of our independent sales representatives (whose number increased an average of
35% in these countries) and to increased investments in marketing.
Taxes on sales, returns and rebates. Taxes on sales, returns and rebates increased 39.5% to R$146.5
million in the first three months of 2004 from R$105.0 million in the first three months of 2003,
primarily due to the increase in sales described above. Taxes on sales, returns and rebates were 30.8% of
our gross operating revenues in the first three months of 2004 and 30.4% in the first three months of
2003. This increase was principally due to the increase in the COFINS tax rate from 3.0% to 7.6% in
February 2004. See “Management’s discussion and analysis of financial condition and results of
operation—Overview—Taxes on sales, returns and rebates”.
53
Net operating revenue
Our net operating revenues increased 37.2% to R$329.2 million in the first three months of 2004 from
R$239.9 million in the first three months of 2003.
Cost of sales
Cost of sales increased 22.2% to R$108.4 million in the first three months of 2004 from R$88.7 million
in the first three months of 2003. The following table sets forth the components of our cost of sales for
the periods indicated, as well as the percentage change of each component.
Three months
ended
March 31,
2003
2004
% Change
(R$ millions)
Raw materials for products and packaging ........................................................ 69.4
82.7
Labor.................................................................................................................
8.1
9.2
Depreciation ......................................................................................................
4.7
5.3
Other costs(1) ....................................................................................................
6.6
11.2
Cost of sales ............................................................................................... 88.7 108.4
19.2%
13.2%
13.5%
71.2%
22.2%
(1) Other costs include electricity, water, natural gas, consulting services and information technology
services, among others.
As a percentage of net operating revenue, our cost of sales decreased to 32.9% in the first three months
of 2004 from 37.0% in the first three months of 2003. This decrease was primarily due to the increase in
our average prices of 12.1% at the end of the first three months of 2003, together with the maintenance
of relatively stable prices of raw materials as a whole during the past 12 months. In addition, we reduced
costs in our production process and experienced gains of scale. The number of items we produced
increased 34.1% to 35.5 million in the first three months of 2004 from 26.5 million in the first three
months of 2003.
Other costs increased 71.2% in the first three months of 2004 compared to the first three months of
2003 due to the reclassification of certain costs previously classified as labor costs resulting from the
outsourcing of technical engineering services.
Gross profit
Gross profit increased 46.1% to R$220.8 million in the first three months of 2004 from R$151.2 million
in the first three months of 2003. Our gross margin increased to 67.1% in the first three months of 2004
from 63.0% in the first three months of 2003, due primarily to an improvement in the ratio of cost of
sales to net operating revenues as described above.
54
Operating expenses
Our operating expenses increased 19.8% to R$148.7 million in the first three months of 2004 from
R$124.2 million in the first three months of 2003. The following table sets forth the components of our
operating expenses for the periods indicated, as well as the percentage change of each component.
Three months
ended March 31,
2003
2004
% Change
(R$ millions)
Selling expenses ............................................................................................. (78.7)
General and administrative expenses ............................................................. (29.8)
Employee profit sharing.................................................................................
(3.8)
Management compensation ...........................................................................
(1.3)
Financial expenses ......................................................................................... (25.5)
Financial income............................................................................................ 14.9
(103.9)
(37.0)
(4.8)
(1.9)
(14.1)
13.1
32.1%
24.2%
26.3%
46.2%
(44.5)%
(12.0)%
Selling expenses. As a percentage of our net operating revenues, selling expenses decreased to 31.6% in
the first three months of 2004 from 32.8% in the first three months of 2003. This decrease in percentage
was due primarily to an increase in productivity of our independent sales representatives and to the
dilution of fixed costs of our distribution channel. The increase in our selling expenses in absolute terms
was principally due to (1) a R$10.9 million increase in expenses of receipt, sourcing and delivery of
orders (the number of orders increased 36.0% from period to period), (2) a R$10.6 million increase in
our advertising and international operations expenses and (3) an increase in expenses for the sales force
and communicating with our sales channel (the average number of sales promoters increased 1.7%, and
the average number of independent sales representatives increased 16.5% from period to period).
General and administrative expenses. As a percentage of our net operating revenues, general and
administrative expenses decreased to 11.2% in the first three months of 2004 from 12.4% in the first
three months of 2003. The increase in our general and administrative expenses in absolute terms was
principally due to (1) an increase in expenses relating to the international expansion of our Natura Ekos
line and other projects in the aggregate amount of approximately R$2.6 million, (2) the establishment of
a reserve for the payment of stock options to certain of our employees in the amount of R$2.6 million
and (3) the net effect of R$2.0 million from an increase in administrative personnel expenses and from
the decrease of revenues of Natura Inovação from our company, which were recorded as administrative
expenses in our consolidated financial statements until January 2004. (The merger of Natura
Empreendimentos with our company described in “—Overview—Recent corporate reorganization” was
based on the balance sheets as of January 31, 2004 of both our company and Natura Empreendimentos.)
Employee profit sharing. The increase in our employee profit sharing reserve was principally due to
improvements in our financial and operating performance in the first three months of 2004 compared to
the first three months of 2003.
Financial expenses. Our financial expenses decreased to R$14.1 million in the first three months of
2004 from R$25.5 million in the first three months of 2003. This decrease was principally due to the
reduction of our provision for losses on derivative contracts resulting from the 5.1% appreciation of the
real against the U.S. dollar in the first three months of 2003 compared to the slight depreciation of 0.7%
of the real against the U.S. dollar in the first three months of 2004. The decrease in our expenses was
partially offset by an increase in our interest expenses related to loans of Natura Empreendimentos and
Natura Inovação that we assumed in connection with the merger of Natura Empreendimentos with our
company.
55
Financial income. Our financial income decreased to R$13.1 million in the first three months of 2004
from R$14.9 million in the first three months of 2003. The increase in our average cash and banks and
cash equivalents through the merger of Natura Empreendimentos into our company had a positive effect
on our financial income for the first three months of 2004 (that is, interest from cash equivalents of
Natura Empreendimentos and Natura Inovação had a positive effect on our consolidated financial
statements in February and March 2004). However, this effect was more than offset by the absence in
the first three months of 2004 of the gain we recorded in the first three months of 2003 due to the effect
of the appreciation of the real against the U.S. dollar in that period on our U.S. dollar-denominated debt.
As a result, our financial income in the first three months of 2004 was slightly lower than in the first
three months of 2003.
We had net financial expenses of R$10.6 million in the first three months of 2003, compared to net
financial expenses of R$1.0 million in the first three months of 2004. This decrease was principally due
to (1) a decrease in our average net loans and financing (total loans and financing plus provisions for
losses on derivative contracts, less cash and banks, cash equivalents and credits on derivative contracts,
without considering the subordinated debentures that were redeemed and the credits for which were
capitalized on March 2, 2004) to R$1.3 million in the first three months of 2004 from R$126.3 million
in the first three months of 2003 and (2) the decrease of the average CDI rate to 16.2% per annum in the
first three months of 2004 from 25.6% per annum in the first three months of 2003. We calculate our
average net loans and financing for the first three months of the year as the average of our net loans and
financing at the end of the period and our net loans and financing at the end of the previous year.
If we analyze our financial income and financial expenses together, The effect of exchange rate variations
on our financial expenses and financial income is eliminated when we consider both line items together
because our U.S. dollar-denominated indebtedness is generally hedged with swap agreements that, in
practice, cause this debt exposure to be linked to variations in the CDI rate.
Nonoperating income
We had a nonoperating income of R$0.7 million in the first three months of 2004, compared to
nonoperating expense of R$1.2 million in the first three months of 2003. The nonoperating income in
the first three months of 2004 occurred primarily because of gains from the sale of vehicles. The
nonoperating expense in the first three months of 2003 was primarily due to losses from the effect of
exchange variations on the consolidation of the financial statements of our subsidiaries in Argentina,
Chile and Peru in our financial statements.
Profit sharing payments to holders of subordinated debentures decreased 54.5% to R$7.2 million in the
first three months of 2004 from R$15.8 million in the first three months of 2003. This decrease was
principally due to the redemption of the subordinated debentures in 2004 and to the resulting payment
of profit sharing amounts to the holders of the debentures only for the month of January 2004,
compared to profit sharing payments we made for the full period in 2003. No participations in profits
were payable for the period after January 31, 2004, the balance sheet date based on which Natura
Empreendimentos merged with our company. Because the debentures were redeemed on March 2, 2004,
as described in “—Overview—Participations of subordinated debentures,” profit sharing payments will
no longer be made to holders of debentures.
Income and social contribution taxes
Income and social contribution taxes increased to R$20.9 million in the first three months of 2004 from
R$5.0 million in the first three months of 2003. This increase was principally due to the increase in our
56
results of operations, for the reasons outlined above. See note 9(b) to our unaudited interim consolidated
financial statements for a reconciliation of income before taxes to income and social contribution taxes.
Our expenses from income and social contribution taxes were partially offset by the amortization of the
goodwill, beginning in March 2004, for purposes of calculating income and social contribution taxes. See
“—Overview—Income taxes—Amortization of goodwill”.
Net income
As a result of the foregoing, net income increased to R$44.7 million in the first three months of 2004
compared with R$5.0 million in the first three months of 2003.
International operations
Our international operations recorded a loss from operations before net financial expenses of R$2.4
million (equivalent to 24.4% of net operating revenues of our international operations) in the first three
months of 2004 and a similar loss of R$2.4 million (equivalent to 37.0% of net operating revenues of
our international operations) in the first three months of 2003. This loss remained constant in spite of a
51.6% increase in gross operating revenues in real terms because of an increase in marketing expenses
for our international operations.
Adjusted EBITDA
Our adjusted EBITDA (earnings before net financial expenses, income and social contribution taxes,
depreciation, amortization, participations of subordinated debentures and minority interest) increased
87.5% to R$82.3 million in the first three months of 2004 from R$43.9 million in the first three months
of 2003. Our adjusted EBITDA margin was 25.1% in the first three months of 2004, compared to
18.3% in the first three months of 2003. This increase was due primarily to an improvement in the ratio
of cost of sales to net operating revenue, as described above, and to the dilution of costs.
Adjusted EBITDA is not a Brazilian GAAP measurement, does not represent cash flow for the periods
presented and should not be considered an alternative to net income as an indicator of our operating
performance or as an alternative to cash flow as an indicator of liquidity. Adjusted EBITDA does not
have a standardized meaning, and our definition of adjusted EBITDA may not be comparable to EBITDA
or adjusted EBITDA used by other companies. Although adjusted EBITDA does not provide a Brazilian
GAAP measure of operating cash flows, our management uses it to measure our operating performance.
In addition, we understand that certain investors and financial analysts use EBITDA and adjusted
EBITDA as indicators of a company’s operating performance and/or cash flow.
The table below reconciles adjusted EBITDA to net income for the periods indicated.
Three months
ended March 31,
2003
2004
(R$ millions)
Adjusted EBITDA..............................................................................................................
(ⳮ) Depreciation........................................................................................................
(ⳮ) Net financial expenses .........................................................................................
(ⳮ) Participations of subordinated debentures(1).......................................................
(ⳮ) Income tax and social contribution .....................................................................
(ⳮ) Minority interest .................................................................................................
Net income........................................................................................................................
43.9
7.5
10.6
15.8
5.0
—
5.0
82.3
8.5
1.0
7.2
20.9
—
44.7
57
(1) We exclude participations of subordinated debentures in calculating adjusted EBITDA because
March 2004, as described in “—Overview—Participations of subordinated debentures.” As a result,
in future periods, amounts that would have been paid to holders of debentures will not be
subtracted from income before taxes and will be included in calculations of EBITDA. We also
exclude minority interest in calculating adjusted EBITDA because it is not an operating expense.
Year ended December 31, 2003 compared to year ended December 31, 2002
Our gross operating revenues increased 35.4% to R$1,910.1 million in 2003 from R$1,411.2 million in
2002. The composition of our gross operating revenues before deduction of taxes on sales, returns and
rebates is presented in our audited consolidated financial statements and discussed below.
Sales to domestic market. Revenues from sales to the domestic market increased 35.3% to R$1,860.3
million in 2003 from R$1,375.2 million in 2002. Revenues from sales to the domestic market
represented 97.5% of our total gross operating revenues in 2003. This increase can be broken down into
average price increases of approximately 10% and an increase in the number of items sold to 142.3
million in 2003 from 115.9 million in 2002.
The increase in the number of items sold was primarily due to an increase of 11.5% in the number of our
average independent sales representatives, to a more aggressive marketing strategy and new product
launches with greater appeal. In addition, sales were boosted by a successful pricing strategy in which
productivity gains and economies of scale enabled us not to pass on to consumers the full impact of
inflation on our costs and expenses.
Year ended
December 31,
2002
2003
(R$ millions)
From sales to domestic market—cosmetics and fragrances(1)......................................... 945.7 1,286.7
From sales to domestic market—toiletries(2) .................................................................. 351.4
495.2
Other products(3) ..........................................................................................................
79.2
80.3
From sales to foreign market(4)......................................................................................
35.0
47.9
bags).
in 2003 from R$35.0 million in 2002. This increase was mainly due to significant growth in the revenues
of our operations in Argentina (which grew 77.4% in local currency terms), Peru (which grew 47.6% in
local currency terms) and Chile (which grew 19.5% in local currency terms). This increase was partially
offset by the effects of the exchange rates of the real against these local currencies. In the specific case of
Chile, the real-peso exchange rate caused our revenues from sales in Chile to decline when measured in
58
reais. Our growing sales in local currency in these countries resulted primarily from more intense
marketing of our products compared to our historical practice and the expansion of our sales network.
Taxes on sales, returns and rebates. Taxes on sales, returns and rebates increased 39.0% to R$518.2
million in 2003 from R$418.0 million in 2002, primarily due to the increase in sales described above.
Taxes on sales, returns and rebates were 30.4% of our gross operating revenues for 2003 and 29.6% for
2002. The increase was principally due to an increase in sales of products subject to higher tax rates.
Our net operating revenues increased 33.8% to R$1,328.9 million in 2003 from R$993.1 million in
2002.
Cost of sales
Cost of sales increased 32.7% to R$458.4 million in 2003 from R$345.3 million in 2002. The following
table sets forth the components of our cost of sales for the periods indicated, as well as the percentage
change of each component.
Year ended
December 31,
2002
2003
% Change
(R$ millions)
Raw materials for products and packaging ...................................................... 272.7 364.9
Labor...............................................................................................................
28.3
34.9
Depreciation ....................................................................................................
17.8
19.9
Other...............................................................................................................
26.5
38.7
Cost of sales ............................................................................................. 345.3 458.4
33.8%
23.3%
11.8%
46.0%
32.7%
As a percentage of net operating revenue, our cost of sales decreased to 34.5% in 2003 from 34.8% in
2002. This decrease was primarily due to scale and productivity gains and cost reduction initiatives
during the period. The number of items we produced increased to approximately 136 million in 2003
from approximately 107 million in 2002.
The increase in total cost of raw materials for products and packaging was due primarily to (1) an
increase by 22.9% in the number of products sold in 2003 as compared to 2002 and (2) the average
inflation and average devaluation of the real against the foreign currencies in which we purchase some of
our raw materials, which factors were partially offset by negotiations with suppliers in connection with
the increase in scale and productivity.
The increase in total labor costs was due primarily to our obligations under the collective bargaining
agreement with our employees. The other costs which make up our cost of sales were affected mainly by
the increase in amount of products sold and average inflation over the period.
Gross profit
Gross profit increased 34.4% to R$870.5 million in 2003 from R$647.8 million in 2002. Our gross
margin increased to 65.5% in 2003 from 65.2% in 2002. During 2003, gains from economies of scale,
increases in productivity and cost reduction efforts allowed us to avoid passing on to consumers the full
impact of inflation on our costs.
59
Operating expenses
Our operating expenses increased 21.6% to R$640.1 million in 2003 from R$526.6 million in 2002. The
following table sets forth the components of our operating expenses for the periods indicated, as well as
the percentage change of each component.
Year ended
December 31,
2002
2003
% Change
(R$ millions)
Selling expenses ............................................................................................. (321.9) (403.0)
General and administrative expenses ............................................................. (146.1) (182.9)
Employee profit sharing ................................................................................
(11.5) (20.5)
Management compensation ...........................................................................
(2.8)
(3.6)
Financial expenses ......................................................................................... (134.0) (64.4)
Financial income ...........................................................................................
89.7
34.3
25.2%
25.2%
78.3%
28.6%
(51.9)%
(61.8)%
Selling expenses. As a percentage of our net operating revenues, selling expenses decreased to 30.3% in
2003 from 32.4% in 2002. The increase in our selling expenses in absolute terms was principally due to
(1) a R$41 million increase in expenses of receipt, sourcing and delivery of orders (the number of orders
processed increased 30% in 2003), (2) an increase in expenses for the sales force and communicating
with our sales channel (the average number of sales promoters increased 2.7%, and the average number
of independent sales representatives increased 11.5%, calculating the average number of sales promoters
and independent sales representatives as the average of the numbers at the end of the period and at the
end of the previous period) and (3) increases in our other expenses, such as increases in advertising
expenses and the expenses of our international operations. Many of these expenses were negatively
affected by inflation.
General and administrative expenses. As a percentage of our net operating revenues, general and
administrative expenses decreased to 13.8% in 2003 from 14.7% in 2002. The increase in our general
and administrative expenses in absolute terms was principally due to (1) an increase in expenses relating
to the international expansion of our Natura Ekos line and other projects in the aggregate amount of
approximately R$15 million, (2) an increase in administrative personnel expenses (including
contributions and benefits) of approximately R$8 million and (3) an increase in provisions for contingent
liabilities and CPMF taxes in the amount of approximately R$7 million.
Employee profit sharing. The increase in our employee profit sharing payments was principally due to
improvements in our financial and operating performance during the period.
Financial expenses. The decrease in our financial expenses was principally due to the significant
devaluation of the real against the U.S. dollar in 2002 compared to the subsequent appreciation of the
real in 2003. In 2002, we incurred financial expenses from exchange variations relating to our debt
denominated in U.S. dollars, whereas in 2003 we recognized a gain from exchange variations relating to
this debt.
Our average loans and financing decreased to R$156.1 million in 2003 from R$220.7 million in 2002.
We calculate average loans and financing as the average of our loans and financing outstanding at the
end of the period and our loans and financing outstanding at the end of the previous period. The positive
effect on our financial expenses of this reduction in loans and financing was partially offset by increases
in the average CDI rate to 23.1% in 2003 from 19.1% in 2002 and in the average TJLP rate to 11.5% in
2003 from 9.9% in 2002.
60
Financial income. The decrease in our financial income was principally due to the appreciation of the
real against the U.S. dollar, which resulted in a loss on our derivative contracts in 2003, compared to a
gain in 2002. This loss was partially offset by our gain from exchange variations relating to our U.S.
dollar-denominated debt and by the financial income generated by the increase in our average cash and
banks and cash equivalents to R$96.8 million in 2003 from R$57.7 million in 2002 and the higher
average CDI rate. We calculate our average cash and banks and cash equivalents as the average of our
cash and banks and cash equivalents at the end of the period and our cash and banks and cash
equivalents at the end of the previous period.
Nonoperating income
We had a nonoperating income of R$1.5 million in 2003, compared to nonoperating income of R$5.5
million in 2002. The decrease in nonoperating income in 2003 occurred primarily because we recorded a
gain on our income statement in 2002 due to the effect of exchange variations on the consolidation of
the financial statements of our subsidiaries in Argentina, Chile and Peru in our financial statements, but
we recorded a loss due to the effect of exchange variations on this consolidation in 2003. This loss was
partially offset by an increase in income from rents of space leased to Natura Inovação. The higher
nonoperating income in 2002 was due to the gain described above and to income from our lease of space
to Natura Inovação.
Profit sharing payments to holders of debentures increased 68.4% to R$127.7 million in 2003 from
R$75.8 million in 2002. This increase was principally due to an increase in our income before taxes,
which was the basis for calculating profit sharing payments. Because the debentures were redeemed in
March 2004, as described in “—Overview—Participations of subordinated debentures,” participations
will no longer be payable to holders of debentures.
Income and social contribution taxes increased 38.6% to R$40.4 million in 2003 from R$29.1 million in
2002. This increase was principally due to the increase in our results of operations, for the reasons
outlined above. This increase was partially offset by tax benefits in the amount of R$3.4 million that we
obtained due to the payment of interest on capital of approximately R$10.0 million. See note 9(b) to our
audited consolidated financial statements for a reconciliation of income before taxes to income and social
contribution taxes.
Net income
As a result of the foregoing, net income increased 193.8% to R$63.9 million in 2003 compared with
R$21.7 million in 2002.
million (equivalent to 26% of net operating revenues of our international operations) in 2003, a 24%
decrease from the loss of R$12.1 million (equivalent to 47% of net operating revenues of our
international operations) in 2002. This improvement in our operating margin was due primarily to the
dilution of expenses of our international operations.
61
Adjusted EBITDA
Our adjusted EBITDA increased 48.4% to R$295.7 million in 2003 from R$199.2 million in 2002. Our
adjusted EBITDA margin was 22.2% in 2003, compared to 20.1% in 2002.
The table below reconciles adjusted EBITDA to net income for the periods indicated. See “—Results of
Operations—Three months ended March 31, 2004 compared to three months ended March 31, 2003—
Adjusted EBITDA” for the definition of adjusted EBITDA and additional information about adjusted
EBITDA.
Year ended
December 31,
2002
2003
% Change
(R$ millions)
Adjusted EBITDA ............................................................................................ 199.2 295.7
(ⳮ) Depreciation ......................................................................................
28.3
33.7
(ⳮ) Net financial expenses .......................................................................
44.3
30.1
(ⳮ) Participations of subordinated debentures(1) .....................................
75.8 127.7
(ⳮ) Income and social contribution taxes .................................................
29.1
40.4
(ⳮ) Minority interest................................................................................
—
(0.1)
Net income ......................................................................................................
21.7
63.9
48.4
19.1
(32.1)
68.5
38.8
22.4
194.5
March 2004, as described in “—Overview—Participations of subordinated debentures.” As a result,
in future periods, amounts that would have been paid to holders of debentures will not be
subtracted from income before taxes and will be included in calculations of EBITDA. We also
exclude minority interest in calculating adjusted EBITDA because it is not an operating expense.
Year ended December 31, 2002 compared to year ended December 31, 2001
Our gross operating revenues increased 20.8% to R$1,411.2 million in 2002 from R$1,168.0 million in
2001. The composition of our gross operating revenues before deduction of taxes on sales, returns and
rebates is presented in our consolidated audited financial statements and discussed below.
Sales to domestic market. Revenues from sales to the domestic market increased 20.4% to R$1,375.2
million in 2002, from R$1,140.3 million in 2001. This increase can be broken down into (1) price
increases of approximately 14.8%, of which 12.2% was due to increases in prices and the remainder
from changes in the mix of products sold and (2) an increase in the quantity of items sold to 115.9
million in 2002 from 110.0 million in 2001. The increase in the number of items sold was primarily due
to a consistent increase in our sales channel (the average number of independent sales representatives
increased 6.7% during the period) and the launching of a more aggressive marketing strategy in the last
quarter of 2002.
62
Year ended
December 31,
2001
2002
(R$ millions)
From sales to domestic market—cosmetics and fragrances(1)............................................ 806.3 945.7
From sales to domestic market—toiletries(2) ..................................................................... 288.5 351.4
Other products(3) .............................................................................................................
45.5
79.2
From sales to foreign market(4) ........................................................................................
27.7
35.0
bags).
in 2002 from R$27.7 million in 2001. This increase was mainly due to significant growth in the revenues
of our operations in Peru (which grew 26.6% in local currency terms), Chile (which grew 13.9% in local
currency terms) and Argentina (which grew 91.7% in local currency terms). This increase was partially
offset by the net effects of the exchange rates of the real against these local currencies. A slight
devaluation of the real against the Chilean peso and the Peruvian sole caused our revenues from sales in
Chile and Peru to grow more in real terms than in local currency terms. However, in the case of
Argentina, the real-peso exchange rate caused our revenues from sales to Argentina to decline in reais.
Our growing local currency sales in these markets resulted from more intense marketing and more
aggressive pricing policies (particularly in Argentina).
Taxes on sales, returns and rebates. Our taxes on sales, returns and rebates increased 42.9% to
R$418.0 million in 2002 from R$292.5 million in 2001. This increase was due primarily to the increase
in sales described above and to the inclusion of taxes on sales, returns and rebates (primarily IPI, PIS and
COFINS taxes) of Natura Indústria in our financial statements for the full year of 2002 compared to
only one month in 2001 (due to the transfer of Natura Indústria to our company in late November
2001). This increase was partially offset by a change in the form of calculation of the PIS and COFINS
taxes for the companies within our industry and a reduction in the IPI rate for certain products in our
portfolio. Taxes on sales, returns and rebates were 29.6% of our gross operating revenues in 2002,
compared to 25.0% in 2001.
As a result of the foregoing, our net operating revenues increased 13.4% to R$993.1 million in 2002
from R$875.5 million in 2001. Our net operating revenues grew less than our gross operating revenues
in the same period for the reasons described above.
Cost of sales
Our cost of sales decreased 8.4% to R$345.3 million in 2002 from R$377.0 million in 2001, but this
decrease occurred primarily after Natura Indústria became our subsidiary in late November 2001, when
we ceased including Natura Indústria’s gross margin and taxes on sales, returns and rebates (IPI, PIS and
COFINS) in our cost of sales. See “—Principal differences between the financial statements of Natura
63
Cosméticos and Natura Empreendimentos.” The following table sets forth the components of our cost of
sales for the periods indicated, as well as the percentage change of each component.
Year ended
December 31,
2001
2002
% Change
(R$ millions)
Raw materials for products and packaging ...................................................... 369.3 272.7
Labor...............................................................................................................
3.0
28.4
Depreciation ....................................................................................................
1.9
17.8
Other...............................................................................................................
2.8
26.5
Cost of sales ............................................................................................. 377.0 345.3
(26.2)%
846.7%
836.8%
846.4%
(8.4)%
As a percentage of our net operating revenue, our cost of sales decreased to 34.8% in 2002 from 43.1%
in 2001. This decrease was primarily due to the effect of consolidating Natura Indústria in our financial
statements after it became our subsidiary in late November 2001.
The decrease in our cost of raw materials for products and packaging occurred primarily because in
January through November 2001, the entire gross operating revenues, net of ICMS tax, of Natura
Indústria was included in our cost of sales and constituted the cost of raw materials of Natura
Cosméticos. However, we consolidated Natura Indústria for the full year of 2002, and during this period
our cost of raw materials did not include the gross margin, taxes on sales, returns and rebates, labor,
depreciation and other costs of Natura Indústria. For the months of January through November 2001,
for example, these amounts for Natura Indústria amounted to R$83.9 million. In addition, we negotiated
with some of our suppliers so that they passed on only a portion of the impact of the devaluation of the
real in 2002. This decrease in cost of sales was partially offset by (1) a 5.4% increase in products sold in
2002 compared to 2001 and (2) the average inflation and strong devaluation of the real against the U.S.
dollar.
The increase in our labor costs occurred primarily because we included the labor costs of Natura
Indústria in our cost of sales for the full year of 2002 but included those costs for only one month in
2001. In addition, our labor costs increased slightly due to higher salary obligations under our collective
bargaining agreements. However, the increased demand for labor to meet the growth in our production
volumes was largely met by increased productivity due to the inauguration of our Cajamar facilities in
May 2001.
The increase in our depreciation costs occurred primarily because we included the depreciation costs of
Natura Indústria in our cost of sales for the full year of 2002 but included those costs for only month in
2001. In addition, the depreciation costs of Natura Indústria itself increased significantly from 2001 to
2002 because it depreciated our Cajamar facilities during all of 2002, compared to only eight months
(May to December) in 2001.
Gross profit
Gross profit increased 29.9% to R$647.8 million in 2002 from R$498.6 million in 2001. Our gross
margin increased to 65.2% in 2002 from 56.9% in 2001. The primary reason for the increase in our
gross margin was the consolidation of the results of operations of Natura Indústria for the full year of
2002 compared to only one month in 2001, as explained above. In addition, our gross margin increased
due to gains of scale and efficiency from operations at our Cajamar facilities.
64
Operating expenses
Our operating expenses increased 23.5% to R$526.6 million in 2002 from R$426.3 million in 2001. The
following table sets forth the components of our operating expenses for the periods indicated, as well as
the percentage change of each component.
Year ended
December 31,
2001
2002
% Change
(R$ millions)
Selling expenses........................................................................................
General and administrative expenses........................................................
Employee profit sharing ...........................................................................
Management compensation......................................................................
Financial expenses....................................................................................
Financial income ......................................................................................
(275.0)
(105.1)
(8.7)
(2.0)
(65.3)
29.8
(321.9)
(146.1)
(11.5)
(2.8)
(134.0)
89.7
17.1%
39.1%
32.2%
40.0%
105.2%
201.0%
Selling expenses. As a percentage of net operating revenues, selling expenses increased to 32.4% in
2002 from 31.4% in 2001. The increase in selling expenses in absolute terms was principally due to
(1) increased expenses for the sales force and communicating with our sales channel of approximately
R$16.0 million (the average number of sales promoters increased 2.7%, and the average number of
independent sales representatives increased 6.7%), (2) increased expenses for our international
operations (due primarily to the 26.1% growth in revenues from these operations in reais) and
advertising expenses of approximately R$22.6 million and (3) increased expenses of receipt, sourcing and
delivery of orders of approximately R$6.0 million (due principally to a 7.5% increase in orders).
General and administrative expenses. As a percentage of net operating revenues, general and
administrative expenses increased to 14.7% in 2002 from 12.0% in 2001. In absolute terms, our general
and administrative expenses also increased, principally due to (1) the net effect of the corporate
transactions described in “—Limits on the comparability of our financial statements” and increases in
administrative personnel expenses, a portion of which were related to those corporate transactions, in the
aggregate amount of approximately R$15 million, (2) increases in CPMF tax obligations and provisions
for contingencies in the aggregate amount of approximately R$10 million and (3) increased expenses on
information technology and social action projects in the aggregate amount of approximately R$6
million. The net effect of the corporate transactions described in “—Limits on comparability of our
financial statements” included the recording in our general and administrative expenses of services
rendered by Natura Inovação for the full year of 2002, compared to only seven months in 2001, and the
inclusion in our general and administrative expenses of expenses for services rendered by Natura
Logística through November 2001 before Natura Logística was transferred to our company.
Employee profit sharing. The increase in employee profit sharing payments was principally due to
improvements in our financial and operating performance during the period.
Financial expenses. Financial expenses increased 105.3% to R$134.0 million in 2002 from R$65.3
million in 2001. The increase was principally due to exchange variation losses on U.S. dollardenominated debt, and these losses were greater than in the prior year due to the greater rate of
devaluation of the real against the U.S. dollar.
Financial income. Financial income increased 200.7% to R$89.7 million in 2002 from R$29.8 million
in 2001, principally due to gains on our derivative contracts. The higher devaluation rate of the real that
caused increased financial expenses also spurred higher gains on our derivative contracts. In addition,
65
our average cash and banks and cash equivalents increased to R$57.7 million in 2002 from R$33.1
million in 2001, and the average CDI rate increased to 19.1% in 2002 from 17.3% in 2001, yielding
additional financial income.
Nonoperating income
Nonoperating income increased to R$5.5 million in 2002 from R$1.0 million in 2001. This increase was
principally due to gains recorded in our income statement due to the effect of exchange variations on the
consolidation of the financial statements of our subsidiaries in Argentina, Chile and Peru into our
financial statements.
Profit sharing payments to holders of debentures increased 79.4% to R$75.8 million in 2002 from
R$42.3 million in 2001. This increase was principally due to an increase in our income before taxes,
which was the basis for calculating profit sharing payments.
Income and social contribution taxes increased 33.2% to R$29.1 million in 2002 from R$21.9 million in
2001. This increase was principally due to the increase in results of operations, for the reasons outlined
above. In addition, we had non-deductible charges in 2002 relating to the deferral of exchange variation
losses compared to an exchange variation gain in 2001. See note 9(b) to our audited consolidated
financial statements for a reconciliation of income before taxes to income and social contribution taxes.
Net income
As a result of the foregoing, net income increased 129.2% to R$21.7 million in 2002 from R$9.5 million
in 2001.
million (equivalent to 47% of net operating revenues of our international operations) in 2002, a 33%
decrease from the loss of R$18.0 million (equivalent to 87% of net operating revenues of our
international operations) in 2001. A 22.3% increase in gross operating revenues for our international
operations was more than offset by the effects of the strong devaluation of the Argentine peso, but the
operating margin of our international operations improved in comparison to 2001.
Adjusted EBITDA
Our adjusted EBITDA increased 65.6% to R$199.2 million in 2002 from R$120.3 million in 2001, and
our adjusted EBITDA margin was 20.1% in 2002, compared to 13.7% in 2001. Of this 6.4% increase
between 2001 and 2002, however, approximately 1.9% was due to the effects of the consolidation of
Natura Indústria and Natura Logística for the full year of 2002 (compared to only portions of 2001) and
of the establishment of Natura Inovação, which had an effect on our depreciation, net financial expenses
and income and social contribution taxes, all of which are used to calculated adjusted EBITDA and
which are discussed in more detail above.
66
The table below reconciles adjusted EBITDA to net income for the periods indicated. See “—Results of
Operations—Three months ended March 31, 2004 compared to three months ended March 31, 2003—
Adjusted EBITDA” for the definition of adjusted EBITDA and additional information about adjusted
EBITDA.
Year ended
December 31,
2001
2002
% Change
(R$ millions)
Adjusted EBITDA ............................................................................................ 120.3 199.2
(ⳮ) Depreciation ......................................................................................
11.5
28.3
(ⳮ) Net financial expenses .......................................................................
35.4
44.3
(ⳮ) Participations of subordinated debentures(1) .....................................
42.3
75.8
(ⳮ) Income and social contribution taxes .................................................
21.9
29.1
(ⳮ) Minority interest................................................................................
(0.3)
—
Net income ......................................................................................................
9.5
21.7
65.6
145.1
25.0
79.4
33.2
(81.2)
129.2
March 2004, as described in “—Participations of subordinated debentures.” As a result, in future
periods, amounts that would have been paid to holders of debentures will not be subtracted from
income before taxes and will be included in calculations of EBITDA. We also exclude minority
interest in calculating adjusted EBITDA because it is not an operating expense.
LIQUIDITY AND CAPITAL RESOURCES
Sources of funds
Our principal sources of funds are funds from operations and financings from financial institutions. Our
net cash flow from operations increased 42.6% to R$201.5 million in 2003 from R$141.3 million in
2002. This increase was primarily due to (1) an increase in our net income to R$63.9 million in 2003
from R$21.7 million in 2002 and (2) an increase in participations of subordinated debentures to
R$102.2 million in 2003 from R$60.7 million in 2002, which did not represent a use of cash. These
increases were negatively affected by fluctuations in the value of our assets and liabilities. In 2003, the
net effect of increases and decreases in assets and liabilities recorded on our cash flow statement was a
use of cash in the amount of R$39.9 million. In 2002, the net effect of these increases and decreases was
a use of cash in the amount of R$30.9 million.
Our net cash flow from operations increased 84.4% to R$141.3 million in 2002 from R$76.6 million in
2001. This increase was primarily due to an increase in (1) net income to R$21.7 million in 2002 from
R$9.5 million in 2001, (2) an increase in participations of subordinated debentures to R$60.7 million in
2002 from R$33.8 million in 2001, (3) a net increase in expenses from monetary and exchange
variations and provisions for derivative contracts to R$40.4 million in 2002 from R$17.8 million in
2001, which adversely affected our results but did not represent a use of cash and (4) an increase in
depreciation to R$28.3 million in 2002 from R$11.5 million in 2001 due to the consolidation of the
assets of Natura Indústria and Natura Logística for the full year of 2002 compared to only the month of
December in 2001, which also did not represent a use of cash. These increases were negatively affected
by fluctuations in the value of our assets and liabilities. In 2002, the net effect of increases and decreases
in assets and liabilities recorded on our cash flow statement was a use of cash of R$30.9 million. In
2001, the net effect of these increases and decreases was a generation of cash of R$0.6 million.
67
We had working capital (current assets minus current liabilities) of R$28.8 million at December 31,
2003, compared to working capital of R$38.4 million at December 31, 2002 and R$26.5 million at
December 31, 2001. We believe that our working capital is sufficient for our present requirements.
See “—Debt” below for a description of our loans and financing.
Uses of funds
Our principal uses of funds are for servicing our debt, making capital expenditures and paying dividends
and interest on capital. We had short-term loans and financing of R$75.1 million and long-term loans
and financing of R$33.0 million at December 31, 2003. At March 31, 2004, we had short-term loans
and financing of R$39.7 million and long-term loans and financing of R$101.2 million.
We paid dividends and/or interest on capital in cash of R$12.4 million in 2003, and we did not pay
dividends or interest on capital in cash in 2002 and 2001. However, we paid the amounts in 2003 to
Natura Empreendimentos before the corporate reorganization described in “—Overview—Recent
corporate reorganization.” In addition, for the reasons outlined in “Dividends,” these amounts are not
comparable to amounts we may pay in the future because the basis for calculating dividends will be
different, and we may be required to pay significantly higher amounts in future years. We currently
intend to pay dividends and/or shareholders’ equity in the amount equivalent to 45% of our net income,
adjusted in accordance with the Brazilian corporation law, for each fiscal year. However, our board of
directors may change this dividend policy at any time. See “Risk factors—Risks relating to our common
shares—Our board of directors may decide at any time to change its existing policy of paying dividends.”
Our shareholders have the right to receive the minimum dividends described in “Description of capital
stock—Allocation of net income and distribution of dividends—Payment of dividends and interest on
capital.”
We had total capital expenditures of R$7.1 million in 2001, R$25.2 million in 2002 and R$23.9 million
in 2003. We explain our capital expenditures below under “—Capital expenditures.”
Capital expenditures
The table below sets forth our capital expenditures for the periods indicated.
2001
2002
2003
(R$ millions)
Software and information technology equipment ..................................................
Machinery, tools and accessories ...........................................................................
Vehicles.................................................................................................................
Buildings and facilities...........................................................................................
Molds(1) ...............................................................................................................
International(2) .....................................................................................................
Other expenditures................................................................................................
1.2
0.1
3.5
1.3
0.1
0.8
0.1
3.5
2.8
2.4
11.5
2.2
1.4
1.4
6.5
3.9
4.4
3.1
3.3
1.8
0.9
Total capital expenditures .....................................................................................
7.1
25.2
23.9
(1) Molds are the steel molds manufactured specially for use by our suppliers in producing bottles and
plastic packaging for our products. We retain ownership of the molds.
(2) This line includes all fixed assets of our international operations, comprised principally of furniture
and information technology equipment.
The total capital expenditures in the amount of R$7.1 million in 2001 shown in the table above does not
reflect the capital expenditures of R$28.0 million made by Natura Indústria and Natura Logística for the
period from January through November 2001 before they became our subsidiaries. These capital
68
expenditures by Natura Indústria and Natura Logística in 2001 generally reflect the significant
investments made to finish construction of our Cajamar facilities. A total of approximately R$200
million was invested in the Cajamar site.
Our capital expenditures were generally driven by the need to meet the increasing demand reflected in
the increase in items produced of approximately 50% between 2001 and 2003. In addition, we spent
R$3.9 million in 2002 to study and implement measures to remedy shifts in soil under our vertical
warehouse and order sourcing line. See “Description of our business—Our facilities.”
We did not make any material divestitures of capital assets from 2001 to 2003. We also did not make
any investment in any company outside the Natura group during the same period.
We expect to invest approximately R$80.0 million in 2004 in product movement within our facilities
(inventory capacity and order sourcing), manufacturing capacity and other current investments (such as
maintenance, information technology equipment, software, molds and vehicles). We describe those
investments below:
➤
New vertical storage facility. We are finalizing technical planning for the construction of a new
vertical storage facility, which we expect to complete in the first half of 2005. We estimate that the
project will require a total investment of R$32.0 million, of which we expect to spend R$17.0 million
in 2004. With this new facility, our storage capacity for finished products, packages and raw materials
would increase from our current 24,000 pallets to 52,000 pallets in 2005.
➤
New order sourcing line. We are finalizing technical planning for the construction of a new order
sourcing line, which we expect to complete in the second half of 2004. We estimate that the project
will require a total investment of R$10.0 million, and we expect to spend R$8 million of this amount
in 2004. With this new line, our order sourcing capacity would increase approximately 125% from
our current 32,300 orders per day to 72,700 orders per day.
➤
Manufacturing capacity. We expect to invest approximately R$21.0 million in 2004 to increase our
manufacturing capacity by acquiring new machinery or upgrading existing machinery without building
out any of the projected modules of our Cajamar facility.
➤
Other significant investments. We expect to invest approximately R$34.0 million in 2004. Of this
amount, approximately R$19 million is allocated to investments relating to the maintenance of our
operations (for trade-ins of vehicles used by our sales promoters and managers, new molds and tools
for products we launch, software and information technology equipment) and R$15 million are
expected to be investments to improve our processes.
A portion of the investments related to increasing our manufacturing capacity described above will be
financed by Banco Itaú BBA, which provided a loan of US$10.0 million to us from funding it received
from the International Finance Corporation, or IFC. See “—Debt.” For our other investments related to
increasing our manufacturing and inventory capacity, we are currently negotiating new credit lines.
Although these financings will be important for our expansion, we believe we would be able to
implement these projects with our own funds in the event that financing in the capital markets is
unavailable.
Debt
At March 31, 2004, our total loans and financing and provisions for losses on derivative transactions
exceeded by R$21.5 million our consolidated cash and banks and cash equivalents (excluding the
subordinated debentures with the right to participation in our profits that were redeemed and the credits
for which were capitalized March 2, 2004). At December 31, 2003, our consolidated cash and banks and
69
cash equivalents exceeded by R$19.0 million our total loans and financing and provisions for losses on
derivative transactions. The increase in our net loans and financing occurred due to a concentration of
cash disbursements in the first quarter of 2004, such as payments of dividends, payments in connection
with our stock option plans from previous years and payment of profit sharing payments to our
employees from our results of operations for 2003.
At December 31, 2003, we had long-term loans and financing of R$33.0 million and short-term loans
and financing of R$75.1 million, and at March 31, 2004, we had long-term loans and financing of
R$101.2 million and short-term loans and financing of R$39.7 million. These loans and financing
currently consist primarily of financing from BNDES and other Brazilian governmental agencies. In
addition, at December 31, 2003, we had outstanding subordinated debentures in the aggregate principal
amount of R$130.7 million. We redeemed these debentures in full on March 2, 2004. The former
holders of these debentures made a capital contribution to our company in the form of the credits
obtained from the redemption of the debentures and from the net remuneration on the debentures
through January 31, 2004 and received common shares in return.
We reduced our total short-term and long-term loans and financing to R$108.1 million in 2003 from
R$204.1 million in 2002. This decrease was due, in part, to net principal repayments of R$82.5 million
and in part to the positive effect of the appreciation of the real against the U.S. dollar on our U.S. dollardenominated debt.
We reduced our total short-term and long-term loans and financing to R$204.1 million in 2002 from
R$237.3 million in 2001. This decrease was principally due to net principal repayments of R$116.8
million, partially offset by the negative effects of the real-U.S. dollar exchange rate on the amount of our
debt denominated in U.S. dollars.
The following table shows the variation of our net loans and financing, taking into account provisions
for losses or gains resulting from our derivative contracts for the periods indicated.
At December 31,
2001
2002
2003
At March 31,
2004
(R$ millions)
A. Total loans and financing ......................................................... 237.3 204.1 108.1
B. Provisions for loss/(gain) from our derivative contracts.............
25.8 (27.6)
9.0
C. Cash and banks and cash equivalents........................................
58.1
57.4 136.1
Net loans and financing (A+B-C) (1)......................................... 205.0 119.1 (19.0)
140.9
2.8
122.2
21.5
(1) Excluding the subordinated debentures described above, which were redeemed and the credits for
which were capitalized in March 2004.
Our net loans and financing in 2001 resulted primarily from the investments we made to construct our
Cajamar facilities. Since that time, we have generally reduced our net loans and financing through
operating cash flows so that our net loans and financing were negative in 2003. However, at March 31,
2004, our net loans and financing were positive (our total loans and financing and provisions for losses
on derivative contracts exceeded by R$21.5 million our consolidated cash and banks and cash
equivalents), primarily due to a concentration of cash disbursements in the first quarter of 2004, such as
payments of dividends, payments in connection with our stock option plans from previous years and
payment of profit sharing payments to our employees from our results of operations for 2003.
70
The table below sets forth the maturity of our consolidated long-term debt at December 31, 2003:
Maturity of long-term debt
Amount of long-term debt
(R$ millions)
2005 ...................................................................................................................
2006 ...................................................................................................................
2007 and thereafter.............................................................................................
12.3
11.6
9.1
Our loans and financing include the instruments we describe below. Although we have the loans and
financing described below, we believe we do not depend on third-party funds to finance our business in
view of our historical levels of cash flow generation. See note 14 to our audited consolidated financial
statements for information about certain other loans and financing.
➤
BNDES financing. In February 2001, we entered into a financing agreement with BNDES, of which
R$39.9 million was outstanding at March 31, 2004 in two tranches of R$28.4 million and R$11.5
million. The first tranche of the loans bears interest at the TJLP plus 4% per annum, and the other
tranche bears interest at a variable rate based on the average cost incurred by BNDES to borrow in
foreign currency plus 4%, in each case payable monthly. The principal amount is payable in 48
monthly payments, starting on September 15, 2003 for one tranche of the loans and on November 15,
2003 for the other tranche. The BNDES financing agreement contains restrictive covenants, including
limitations on the sale of assets, the issuance of debentures and the assumption of certain debts, which
remain in effect so long as we owe any amount to BNDES. The financing agreement also allows
BNDES to accelerate the loan if there is a change of control of our company without the prior written
consent of BNDES. The loans are secured by a mortgage on a portion of the property in Itapecerica da
Serra and Cajamar owned by our subsidiary Natura Indústria. In addition, a portion of the debt is
guaranteed by a letter of guaranty issued by a commercial bank, and the debt was fully guaranteed by
Natura Empreendimentos before the March 2004 corporate reorganization.
➤
BankBoston floating rate notes. In December 2001, we entered into a private placement and agency
agreement with BankBoston, N.A. pursuant to which we issued two US$20.0 million tranches of
floating rate notes, of which an aggregate amount of US$20.0 million was outstanding at December
31, 2003. We had the option to prepay this obligation, and we prepaid it in full on March 17, 2004.
➤
Itaú BBA/IFC financing. In January 2004, Banco Itaú BBA S.A. received a loan from the
International Finance Corporation, or IFC, in the amount of US$10 million and simultaneously made a
loan to Natura Indústria in the same amount using a structure known as a repasse. Natura Indústria’s
loan is payable in 14 payments due each June and December from June 2005 to December 2011.
Interest on the loan begins accruing in June 2004 at a rate of LIBOR plus 6.05% per annum and is
payable semi-annually. The agreement contains financial covenants, including an interest coverage
ratio, a net debt to EBITDA ratio and a maximum ratio of net debt to the sum of shareholders’ equity
and net debt. The definitions of EBITDA in this agreement may not be comparable to adjusted
EBITDA as reported in “—Results of operations.” The agreement also contains other restrictive
covenants, including limitations on corporate reorganizations and changes of corporate control. The
agreement provides for the acceleration of the loan upon the ocurrence of certain events, including a
material adverse change in the financial condition of Natura Indústria or our company in the judgment
of Banco Itaú BBA. The loan is secured by a promissory note issued by Natura Indústria in the amount
of 125% of the principal amount of the loan that was guaranteed by Natura Empreendimentos. The
repayment of the debt notes also benefited from a guarantee of Natura Empreendimentos, and we have
assumed that guarantee obligation in connection with our corporate reorganization.
71
We also have a number of loans from commercial banks in the aggregate amount of R$3.9 million at
March 31, 2004 that were funded with simultaneous loans from the Agência Especial de Financiamento
Industrial (Special Agency for Industrial Funding, or FINAME), an agency of BNDES. These loans were
used to purchase equipment and are generally secured in favor of the commercial banks by the
equipment purchased.
In addition, on March 5, 2004, in connection with the corporate reorganization described in
“—Overview—Recent corporate reorganization,” we assumed certain financings of Natura
Empreendimentos as follows:
➤
BNDESPAR debentures. In December 2000, Natura Empreendimentos issued debentures to
BNDESPAR, of which an aggregate principal amount of R$35.3 million were outstanding at
March 31, 2004. We assumed the obligations of Natura Empreendimentos under the debentures in
connection with our corporate reorganization. The debentures bore interest at the TJLP plus 4% per
annum, payable semi-annually, and provided for amortization in two equal installments on December
15, 2004 and December 15, 2005. The agreement governing these debentures provided that if we did
not conduct an initial public offering of our shares by June 15, 2004, we would be obligated to pay a
premium to BNDESPAR of approximately 12% of the nominal value of the debentures adjusted for
inflation, and the interest rate would be increased to TJLP plus 7%. The subscription agreement signed
with BNDESPAR contained restrictive covenants, including limitations on the sale of assets, the
issuance of debentures and the assumption of certain debts. The agreement also permitted BNDESPAR
to accelerate the debentures if there was a change of control of our company without the prior written
consent of BNDESPAR. On May 24, 2004, BNDESPAR converted these debentures into 2,172,550
common shares of our company, representing 2.54% of our capital stock.
➤
FINEP financing. In December 2001, Natura Inovação entered into a financing agreement with
Financiadora de Estudos e Projetos (Agency for Financing of Studies and Projects, or FINEP), an
agency of the Brazilian Ministry of Science and Technology, of which an aggregate principal amount
of R$26.2 million was outstanding at March 31, 2004. The loans were secured by a guarantee of
Natura Participações, and we have assumed this guarantee in connection with our corporate
reorganization. The loans are also secured by a pledge of our receivables in an amount up to the
principal amount of the debt and by promissory notes issued by Natura Inovação in an amount equal
to 130% of each monthly principal installment. The loans under the financing agreement bear interest
at the TJLP plus 3% per annum, payable quarterly until December 15, 2004 and monthly thereafter,
and the principal is payable in 49 monthly payments, the first of which is due on December 15, 2004.
The financing agreement provides for the capitalization of the portion of the TJLP that exceeds 6% per
annum.
72
Contractual obligations and commercial commitments
The following table sets forth our consolidated contractual obligations and commercial commitments at
December 31, 2003.
Payments due by period in millions of reais
Less than
Total
1 year
1-3 years After 4 years
Contractual obligations:
Long-term debt .................................................................... 33.0
Capital lease obligations ...................................................... —
Operating leases................................................................... —
Purchase obligations ............................................................ —
Other long-term obligations................................................. —
Total contractual cash obligations............................................... 33.0
—
—
—
—
—
—
32.9
—
—
—
—
32.9
0.1
—
—
—
—
0.1
Certain contracts
We do not enter into material contracts that are not directly related to our business activities. Our
important contracts that relate to our business activities include the following:
➤
Natura Indústria entered into a contract with Sinter Futura Ltda. on December 12, 2002 under which
Sinter manufactures bar soaps in the quantities and according to the specifications indicated by Natura
for sale in the domestic and international markets. This contract had an original term of one year and
was renewed on February 1, 2004 for a period of five years. In 2003, the total amount we paid Sinter
under this contract was R$48.3 million.
➤
We outsource the call center functions of receiving orders by phone from our independent sales
representatives to two different companies:
Š On February 28, 2002, we entered into a contract with CSU Cardsystem S.A. with a term of 36
months. Under this contract, CSU Cardsystem renders call center and telephone bill collection
services to us, which include maintaining and verifying certain quality controls established by the
parties. In 2003, the total amount we paid CSU Cardsystem under this contract was R$24.3 million.
Š On June 7, 2002, we entered into a contract with Sercom S.A. under which Sercom renders call
center services at our facilities for the receipt of orders from our independent sales representatives.
This contract had an original term of one year and was renewed on February 27, 2004 until April 2,
2005. In 2003, the total amount we paid to Sercom under this contract was R$6.4 million.
Although these contracts relating to the outsourcing of our call center functions do not involve material
amounts, they are important to our distribution channel, since our independent sales representatives
place their orders either by telephone or through the Internet. In 2003, approximately 70% of the orders
placed by our independent sales representatives were placed through our call center.
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not use any off-balance sheet arrangements to finance our operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to several market risks, including interest rate and exchange rate variations. We enter
into hedging transactions to limit our exposure to exchange rate risk and, to a lesser extent, to interest
rate risk. Our debt denominated in U.S. dollars was generally hedged by swap transactions in 2002 and
2003 and during the first three months of 2004. We do not enter into derivative contracts for trading or
speculative purposes.
73
Interest rate risk
During years 2002 and 2003, approximately 74.9% and 55.3%, respectively, of our indebtedness was
denominated in U.S. dollars. During the first three months of 2004, approximately 21.0% of our
indebtedness was denominated in U.S. dollars. These amounts were generally hedged by swap
transactions with interest rates generally based on the CDI. As a result, our primary interest rate
exposure is to changes in the CDI rate. The additional interest expense we would have incurred in the
years ended December 31, 2002 and December 31, 2003 from a hypothetical 10% increase in the CDI
rate would have been R$3.1 million and R$2.5 million, respectively. The net additional interest expense
we would have incurred in the first three months of 2004 from such an increase would have been R$0.2
million.
At December 31, 2003, R$48.3 million of our short-term and long-term indebtedness, or 44.7% of our
total indebtedness, was subject to the TJLP and BNDES’s UMBNDES currency basket rate, a rate based
on the average cost incurred by BNDES to borrow in foreign currency, compared to R$50.8 million, or
24.9% of our total indebtedness, at December 31, 2002. At March 31, 2004, R$111.3 million of our
short-term and long-term indebtedness, or 79.0% of our total indebtedness, was subject to the TJLP and
the UMBNDES currency basket rate. The net additional interest expense we would have incurred in the
years ended December 31, 2002 and December 31, 2003 from a hypothetical 10% increase in the TJLP
rate would have been R$0.6 million in both years. The net additional interest expense we would have
incurred in the first three months of 2004 from such an increase would have been R$0.2 million.
Foreign currency risk
At December 31, 2003, R$59.7 million of our short-term and long-term indebtedness, or 55.3% of our
total indebtedness, was denominated in U.S. dollars, compared to R$152.9 million, or 74.9% of our
total indebtedness, at December 31, 2002. At March 31, 2004, R$29.5 million of our short-term and
long-term indebtedness, or 21.0% of our total indebtedness, was denominated in U.S. dollars. However,
since our debts denominated in U.S. dollars are generally hedged under derivative contracts, exchange
rate variations do not have an impact on the amount of our debt. We had derivative contracts with
financial institutions in the amount of R$180.2 million (US$51.0 million) at December 31, 2002, R$65.6
million (US$22.7 million) at December 31, 2003 and R$36.3 million (US$12.5 million) at March 31,
2004. Our provisions for losses on derivative contracts were R$9.0 million in 2003, compared to credits
for gains on derivative contracts of R$27.6 million in 2002. At March 31, 2004, our provision for losses
on derivative contracts was R$2.8 million.
Our results of operations and financial condition are also affected by the real-U.S. dollar exchange rate
and the real-euro exchange rate, which is generally calculated with reference to the real-U.S. dollar
exchange rate and the U.S. dollar-euro exchange rate. In 2003, approximately 30% of our costs of sales
were linked to foreign currency exchange rates. Of this foreign currency-linked amount, approximately
17% represented costs of imported raw materials (approximately 70% of which were in euros and 30%
of which were in U.S. dollars) and approximately 83% represented costs of domestic raw materials that
were partially tied to the real-U.S. dollar exchange rate.
In order to minimize the effect of exchange rate variations over our production costs, we monitor the
tendencies of the exchange rate of the real against the U.S. dollar and, to the extent necessary, we enter
into purchase transactions in the foreign exchange futures market of the Bolsa de Mercadorias & Futuros
(Brazilian Mercantile and Futures Exchange, or BM&F). Our transactions in the foreign exchange
futures market are intended solely for the purpose of protecting ourselves against foreign exchange
variations, and we do not carry any transaction in the BM&F for speculative purposes.
The effect of a 10% devaluation of the real against the U.S. dollar would have no impact on our debt,
and would have impacted our cost of sales by approximately R$10.9 million in 2003 in the event we did
not carry out transactions in the foreign exchange futures market of BM&F.
74
The effect of a 10% devaluation of the real against the euro would have impacted our cost of sales by
approximately R$1.6 million in 2003 in the event we did not carry out transactions in the foreign
exchange futures market of BM&F.
U.S. GAAP RECONCILIATION AND ACCOUNTING PRONOUNCEMENTS
Reconciliation
Our financial statements have been prepared in accordance with Brazilian GAAP. The following table
sets forth net income and shareholders’ equity for the years ended December 31, 2002 and 2003 under
Brazilian GAAP and U.S. GAAP.
2002
2003
2003
(R$ millions)
(US$ millions)
Net income (Brazilian GAAP)........................................................................ 21.7
63.9
Net income (U.S. GAAP) ...............................................................................
6.2
80.4
Shareholders’ equity (Brazilian GAAP) .......................................................... 91.2 121.3
Shareholders’ equity (U.S. GAAP) ................................................................. 85.0 145.5
22.1
27.8
42.0
50.4
For further information about these differences between Brazilian GAAP and U.S. GAAP, see note 23 to
our audited consolidated financial statements.
The principal differences between Brazilian GAAP and U.S. GAAP as they affected our results of
operations and shareholders’ equity in the years ended December 31, 2002 and 2003 were:
➤
differences in the amortization of capitalized interest under Brazilian GAAP and under U.S. GAAP;
➤
the amortization under U.S. GAAP of the restatement of fixed assets resulting from the application of
inflation accounting during 1996 and 1997. Under U.S. GAAP, Brazil was considered a highly
inflationary economy until July 1, 1997, but under Brazilian GAAP, we discontinued accounting for
the effects of inflation as of December 31, 1995;
➤
the reversal under U.S. GAAP of the deferral of foreign exchange losses incurred as a results of
adjustment of assets and liabilities denominated in foreign currency for the year ended December 31,
2001;
➤
the reversal under U.S. GAAP of proposed dividends accrued;
➤
the effects of non-designation of certain derivative instruments as “hedges” under U.S. GAAP;
➤
the recording of a liability under U.S. GAAP for the amount payable under stock option plans at the
end of the period reflecting the effects of changes in the estimated fair value of our common shares,
given that we did not adopt the accounting policy described under “—Overview—Discussion of
critical accounting policies—Stock option plan” until after December 31, 2002;
➤
the recording of the effects of translating the financial statements of our foreign subsidiaries in results
of operations under Brazilian GAAP, whereas adjustments from this translation are not recorded in
results of operations under U.S. GAAP but are accumulated in a separate component of consolidated
equity (foreign currency translation adjustments);
➤
the inclusion of interest income (expense) in operating income under Brazilian GAAP, whereas under
U.S. GAAP, interest income (expense) is included as non-operating income;
➤
the requirement under U.S. GAAP to disclose comprehensive income (loss);
➤
the recording under U.S. GAAP of impairment charges relating to goodwill from the acquisition of
Nova Flora Participaçoes Ltda.; and
➤
the deferred tax effect of these adjustments.
75
Cosmetics, fragrances and toiletries industry
GLOBAL COSMETICS, FRAGRANCES AND TOILETRIES INDUSTRY OVERVIEW
The global cosmetics, fragrances and toiletries industry grew at an average annual rate of approximately
2.0% from 1998 to 2002, with total sales reaching approximately US$180 billion in 2002, according to
a report published by Euromonitor International in July 2003.
Global sales of cosmetics and toiletries
1998
Value (US$ billions) ............................................................
Growth from prior year ......................................................
1999
2000
2001
2002
165.8 171.2 173.5 173.7 179.7
0.0%
3.3%
1.4%
0.1%
3.5%
Source: Euromonitor International
According to Euromonitor International, the stronger performance in 2002 was driven in part by the
weak U.S. dollar in relation to other currencies, which negatively affected sales in Latin America, but
lifted sales in Western Europe and Asia. The products that drove sales varied according to the level of
development of the market, with developed countries generally exhibiting higher growth in high-margin
products and emerging markets showing a tendency for consumers to buy increasingly higher-priced
products in the mass category and increases in demand for premium products in urban areas.
Per capita global expenditures of cosmetics, fragrances and toiletries were approximately US$29 in 2002,
having remained relatively stable from 1997 to 2002, according to the same report. The table below
shows the relative size of several major markets and per capita consumption of cosmetics, fragrances and
toiletries in 2002.
Sales and per capita consumption in major markets in 2002
Country
Value of sales
(US$ billions)
Percentage of
world market
Per capita
consumption
(%)
(US$)
U.S.A. .......................................................................................
Japan ........................................................................................
France.......................................................................................
Germany...................................................................................
United Kingdom .......................................................................
Italy ..........................................................................................
Brazil ........................................................................................
China........................................................................................
South Korea..............................................................................
Mexico .....................................................................................
Spain.........................................................................................
Russia .......................................................................................
Canada .....................................................................................
India .........................................................................................
Poland ......................................................................................
Others.......................................................................................
45.2
19.4
9.8
9.5
8.7
6.9
6.3
5.5
4.9
4.5
4.5
4.3
3.6
2.9
2.1
41.6
25.1
10.8
5.4
5.3
4.8
3.8
3.5
3.0
2.7
2.5
2.5
2.4
2.0
1.6
1.1
23.1
162
153
165
117
146
119
37
4
102
44
113
30
117
3
53
n.a.
Total..................................................................................
179.7
100.0
(1) Average global per capita consumption.
76
29(1)
As suggested by the table above, the global cosmetics, fragrances and toiletries industries is highly
differentiated geographically depending on the level and distribution of income, varying degrees of
saturation of the market, demographic and climate differences and cultural preferences for different types
of products. The United States and Japan are mature markets that together represent more than a third
of the global market. Both markets have recently been affected by difficult macroeconomic conditions.
Western European markets are also generally mature, with France ranking first in global per capita
consumption, according to Euromonitor International. Some Western European countries like Spain,
however, are less mature and have recently shown higher growth in the cosmetics, fragrances and
toiletries sector. Euromonitor International identifies Brazil as an important developing market and also
highlights growth in Mexico driven, in part, by the entry of increasing numbers of women into the
workforce.
The table below shows the relative importance to global sales in 2002 of several product segments, as
well as compound annual growth rates of those segments over the previous five-year period.
Global sales breakdown by segments
Segment
Hair care........................................................
Skin care ........................................................
Make-up ........................................................
Fragrances......................................................
Bath and shower ............................................
Oral hygiene ..................................................
Men’s grooming .............................................
Deodorants ....................................................
Sun care .........................................................
Baby care .......................................................
Depilatories....................................................
Value of sales in 2002
Percentage of
total market in 2002
Compound annual
growth, 1997-2002
(US$ billions)(1)
(%)(2)
(%)
37.3
33.6
25.3
20.4
19.1
19.0
13.9
8.0
3.5
3.1
2.3
20.7
18.7
14.1
11.4
10.7
10.6
7.8
4.5
1.9
1.7
1.3
1.3
3.3
2.8
0.7
—
0.3
2.7
0.4
3.2
1.3
7.7
(1) The sum of the numbers in the column exceeds the worldwide total for 2002 because of doublecounting of men’s grooming products that also fall in other categories.
(2) The sum of the percentages exceeds 100% because of double-counting of men’s grooming products
that also fall in other categories.
According to Euromonitor International, several drivers of growth in 2002 among these product
segments can be identified. Among the different types of products offered by the industry, hair care
products is the largest segment, representing approximately 21% of the market in 2002. Companies tried
to meet the challenges of the mature market for shampoos in the United States, Western Europe and
Australasia through greater segmentation of products with special features. In less developed markets,
growth was driven by increasing income levels and market penetration. Skin care products, which
represented approximately 19% of the market in 2002, and make-up, which represented approximately
14% of the market in 2002, both showed higher growth from increasing sales of products with antiaging ingredients. Growth in the skin care segment was also boosted by products offering time–saving
features and firming ingredients. Increased sales of fragrances, which represented approximately 11% of
the market in 2002, were influenced by the stronger euro in the Western European market, as well as by
an increased focus on innovative fragrances and, in developing markets, rising incomes and intense
publicity. Many products in the oral hygiene sector and the bath and shower sector, each of which
77
accounted for approximately 11% of the market in 2002, are commodities, limiting the potential for
high growth rates on a global scale. However, the oral hygiene sector grew in 2002, partly due to sales in
Western and Eastern Europe, and the bath and shower sector showed slight growth, fueled partly by
sales in emerging markets.
At the global level, the primary distribution channel for cosmetics, fragrances and toiletries is the mass
market retail channel in which several large retailers account for the majority of sales. However,
cosmetics sales are also generated through selective distribution channels that vary from region to region,
including direct sales in Latin America, which is one of the most important distribution channels in that
region. The following table shows the relative importance of different distribution channels worldwide.
Percentage of sales by distribution channel in 2002 (%)
Region
Western Europe .........
North America...........
Asia/Pacific ................
Latin America ............
Africa/Middle East .....
Australasia .................
Eastern Europe...........
Pharmacies
Grocery
Discounters
Department
stores
Specialists
Direct
sales
Outdoor
markets
Others
27.0
17.0
15.5
12.3
19.0
12.4
11.4
37.7
17.1
30.7
43.1
41.4
53.5
20.2
2.8
24.2
2.0
0.1
4.0
7.9
1.0
10.3
16.2
18.8
4.0
15.6
12.6
28.7
14.8
7.9
17.4
11.6
13.2
2.1
16.7
4.9
8.1
12.2
26.2
2.7
5.7
9.5
0.3
0.4
1.7
0.9
2.1
0.0
11.0
2.2
9.0
1.6
1.8
1.9
5.8
1.5
LATIN AMERICAN COSMETICS, FRAGRANCES AND TOILETRIES INDUSTRY OVERVIEW
For the region as a whole, the value of sales in the cosmetics, fragrances and toiletries sector decreased in
U.S. dollars from 1997 to 2002 at an average annual rate of 3.5%. In a region affected by recent
economic recession, growth in Brazil (without considering the effects of the depreciation of the real
against the U.S. dollar) and Mexico, the two largest markets (which together represented approximately
60% of the Latin American market in 2002), contrasted with more difficult circumstances for the
industry in Argentina, Colombia, Venezuela and other markets, according to Euromonitor International.
The table below shows the value of sales and growth from the prior year for 1998 to 2002.
Latin American sales of cosmetics and toiletries
1998
Value (US$ billions) ..............................................................
Growth from prior year ........................................................
78
1999
2000
2001
2002
20.6
18.5
19.8
19.4
17.0
0.9% (10.0)% 6.8% (1.8)% (12.4)%
The table below shows the relative size of several markets in the region in U.S. dollars from 1998 to
2002.
Sales in Latin American markets, 1998-2002
Country
1998
1999
9.1
3.4
1.0
0.9
2.6
0.9
2.5
6.8
3.6
1.1
1.0
2.6
0.9
2.5
2000
2001
2002
(US$ billions)
Brazil ................................................................................
Mexico..............................................................................
Venezuela..........................................................................
Colombia ..........................................................................
Argentina ..........................................................................
Chile .................................................................................
Other ................................................................................
Total Latin America ...................................................
7.6
3.9
1.1
1.0
2.6
0.9
2.6
% of market
in 2002
(%)
7.0
4.3
1.2
0.9
2.4
0.8
2.8
6.3
4.5
0.9
0.9
0.9
0.8
2.7
37
26
5
5
5
5
16
20.6 18.5 19.8 19.4 17.0
100
BRAZILIAN COSMETICS, FRAGRANCES AND TOILETRIES INDUSTRY OVERVIEW
Size of the market—Methodologies
The Brazilian cosmetics, fragrances and toiletries market is monitored by two institutions: the Sindicato
da Indústria de Perfumaria e Artigos de Toucador do Estado de São Paulo (the Union for the Perfume
and Toiletries Industry in the State of São Paulo, or ABIHPEC/Sipatesp) and by Euromonitor
International. These organizations use different methodologies to determine the size of the market.
ABIHPEC/Sipatesp uses net income figures of the manufacturers in the sector, which totaled
approximately R$11.0 billion in 2003 and R$9.6 billion in 2002. In contrast, Euromonitor International
uses various sources to estimate the size of the market as a whole based on prices to end consumers, and
that estimate was R$18.9 billion in 2002.
Industry growth
The Brazilian cosmetics, fragrances and toiletries industry has experienced growth in recent years in local
currency terms in spite of the economic uncertainty that followed the devaluation of the real in early
1999, the economic crisis in neighboring Argentina and the global economic downturn in 2001 and
2002. Although sales of cosmetics, fragrances and toiletries in Brazil declined in U.S. dollar terms from
US$9.1 billion in 1998 to US$6.3 billion in 2002, according to Euromonitor International, sales grew in
local currency terms. The Brazilian cosmetics, fragrances and toiletries industry grew at a faster pace in
real local currency terms than the gross domestic product from 1998 to 2003, as shown in the following
table, according to data published by ABIHPEC/Sipatesp, adjusted for inflation using the IPCA.
Year
GDP
Annual growth (%)
Cosmetics, fragrances and
toiletries industry real growth
1998.....................................................................................................
1999.....................................................................................................
2000.....................................................................................................
2001.....................................................................................................
2002.....................................................................................................
2003.....................................................................................................
0.1
0.8
4.4
1.3
1.9
(0.2)
5.1
2.6
7.9
2.7
2.5
5.3
Source: IBGE and ABIHPEC/Sipatesp
79
According to Euromonitor International, industry growth from 1997 to 2002 was due to a combination
of factors, including:
➤
strong demand from a large youth market;
➤
cultural emphasis on beauty;
➤
aggressive competition from large multinational corporations as well as a significant domestic
industry;
➤
advertising in the extensive array of fashion magazines and trade publications;
➤
increasing participation of women in the workforce, who generally use more cosmetics than those
working in the home;
➤
development of new and increasingly segmented products;
➤
effective distribution by direct sales companies like our company and Avon; and
➤
ability of the industry to limit their increases in prices, although Euromonitor International indicates
that increasing pressure from the appreciation of the real against the U.S. dollar on costs for imported
materials and inflation forced the industry to pass costs on to consumers in 2002.
General market and industry profile
Brazil’s geographic and demographic diversity presents unique challenges and opportunities to
manufacturers of cosmetics, fragrances and toiletries. Brazil’s land mass of 8.5 million square kilometers
has significant variations in climate, and lifestyles vary widely from the highly urbanized regions in the
southeast to sparsely populated regions in the north. In addition, Brazil’s 175 million people are a
complex mix of African, European and Asian ancestry. While the Brazilian market contains millions of
consumers of mass market products, these differences provide opportunities for producers to develop
specialized products that can often compete successfully against existing mass market products.
In over three decades of experience in the industry, we have seen increasing levels of sophistication in
consumer expectations, the quality of suppliers, technology and marketing. Over the years, we have also
seen increasing competition, and we describe our principal competitors in “Description of our business—
Competition.” Several multinational cosmetics companies have a presence in Brazil, but the domestic
cosmetics industry has also become increasingly effective in competing with multinational players.
According to Euromonitor International, seven of the 20 leading companies in the Brazilian market in
2002 were domestic companies. As the industry continues to grow, other Brazilian or multinational
companies may enter the Brazilian market.
80
The table below shows the relative importance to total sales of several product segments in the Brazilian
cosmetics, fragrances and toiletries market.
Retail sales in Brazil per segment
Segment
1997
1998
1999
2000
2001
2002
(in R$ millions)
Hair care .............................................
Skin care .............................................
Make-up .............................................
Fragrances ...........................................
Bath and shower..................................
Oral hygiene........................................
Men’s grooming ..................................
Deodorants .........................................
Sun care ..............................................
Baby care ............................................
Depilatories .........................................
Total(1)........................................
2,550.0
962.3
865.4
1,369.8
1,102.1
1,437.0
718.5
696.7
140.3
283.2
75.5
2,765.2
975.8
1,043.5
1,434.7
1,161.1
1,527.7
773.6
729.8
150.8
291.4
75.0
3,142.2
1,200.7
1,147.6
1,737.8
1,316.5
1,860.5
956.5
850.6
186.6
317.8
91.7
3,684.5
1,217.2
1,297.5
2,023.4
1,473.6
1,907.0
1,104.2
1,014.9
200.8
319.8
98.0
4,241.0
1,520.2
1,503.0
2,541.0
1,656.2
2,069.6
1,294.7
1,379.4
293.2
396.2
112.8
4,959.9
1,791.1
1,707.2
3,265.9
1,776.2
2,030.1
1,429.9
1,571.6
384.0
482.1
118.3
9,911.2 10,603.5 12,419.5 13,880.6 16,475.2 18,920.9
(1) The sum of the segments is not equivalent to the total because of double-counting. For example,
men’s skin care products are included in men’s grooming products and in skin care products.
Brazil in comparison to other markets
According to Euromonitor International, Brazil was ranked seventh in the world in sales of cosmetics,
fragrances and toiletries in 2002 and was:
➤
third largest in cosmetics, fragrances and toiletries for children;
➤
fourth largest in deodorants and fragrances;
➤
sixth largest in hair care products;
➤
seventh largest in men’s grooming products and oral hygiene products;
➤
eighth largest in sun care products; and
➤
tenth largest in bath and shower, make-up and skin care products.
At US$37 per capita consumption of cosmetics, fragrances and toiletries, Brazil has per capita
consumption well below levels in the United States and many Western Europe countries and therefore
presents opportunities for future growth. In Latin America, Brazil’s per capita consumption is slightly
below that of Mexico but is significantly below levels historically recorded in Argentina. A Euromonitor
International report published in July 2002, for example, reported per capita consumption of US$69 in
Argentina in 2001.
Imports and exports
In recent years, imports of cosmetics, fragrances and toiletries have generally decreased. At the same
time, exports by Brazilian manufacturers in the sector have increased. From 1998 to 2002, for example,
the Brazilian cosmetics, fragrances and toiletries industry’s exports increased to US$159.5 million in
2002 from US$83.2 million in 1998, whereas imports decreased through the same period to US$123.6
million in 2002 from US$236.2 million in 1998, according to ABIHPEC/Sipatesp.
81
South America remains the major destination of Brazilian cosmetics, fragrances and toiletries exports.
However, exports to South America in terms of value have decreased as a percentage of total exports as
Brazilian producers have increased the number of countries to which they export, as shown in the table below.
2000
Exports to South America (US$ millions) .......................................................
Percentage of total exports in sector...............................................................
Destination countries worldwide....................................................................
2001
2002
100.0
102.3
96.4
78.2% 69.7% 60.4%
71
75
87
Source: ABIHPEC/Sipatesp
Distribution
There are three broad distribution channels for cosmetics, fragrances and toiletries in the Brazilian
market:
➤
direct sales, which represented approximately 24% of total sales in 2003 and 2002, compared to
approximately 23% in 2001 and 21% in 2000, according to ABIHPEC/Sipatesp, principally our
company and Avon;
➤
retail sales, which represented approximately 72% of sales in 2003 and primarily were sales through
supermarkets that carry products produced by Unilever N.V., Johnson & Johnson, Beiersdorf AG,
Colgate-Palmolive Company, L’Oréal S.A. and other producers; and
➤
franchises, which represented approximately 4% of sales in 2003 and are sales by stores like O
Boticário that sell one company’s products.
Retail sales also include sales by pharmacies and all-purpose drugstores, or drogarias, which typically sell
cosmetics, fragrances and toiletry products in Brazil.
Sales of cosmetics, fragrances and toiletries products in Brazil through the direct sales channel have grown
in the past six years at a rate exceeding that of other distribution channels. The compound annual growth
rate of the direct sales channel was 7.5% between 1998 and 2003, compared to 3.4% growth in sales
through traditional channels (retail, wholesale and franchises), as set forth in the table below.
Annual growth rate (%)
Direct
Traditional
sales
channels(1)
Year
1998.......................................................................................................................
1999.......................................................................................................................
2000.......................................................................................................................
2001.......................................................................................................................
2002.......................................................................................................................
2003.......................................................................................................................
9.3
0.9
7.5
13.8
7.7
6.2
4.0
3.0
8.0
(0.3)
1.0
5.0
Compound annual growth rate .......................................................................
7.5
3.4
(1) Includes retail, wholesale and franchises.
Source: ABIHPEC/Sipatesp.
Suppliers
The Brazilian cosmetics, fragrances and toiletries industry is characterized by a low concentration of
suppliers of raw materials and packaging. Most global suppliers have operations in Brazil that meet most
of the special requirements of the cosmetics industry. These conditions contribute to the competitiveness
of the Brazilian cosmetics industry in relation to the rest of Latin America, encouraging exports.
82
Description of our business
OVERVIEW
We are a leading Brazilian cosmetics company, and we distribute our products principally through direct
sales by independent sales representatives. We believe our distinctive corporate culture, which values our
relationships with consumers of our products, our independent sales representatives, our suppliers and
others, has been fundamental to our growth. We are an integrated developer, manufacturer, distributor
and seller of cosmetics, fragrances and toiletries, and our brand is one of the most recognized cosmetics
brands in Brazil. We produced over 130 million individual items in 2003, and we offer consumers a
portfolio of over 510 varieties of products. Our products reach consumers in over 5,000 Brazilian
municipalities through our network of approximately 355,000 independent sales representatives at
December 2003, who are not our employees. We also have operations in Argentina, Chile and Peru, and
we distribute our products in Bolivia through an independent distributor.
The following table sets forth, for the periods indicated, some of our principal consolidated financial and
operational indicators:
Compound
annual Three months ended
growth
March 31,
rate,
2001
2002
2003
2003
2004
2001-2003
(R$ millions, except percentages and independent
sales representative data)
Gross operating revenues ................
Net operating revenues....................
taxes ............................................
Net income......................................
Adjusted EBITDA(1) .......................
Independent sales representatives in
Brazil (thousands at period
end)(2).........................................
1,168.0 1,411.2 1,910.1
%
change
first
quarter
20032004
27.9% 344.9
475.6
37.9%
23.2% 239.9
329.2
37.2%
875.5
993.1 1,328.9
73.3
9.5
120.3
126.6
21.7
199.2
231.9
63.9
295.7
77.9%
159.4%
56.8%
25.8
5.0
43.9
72.8
44.7
82.3
181.8%
786.4%
87.5%
287
307
355
11.2%
304
357
17.4%
operating performance or as an alternative to cash flow as an indicator of liquidity. See
“Management’s discussion and analysis of financial condition and results of operations—Results of
Operations” for a reconciliation of adjusted EBITDA to net income.
(2) Excludes independent sales representatives who have not placed at least one order in the previous
three full three-week marketing cycles.
83
Year ended March 31,
2001
2002
2003
(R$ millions)
From sales to domestic market—cosmetics and
fragrances(1) ........................................................................ 806.3 945.7 1,286.7
From sales to domestic market—toiletries(2) ........................... 288.5 351.4
495.2
Other products(3) ....................................................................
45.5
79.2
80.3
From sales to foreign market(4) ...............................................
27.7
35.0
47.9
(1)
(2)
(3)
(4)
Three months
ended March 31,
2004
302.1
146.0
14.0
13.5
Fragrances, make-up, creams, lotions and sun protection products.
Hair care products, soaps, deodorants, shaving products and oral hygiene.
Primarily resale promotional material (e.g., kits), samples, testers and accessories (e.g., cosmetics bags).
Sales from our subsidiaries in Argentina, Chile and Peru and to our distributor in Bolivia.
We offer a full range of cosmetics, fragrances and toiletries for women and men regardless of age,
including skin care products for face and body, hair care and treatment products, make-up, fragrances,
bath products, sun protection products, oral hygiene products and product lines for children. Our
product lines include the following brands, whose strong brand concepts express the values associated
with our corporate brand:
➤
our Chronos line of facial skin treatment products, an important brand in the Brazilian market, uses
specific formulas for women of different ages. This product line is linked to a brand concept of
challenging stereotypes about beauty and affirming the beauty of each woman regardless of age.
➤
our Natura Ekos line of bath products and fragrances is a pioneer in the sustainable use of active
ingredients obtained from Brazil’s biodiversity. This line includes the recently launched fragrances
Perfume do Brasil and Água de Banho.
➤
our Mamãe e Bebê line of personal care products is designed to meet the special needs of pregnant
women and their babies. This product line is linked to a brand concept of the importance of the
mother-child bond in the development of balanced, complete individuals.
We believe that our principles and vision have been important in the development of our company and in
the development of our strong reputation in our 35 years of operations in the Brazilian market:
➤
Our principles: Our purpose is to create and sell products that promote “bem-estar/estar bem.”
“Bem-estar” is the concept of a healthy relationship with oneself and one’s body. “Estar bem” is the
concept of rewarding, empathetic relationships with others and with nature.
➤
Our vision: Through our business practices, the quality of our products and the relationships we
establish, we seek to make Natura a brand ultimately recognized around the world and identified with
a community of people who are committed to building a better world.
We believe these distinct principles and vision help us attract and retain our extensive network of
independent sales representatives and promote a corporate culture that produces innovative marketing
concepts and products. In addition, we believe these principles and vision increase the attractiveness of
our products among consumers and will be important as we expand our operations in other geographic
markets.
We strive to be innovative in all our activities, including:
➤
in developing our products and concepts,
➤
in using resources from Brazilian biodiversity in our Natura Ekos product line, stimulating the
sustainable development of local communities,
84
➤
➤
in using advertising to promote not only our products but also socially conscious values, and
in cultivating the quality of our business relationships.
Our operations are centered at our facility in Cajamar in the State of São Paulo, including state-of-the-art
research and development, manufacturing, storage and order sourcing facilities. We also have
commercial and distribution facilities in Itapecerica da Serra in the State of São Paulo and in Uberlândia
and Matias Barbosa in the State of Minas Gerais.
Brazil is a significant market for cosmetics, fragrances and toiletries, representing approximately US$6.3
billion in sales in 2002, compared to approximately US$17 billion in sales in Latin America as a whole in
that year, according to Euromonitor International. Brazil is our home market, and we believe that our
proximity to other countries in Latin America and our competitiveness offer opportunities for expansion
of our international operations, which currently represent 2.5% of our gross operating revenues. In
addition, we plan to begin testing receptivity to our products in the European market by opening a retail
store in Paris between late 2004 and early 2005, where we intend to sell products from our Natura Ekos
line. On May 21, 2004, our board of directors approved the creation of a wholly owned subsidiary and
the acquisition of a company holding leasehold rights for the property where we expect the store to be
located. If the acquisition is concluded, the company holding the leasehold rights will be controlled by
the wholly owned subsidiary we will create.
HISTORY
Our company traces its roots to 1969, when our founder, Antonio Luiz da Cunha Seabra, opened a
factory and a small store in the City of São Paulo. From the beginning, we have believed that cosmetics
are not simply consumer products but also can positively influence a person’s well-being. By 1974, Mr.
Seabra had determined that the direct sales distribution model would optimize the reach of our company.
Guilherme Peirão Leal and Pedro Luiz Barreiros Passos joined our company in 1979 and 1983,
respectively.
During the course of the 1980s, we grew more than 30 times in terms of gross operating revenues. In
1983, in keeping with our focus on innovation, we were one of the first Brazilian producers of consumer
products to introduce product refills as part of our portfolio, allowing our consumers to reuse the
original containers for our products and thus both reduce waste and save money.
Between 1990 and 1992, we made explicit the beliefs, values and principles that have always guided our
company, and we incorporated into new product lines concepts that expressed this worldview. In 1992
we launched our Chronos line, our innovative line of anti-wrinkle products for different ages, and in the
following year we launched Mamãe e Bebê, our product line for pregnant women and their babies based
on the concept of the bond between mother and child.
During that period, we also began to participate actively in a movement to increase corporate social
responsibility in Brazil. In 1995, in cooperation with Fundação Abrinq pelos Direitos da Criança
(Foundation for Children’s Rights, or Abrinq), we launched the Programa Crer para Ver (the “Believing
is Seeing” Program), which supports the improvement in the quality of education in public schools in
Brazil. In 1998, the year in which we were recognized as Corporation of the Year by the Exame
magazine, we helped found the Instituto Ethos—Empresas e Responsabilidade Social (Ethos Institute for
Business and Social Responsibility).
In 1994, we began our expansion in Latin America. In 1999, we used Brazil’s biodiversity as a platform
for the research and development of our Natura Ekos line of bath products and fragrances based on
essential ingredients from Brazil’s biodiversity. We launched this product line in 2000.
At the end of the 1990s, we enhanced our corporate governance by creating a board of directors in 1998,
an Audit and Risk Management Committee in 1999 to recommend the appointment of independent
85
auditors and review and evaluate our critical processes and a Human Resources Committee in 2001 to
develop employee development strategies and oversee remuneration of our executives. We describe these
committees in more detail in “Management—Committees of the board of directors.”
In 2001, we inaugurated our state-of-the-art manufacturing, research and development, training and
logistics facilities in Cajamar, built at the cost of approximately R$200 million. Also in 2001, we
undertook a corporate reorganization as follows:
➤
Natura Empreendimentos transferred the control of our subsidiary Indústria e Comércio de
Cosméticos Natura Ltda., or Natura Indústria, to our company;
➤
we established Natura Logística e Serviços Ltda. to provide logistics and administrative services to the
companies in the Natura group; and
➤
we established Natura Inovação to provide research and development services to our company.
In March 2004, we completed a further corporate reorganization in which Natura Cosméticos merged
with Natura Empreendimentos and then merged with Natura Participações, with our company, Natura
Cosméticos, as the surviving company. We undertook this reorganization primarily to simplify our
corporate structure in preparation for this offering by eliminating our holding companies.
Before undertaking this reorganization, the corporate structure of the principal companies in the Natura
group was as follows:
86
After the reorganization, the corporate structure of the principal companies in the Natura group is as
follows:
Even though we were not required to do so, we have produced an annual report since 2000 that follows
the guidelines of the Associação Brasileira das Companhias Abertas (Brazilian Association of Public
Companies, or Abrasca), an industry organization that, among other things, serves as a forum for
discussion of corporate governance issues. In 2003, our annual report was considered the best annual
report for a non-public company in Brazil by Abrasca and received first prize from the Associação
Brasileira de Comunicação Empresarial (Brazilian Corporate Communication Association, or Aberje), in
addition to other prizes.
We were also the first Brazilian company to adopt, in its entirety, the reporting methods proposed by the
Global Reporting Initiative, or GRI, an organization created by several multilateral institutions to
develop a common global standard for voluntary reports on the economic, social and environmental
impact of an organization. Our annual report follows the GRI’s guidelines as well.
We are incorporated under the laws of Brazil as a corporation (sociedade por ações) with an indefinite
term of duration. Our headquarters are located at Rodovia Regis Bittencourt, s/n, Km 293, Edifício I,
Bairro Potuverá, CEP 06882-700, Cidade de Itapecerica da Serra—SP—Brazil. Our telephone number is
011-55-11-4147-8300.
OUR STRENGTHS
We believe that the following characteristics will aid us in maintaining our competitiveness and working
toward our strategic objectives:
➤
Strong corporate reputation. We believe the quality of our relationships with our independent sales
representatives, our consumers, our employees, our suppliers, the communities where we are present
and the environment is one of our primary strengths. The high value we place on these relationships,
as well as our commitment to social responsibility and sustainable development, have contributed to
making our company one of the most admired cosmetics companies in Brazil. We believe this
significantly enhances the reputation of our brands and improves our ability to recruit and retain
creative, talented and committed independent sales representatives and employees. Independent
surveys have consistently ranked us among the best Brazilian companies for which to work.
➤
Quality concepts and products. We offer high-quality products linked to concepts that reflect our
values and transcend the functions of those products, increasing their attractiveness and encouraging
loyalty to the Natura brand. Our Chronos brand, for example, is a line of innovative skin treatment
products that use formulas that take into account the different stages of aging of the skin. We promote
87
Chronos using images Truly Beautiful Women (Mulheres Bonitas de Verdade)—actual users of
Chronos, not professional models, whose ages are given in our marketing materials. Our Natura Ekos
brand is associated with the sustainable use of Brazilian biodiversity, reflecting and reinforcing our
company’s socially and environmentally responsible image. According to market research that we
commissioned in 2003 and that covered all Brazilian social classes, our corporate brand had the
highest overall rank among several competing brands in Brazil, based on a number of brand attributes
we identified as important to our business.
➤
Financial strength and consistent cash flow generation. Our financial performance has been
consistent, enabling us to rely primarily on cash flow from operations to grow our business. We have
limited debt, as evidenced by our total loans and financing and provisions for losses on derivative
contracts, which, at March 31, 2004, exceeded by only R$21.5 million our consolidated cash and
banks and cash equivalents. Our consolidated net income was R$9.5 million in 2001, R$21.7 million
in 2002 and R$63.9 million in 2003. Our consolidated net income was R$44.7 million in the first
quarter of 2004, compared to R$5.0 million in the first quarter of 2003. Our adjusted EBITDA
(earnings before net financial expenses, income and social contribution taxes, depreciation,
amortization, participations of subordinated debentures and minority interest) was R$120.3 million in
2001, R$199.2 million in 2002 and R$295.7 million in 2003. Our adjusted EBITDA was
R$82.3 million in the first quarter of 2004, compared to R$43.9 million in the first quarter of 2003.
For a reconciliation of adjusted EBITDA to net income, see “Management’s discussion and analysis of
financial condition and results of operations—Results of operations.”
➤
Ability to grow even in difficult economic circumstances. Our consolidated gross operating revenues
from the Brazilian market grew from R$1,140.3 million in 2001 to R$1,376.2 million in 2002 and
R$1,862.2 million in 2003, or 63% in two years, despite low economic growth rates during the
period. In Latin America, our consolidated gross operating revenues from outside Brazil grew from
R$27.7 million in 2001 to R$35.0 million in 2002 and R$47.9 million in 2003, or 73% from 2001 to
2003, despite the crisis in Argentina and the global economic downturn during that period. We believe
that any improvement in macroeconomic environment in Brazil and in Latin America in 2004 would
provide further opportunities for us to grow.
➤
Focus on product innovation. We believe that the successful launch of our Chronos, Natura Ekos,
Vitaplant, Hidraplant, Tododia and other product lines demonstrates our skill in developing
innovative products and concepts. Our revenues from products that we consider innovative that were
launched in the previous 24 months represented 37.4% of our gross operating revenues in 2003, an
increase from 29.2% in 2002 and 28.6% in 2001. Our ability to continually refresh our portfolio with
these new products is a key feature of our strategy.
➤
Extensive and growing distribution network. Our direct sales network is the second largest in Brazil,
and we believe it is among the most productive in terms of sales per independent sales representative.
Productivity of our independent sales representatives who placed at least one order in the previous threeweek marketing cycle exceeded by more than 80% the average productivity of the rest of the direct sales
industry in Brazil in 2003, based on industry figures published by the Brazilian Association of Direct
Sales Companies. Our network in Brazil grew to approximately 355,000 independent sales
representatives at December 2003 who placed at least one order in the previous three full three-week
marketing cycles, compared to approximately 307,000 independent sales representatives at December
2002 and 286,600 independent sales representatives at December 2001. Our independent sales
representatives are independent contractors and are not our employees. As direct sellers, we do not
depend for distribution on large retailers with greater bargaining power, and the structure of our direct
sales network minimizes the effects of the loss of any one independent sales representative. We believe
88
we have distinctive expertise in recruiting, training and retaining independent sales representatives that
has enabled us to grow consistently throughout our history. Because of the integration of our logistics
and distribution operations without a dependence on large retailers and wholesalers, we have greater
autonomy in conducting our business than cosmetics producers that sell their products through
retailers.
➤
Efficient logistics. Our efficient logistics system in Cajamar enabled us to receive and process an
average of over 20,000 orders per day in 2003 and to ship products to over 5,000 municipalities in
Brazil. In 2003, approximately 98% of our orders were shipped within 24 hours after they were
placed. Our highly flexible ordering system permits our independent sales representatives to place
orders on any day of the week through our call center and twenty-four hours a day through the
Internet.
➤
Recent infrastructure improvements with modular expansion capabilities. We recently invested
approximately R$200 million to build a state-of-the-art integrated development, manufacturing and
distribution site in Cajamar, which includes automated order sourcing and inventory management
systems. Our facilities in Cajamar, which were inaugurated in 2001, are designed to permit modular
expansion of our production lines so that we can add significantly to our sales volume without
requiring large incremental capital expenditures.
OUR STRATEGY
Our objective is for our consumers, independent sales representatives, employees, suppliers, shareholders
and other business partners to view our brand and our products as synonymous with quality, integrity,
innovation and socially conscious business practices. We are engaged in a permanent process of building
our brand as we continue to attain financial, social and environmental goals.
The following are key elements of our strategy:
➤
Growth in the Brazilian market. We believe that the strength of our brand, the quality of our
relationships with our independent sales representatives and the differentiating characteristics of our
products place us in a favorable position to take advantage of what we believe to be the growth
potential of the Brazilian cosmetics market. The Brazilian market will continue to be the primary focus
of our expansion efforts.
➤
Growth elsewhere in the Latin American market. We believe that the widespread acceptance of
direct sales as a way to purchase cosmetics in Latin America, the increasing integration of Brazil with
other Latin American countries and our favorable growth rates in recent years in the Argentine,
Chilean and Peruvian markets offers expansion opportunities in Latin America outside of Brazil over
the next decade.
➤
Growth of our network of independent sales representatives. We intend to provide our independent
sale representatives with opportunities for personal and professional development and economic
improvement and to continue to invest in training and relationship-building programs for our
independent sales representatives. We aim to maintain our emphasis on the value of our independent
sales representatives’ work and to encourage their sense of being part of a community committed to
the improvement of society. By pursuing these objectives, we believe we can grow our network and
maintain robust retention and attraction rates for independent sales representatives.
➤
Continuous refreshing of our portfolio. We believe that generating innovative products that express
our values and expand our product portfolio is important to our brand image, competitiveness and
growth. We will continue to invest in research, strengthening our commitment to the sustainable use of
89
Brazil’s biodiversity. At the same time, we intend to continue to expand our product offering at
competitive prices, where we can do so while maintaining our overall margins and the strength of our
brands.
➤
Investments in operating efficiency. We will continue to seek to obtain gains in operating efficiency,
both from our current infrastructure and increases in scale in the following years to help us generate
savings to support our strategy.
CORPORATE SUSTAINABILITY
In managing our business and in our corporate governance, we pursue a policy of corporate
sustainability, which for us means:
➤
a fundamental emphasis on strong financial performance that will produce value for our shareholders;
➤
the environmentally sustainable use and preservation of natural raw materials;
➤
a commitment to the economic, social and cultural development of all the communities in which we
act;
➤
a goal of contributing to environmental awareness and civic education, particularly through the
education of young people;
➤
the affirmation of business practices based on responsible relationships and transparency; and
➤
a contribution to improving the quality of life of our employees.
PRODUCTS
We offer a wide range of cosmetics, fragrance and toiletry products, and we continue to develop new
products. Our portfolio currently numbers approximately 510 stock keeping units, or SKUs. A “stock
keeping unit” is a measure used in our industry to count each individual variety of a product.
We compete in eight categories of the cosmetics market, principally in fragrances and perfumes, creams
and lotions, make-up and deodorants:
➤
Fragrances and perfumes. We offer 15 brands of women’s fragrances and perfumes, including
Natura Ekos, Perfume do Brasil, Águas de Natura, Kaiak and Sintonia. We also offer seven lines of
men’s fragrances and perfumes, including Kaiak, Sintonia and Natura Homem, and we offer
fragrances within our Mamãe e Bebê and Natura Criança lines tailored for babies and children.
➤
Creams and lotions. We offer three lines of face creams, the most important of which is the Chronos
line. We also sell a variety of body lotions under the brands Natura Ekos, Tododia and Tratamentos
para Corpo.
➤
Make-up. We market a broad portfolio of make-up products under the brands Natura Única and
Faces de Natura.
➤
Deodorants. We sell deodorants under 13 different brands, including perfumed deodorants that are
extensions of our women’s and men’s fragrance lines and the Erva Doce brand. We also offer bath
oils.
➤
Hair care. We compete in the hair care market principally through our Natura Ekos, Vitaplant and
Hidraplant brands.
➤
Hand soaps. In this segment of the market dominated by bar soaps, we offer eight types of soap,
especially within our Erva Doce and Natura Ekos lines. We were also among the first in Brazil to
introduce liquid hand soaps in 1984 within the Erva Doce line.
90
➤
Sunscreens. In addition to our Fotoequilibrio sun protection line, we offer specially designed
sunscreens for children.
➤
Shaving aids.
We offer shaving creams and after shaves as extensions of our men’s fragrance lines.
Our principal conceptual product lines are:
➤
Chronos. Our Chronos line offers a complete range of skin treatment options for the face designed
for women over 30. The Chronos line affirms the beauty of women at every stage of their lives and
aligns skin treatment technology with the rejection of stereotypes about beauty. The Chronos line
includes a variety of skin cleansing, toning, hydrating and wrinkle treatment products divided into
categories for women from 30 to 45, 45 to 60 and 60 and older.
➤
Natura Ekos. Our Natura Ekos line of fragrances, personal care and ambience products draws from
the wealth of Brazil’s biodiversity and is inspired by traditional uses of plant ingredients. Through this
line, we seek to increase awareness of the richness of our environmental heritage and to obtain natural
ingredients sustainably in a way that preserves that heritage for future generations and stimulates the
development and quality of life of the communities that cultivate or extract those ingredients. In
keeping with the concept of sustainability, Natura Ekos products are biodegradable and use bottles
and packaging that contain recycled material, and we offer refills for each product, which both reduces
their environmental impact and increases the price competitiveness of our products. Our Natura Ekos
line extends across most of the market segments in which we operate, including soaps, shampoos,
conditioners, moisturizers and perfumes.
➤
Mamãe e Bebê. Our Mamãe e Bebê line of personal care products was designed to affirm the value of
the bond between mother and child, beginning at pregnancy, including the importance of that
relationship in shaping personalities and contributing to a person’s happiness. The ingredients,
textures, fragrances, colors, forms and functions of these products are designed to evoke the tenderness
of a mother’s care for her child. Our Mamãe e Bebê line includes products for babies and pregnant
women.
➤
Fragrances and perfumes. Our diverse and large portfolio provides alternatives for both genders and
all ages and styles and is attentive to differences in taste among consumers. We offer fragrances,
perfumes, deodorants and perfumed moisturizing lotions in a broad range of prices, packaging and
methods of use.
➤
Natura Única. Our Natura Única line of premium make-up products encourages self-realization and
discovery of the unique beauty of each woman, affirming diverse beauties, races and styles. Drawing
on technology we developed, these cosmetics contain ingredients that treat and protect skin and use
tested formulas. The Natura Única line includes products for the face, eyes and lips.
➤
Faces de Natura. Faces de Natura is a complete line of cosmetics and personal care products
designed to reflect the rhythm of life of the modern young woman. We offer skin treatment products,
cosmetics and fragrances—all practical, easy to use and easily combined with other products within
the line according to the young woman’s personal taste and inspiration.
➤
Tododia. Our Tododia line offers a broad range of products designed for daily use across several
segments. This line follows a worldwide trend in the use of natural ingredients like milk, sugar and
honey in cosmetics, fragrances and toiletries.
With the same degree of care with which we develop the formulas for our products, we also carefully
design the packaging for our products so that it reflects the attractiveness and positive impact of our
company’s values, including our concern for environmental responsibility. We were among the first to
offer refills in 1983 for our highest volume products. Our action in this regard not only affirmed our
commitment to environmental responsibility but also contributed to increased sales volumes.
91
DISTRIBUTION OF OUR PRODUCTS
Our independent sales representatives
We distribute our products mainly through our extensive network of independent sales representatives
throughout Brazil and, to a more limited extent, in Argentina, Chile and Peru. At December 2003, we
had approximately 355,000 independent sales representatives in Brazil, an increase from approximately
307,000 at December 2002 and approximately 286,600 at December 2001. At March 2004, we had
approximately 357,000 independent sales representatives in Brazil, an increase from approximately
304,000 at March 2003. In addition, at December 2003, we had a total of approximately 19,580
independent sales representatives in Argentina, Chile and Peru. These figures reflect the total number of
independent sales representatives who placed orders in the prior three three-week marketing cycles.
We have non-exclusive contractual relationships with our independent sales representatives, who are
independent contractors with no employment relationship with us. The independent sales representatives
purchase products from us for resale at prices, terms and conditions independently agreed with their
respective customers. Our independent sales representatives generally have 21 days to pay for our
products, and up to 42 days during certain peak periods of the year such as the Christmas season. We
may cancel contracts with independent sales representatives who fail to pay for our products, use our
brand inappropriately or fail to continue to place orders regularly. See “—Regulatory matters” for a
description of our legal relationship with our independent sales representatives.
Every three-week marketing cycle, we print approximately 800,000 copies of our Vitrine Natura catalog,
an attractive full-color display of the products and promotions we are offering in that cycle, and send at
least one copy to each independent sales representative. Our catalog includes reference prices for
customers, but independent sales representatives are free to determine the prices and payment conditions
at which they will offer our products. Our independent sales representatives have a period of time to pay
for the products, and our default rate is relatively low. Our losses from failures to pay for our products
were 1.24% of our gross operating revenues in 1999, 1.08% in 2000, 1.70% in 2001, 1.36% in 2002
and 1.33% in 2003.
Our independent sales representatives place their orders by telephone or through the Internet. In 2003,
we received an average of 20,000 orders per day, and approximately 98% of those orders were shipped
within 24 hours. In 2003, approximately 70% of the orders processed by our independent sales
representatives and employees were placed through our call center, and approximately 30% were placed
through our recently developed Internet platform. We have outsourced our call center since 2001 to two
different companies. See “Management’s discussion and analysis of financial condition and results of
operations—Liquidity and capital resources—Certain contracts.”
Our relationship with our independent sales representatives
Our independent sales representatives accounted for substantially all of our sales in 2003. We believe
that if we maintain close relationships with our independent sales representatives by offering them
opportunities for personal development, they will offer high quality, personal service to their clients.
We strengthen our relationship with our independent sales representatives and we recognize their sales
results in several ways, including:
➤
annual gala events at which we award prizes to the best independent sales representatives in each
region;
➤
special invitations to product launch events; and
➤
“VIP” visits to the Cities of Cajamar and Itapecerica da Serra in the State of São Paulo.
92
In addition, we believe that acting as an independent sales representative has important social benefits
that cannot be measured simply by the profits with the resale of our products. We believe we help to
empower our independent sales representatives (97% of whom are women) by giving them an
independent source of income, a greater degree of control over their livelihoods and the opportunity to
further develop relationships in their communities, and we believe we contribute to more widespread
distribution of wealth in our society. We believe these factors contribute to our ability to retain our
independent sales representatives.
We believe that another factor that sets us apart from our competitors is our effort to promote training
for our independent sales representatives. We offer a variety of training programs developed to improve
quality of our independent sales representatives’ relationships with end consumers. In 2003 we trained
approximately 120,000 independent sales representatives.
We also communicate with our independent sales representatives through a 15-minute weekly television
program that is broadcast on national television in Brazil and focuses on the experiences and needs of
our independent sales representatives.
Productivity of our independent sales representatives
Our direct sales network is the second largest in Brazil, and we believe it is among the most productive in
terms of sales per independent sales representative. Productivity of our independent sales representatives
who placed at least one order in our last three-week marketing cycle, measured in terms of annual sales
and prices to end consumers, exceeded by more than 80% the average productivity of the rest of the
direct sales industry in Brazil in 2003, based on industry figures published by the Brazilian Association of
The table below demonstrates productivity of our independent sales representatives compared to the
direct sales market in Brazil:
2001
2002
2003
Operational data
(thousands)(1) ..............................................................................
(thousands)(2) ..............................................................................
(thousands)(3) ..............................................................................
Natura (thousands) ......................................................................
Sales volume of Natura (R$ millions)(4) ..........................................
Sales volume of the market (R$ millions)(5).....................................
Sales volume of the market excluding Natura (R$ millions) .............
Productivity of our active independent sales representatives (annual
R$ per active independent sales representative) ............................
sales representative)......................................................................
Natura’s productivity / Market productivity excluding Natura ........
287
307
355
189
211
248
1,099 1,169
1,252
C=B–A
910
957
D
1,603 1,904
E
5,956 6,896
F = E – D 4,353 4,992
1,004
2,587
8,160
5,573
A
B
D/A
8,478 9,004 10,425
F/C
4,784 5,214
5,553
1.8x
1.7x
1.9x
93
Note: All information in the table above relates to our operations in Brazil only.
including their estimated margins but excluding amounts relating to marketing material (e.g.,
Internet
We also sell products in Brazil directly to consumers via the Internet, even though this sales channel does
not have a significant impact on our revenues. However, we view the Internet primarily as a tool for
communicating with our independent sales representatives in a manner that can provide efficiencies for
us and them. For example, receiving orders through our website costs approximately 80% less than
receiving orders through the call center. We believe that slightly less than half of our independent sales
representatives currently have regular access to the Internet. Sales of our products to end consumers
through the Internet represented less than 1% of our gross operating revenues in 2003.
Our sales structure
Our sales structure in December 2003 was composed of six market management areas for specific
regions of the country, 27 sales managers who oversee the work of our sales promoters and currently
680 sales promoters (excluding inactive sales promoters), who are our primary link to our independent
sales representatives. Our sales promoters monitor, recruit and provide training to our independent sales
representatives. The great majority of our sales promoters live in the regions they cover and speak
regularly with their independent sales representatives.
Just as the quality of our relationship with our independent sales representatives has a ripple effect
throughout our market, the quality of our relationship with our sales promoters has a direct effect on the
satisfaction and productivity of our independent sales representatives. We therefore place great emphasis
on recognizing the efforts of our sales promoters and encouraging them to develop positive relationships
with our independent sales representatives, including through the following initiatives:
➤
our annual sales force campaign, which awards prizes to sales promoters who reach sales targets we
establish;
➤
the use of a new car approximately every three years; and
➤
bonus payments.
Commercial representatives
In addition, in regions with low population density, we often use commercial representatives instead of
sales promoters. Our commercial representatives, who are independent contractors and are not our
employees, oversee the results of the independent sales representatives in their regions and provide
training and support for those independent sales representatives, receiving commissions based on the
results in their regions. We do not expect to increase significantly the number of our commercial
representatives. In 2003 we had 574 commercial representatives, who were responsible for 7.5% of our
gross revenues, compared with 5.6% in 2001 and 6.5% in 2002.
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Peak demand periods
We experience two peak periods of demand during the year—during the month of November before the
Christmas season and in the weeks before Mother’s Day in May. In November, for example, we typically
experience approximately 60% more demand due to Christmas orders than the average for the other
eleven months of the year. We experience seasonality in our net operating revenues and adjusted
EBITDA. In 2002 and 2003, the fourth quarter accounted for approximately one-third of our net
operating revenues for those years and the first quarter accounted for less than 20% of our net operating
revenues for those years. The fluctuations among quarters are heightened when measured in terms of
adjusted EBITDA.
International strategy
Our primary focus in the international market is on Latin America, and this strategy is consistent with:
➤
our objective of expanding our presence in other countries in Latin America;
➤
the widespread acceptance of direct sales as a mechanism to distribute cosmetics in that region;
➤
the increasing integration of Brazil with other countries in Latin America; and
➤
our favorable growth rates in recent years in Argentina, Chile and Peru.
We use a direct sales model for our operations in Latin America. At December 2003, we had
approximately 10,070 independent sales representatives in Argentina, 6,723 independent sales
representatives in Peru and 3,160 independent sales representatives in Chile. In each of these countries
we maintain a country manager and an administrative staff with an aggregate of approximately 150 sales
promoters for all three countries. We have warehouses and distribution centers in each country that are
supplied by our Cajamar plant in the State of São Paulo. From each local distribution center, individual
orders from independent sales representatives are manually packaged, since the volume does not yet
justify automation. We seek to maintain similar procedures in each country and to preserve the brand
attributes we enjoy in Brazil.
The table below sets forth our consolidated number of units sold, gross operating revenues and operating
income in U.S. dollars in Argentina, Chile and Peru for the periods indicated.
2001
2002
2003
(US$ thousands, other than
unit data)
Argentina:
Units sold (thousands).........................................................................
Gross operating revenues ....................................................................
Operating income ...............................................................................
Chile:
Peru:
Total number of units sold (thousands) ......................................................
Total gross operating revenues ...................................................................
Total operating income ..............................................................................
562
6,408
(5,668)
883
3,244
(1,974)
1,468
7,383
(1,816)
236
2,281
(1,403)
238
2,430
(1,112)
318
2,957
(1,073)
262
2,925
(605)
324
3,638
(330)
532
5,425
(278)
1,061
11,614
(7,676)
1,445
9,312
(3,416)
2,318
15,765
(3,166)
95
Three months
ended March 31,
2003
2004
(US$ thousands,
other than
unit data)
Total number of units sold (thousands) .............................................................................
416
700
Total gross operating revenues .......................................................................................... 2,535 4,399
Total operating income .....................................................................................................
(727) (817)
We also sell a reduced portfolio of our products to a distributor in Bolivia with whom we have had a
fourteen-year partnership. Our sales to Bolivia were approximately US$400,000 in 2003.
In addition, we expect to open a retail store in Paris between late 2004 and early 2005 to test the
receptivity of the European market to our Natura Ekos line. On May 21, 2004, our board of directors
approved the creation of a wholly owned subsidiary and the acquisition of a company holding leasehold
rights for the property where we expect the store to be located. If the acquisition is concluded, the
company holding the leasehold rights will be controlled by the wholly owned subsidiary we will create.
We have selected Natura Ekos because we believe its concept of the sustainable use of Brazilian
biodiversity will appeal to the European market. If these products are well received, we will consider
expanding distribution in Europe. If the results of this testing of the European market do not justify
expansion in Europe, we expect to discontinue this project by 2007 and do not believe the investments
would exceed €16 million.
Flora Medicinal
In 1999, we acquired Flora Medicinal J.M.S. Ltda., or Flora Medicinal, a manufacturer of
phytotherapeutic products founded in 1912 that has a portfolio of 29 products and has catalogued the
properties of 300 plants catalogued. Beginning in January 2004, the industrial activities of Flora
Medicinal were assumed by Natura Indústria, and its commercial activities were assumed by our
company. Under Brazilian law, we are not permitted to distribute medicinal products through direct sales
channels. The following chart shows the historic results of Flora Medicinal.
2001
2002
2003
Three months
ended March 31,
2003
2004
(R$ thousands)
Gross revenues ...........................................................................
2,858 3,458 2,279
508
Net loss ...................................................................................... 10,055 6,832 7,072 2,339
185
646
MARKETING
We believe that our marketing should express our values and beliefs through our products. We are
convinced that if people understand who we are and how our products reflect our values, they will buy
those products and remain interested in our company. To that end, we pursue marketing through three
endeavors—the development of innovative products, our relationships with our independent sales
representatives and the protection of our brand.
We believe that the continual refreshing of our portfolio with new products is crucial to our marketing
because it allows us to respond to consumer tastes, assists the sales efforts of our independent sales
representatives and gives us the occasion to promote our brand. New products give our independent sales
representatives the opportunity to present not only new products but also our complete portfolio that
96
includes more traditional offerings. We evaluate our success in offering new products through a ratio
that measures the percentage of gross operating revenues represented by products that we consider
innovative. We calculate this ratio monthly, taking into account all products that we consider innovative
that were launched in the previous 24 months. In 2003 this ratio was 37.4%, an increase from 29.2% in
2002 and 28.6% in 2001. We launched 165 new SKUs in 2001, 91 in 2002 and 117 in 2003. We
highlight these new products in our Vitrine Natura catalog, and we regularly schedule product launch
events.
Equally importantly, we believe that cultivating positive relationships based on our company’s values and
beliefs with our independent sales representatives has a multiplier effect in marketing our image and
products to end customers. We believe that if we can market ourselves effectively to our independent
sales representatives through personalized service, training programs and special events, they will in turn
market our company and products for us through their positive attitudes and service. We describe some
of the methods we use to encourage our independent sales representatives in “—Distribution of our
products—Our relationship with our independent sales representatives.”
We align our communications with our shareholders, independent sales representatives, consumers,
employees, suppliers and the society in which we live according to the principles of transparency in our
information, processes and opinions and the building of relationships through dialogue.
Brand strength
In 2003, we hired a firm to conduct a survey of the image of the Natura brand. The study polled 2,200
men and women of various social classes in six Brazilian cities and was aimed at defining attributes
associated by consumers with the Natura brand compared to certain of our competitors. We selected 20
brand attributes that we believe are important for our business, and the firm we hired conducted the
study on that basis. We were ranked first in all the attributes except two, which dealt with ease of access
to our products (in which we achieved a percentage ranking of 54%, while the highest ranked company,
O Boticário, achieved a 59% rank) and contribution to the personal and professional development of our
employees (in which we were second place with a percentage ranking of 38%, while the highest ranked
company, Avon, achieved a 40% rank). The table below shows the percentage of respondents who
indicated that a particular company possessed the brand attribute listed.
Transparency........................................................................................
Social responsibility ..............................................................................
Dependability .......................................................................................
Innovation ............................................................................................
Quality .................................................................................................
A brand the person would buy again ....................................................
A brand the person would recommend .................................................
Brand preference...................................................................................
Natura
O Boticário
Avon
Nivea
51%
54%
63%
59%
70%
58%
60%
41%
48%
43%
54%
47%
61%
41%
43%
24%
35%
29%
45%
37%
45%
54%
47%
17%
13%
11%
18%
12%
23%
20%
18%
3%
We believe that the results of this survey demonstrate the leadership position of the Natura brand in the
Brazilian cosmetics market, and we believe this position results in part from our efforts to conduct our
business in accordance with our distinct values.
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INNOVATION AND PRODUCT DEVELOPMENT
Designing fresh concepts, generating innovations, valuing traditional knowledge and preserving the
environment are the principles that form the backbone of our innovation and product development
efforts. We develop concepts for our products that express and promote our core values. For example, in
our Natura Ekos line, we used ingredients from Brazil’s biodiversity to articulate a brand concept that
affirms respect for Brazil’s biodiversity and the importance of sustainable use of those assets.
We develop product innovations particularly in skin treatment and in the use of natural resources from
Brazil’s biodiversity. We also value traditional knowledge of the properties of Brazil’s biodiversity, and
we believe that local communities can help us identify applications for natural raw materials.
Our environmental consciousness permeates all these innovation efforts. In 2002, we launched a project
to evaluate the life cycle of the packaging used in our products, attempting to quantify the impact on
environment. In 2003, we began requiring all new products to undergo a study of the environmental
impact of their packaging.
Organization of our research and product development programs
Our innovation subsidiary, Natura Inovação, employs approximately 40 people who perform market
analysis and develop marketing concepts and approximately 100 people who research new technologies
and raw materials and develop new products. We have 11 laboratories at our Cajamar site that focus on
microbiological research, applied technology, packaging development and other areas. We invested
R$27.2 million in 2001, R$28.8 million in 2002 and R$35.5 million in 2003, representing 3.3%, 2.9%
and 2.7% of our net income in those years, respectively, on research and development of new raw
materials and products, development of new packaging and market research.
Our marketing and development team researches market trends and helps to focus our research efforts
on technologies and products that respond to market opportunities. Organized according to product
categories, this team also develops the concepts that relate our products and brands to our core values
and beliefs and organizes promotional campaigns and product launches.
Slightly more than half of our research and development team focuses on developing technologies and
identifying raw materials for specific products, working closely with our marketing and development
team. The remainder of our researchers are engaged in basic research not linked to specific products.
Their job is to explore technologies and methods of extraction of resources that can be applied to future
product development, particularly in the areas of skin care and the use of Brazil’s biodiversity resources.
The length of time required to create a new product and bring it to market varies from approximately six
months for SKUs that are similar to existing products to two to five years for more innovative products.
We take total responsibility for the safety of the products we develop and market. Our Product Safety
Committee, composed of the director of research and development and scientists and doctors, oversees
the toxicological evaluation of all the ingredients used in our formulas in accordance with international
standards. We keep a database on the safety of each product we offer, and we monitor the safety of our
products after they are sold.
We are also committed to using animal testing only in limited and essential circumstances. Whenever
possible, we try to reduce, refine and replace the use of animal testing, and we have invested in the
development and implementation of alternatives to animal testing in line with internationally accepted
standards. Since 1997, we have reduced animal testing by 92%, based on the number of animals used.
98
Collaborative research efforts
We intend increasingly to leverage our research and development capabilities through associations with
universities and private research centers. We launched our Natura Campus initiative in 2003 in
partnership with the Fundação de Amparo à Pesquisa do Estado de São Paulo (Foundation for Research
Support of the State of São Paulo) to encourage students to identify research projects on which they
would like to collaborate with us. We have received 44 proposals and have approved four projects from
three universities so far. In future projects, we expect that the university will retain ownership rights of
any resulting patents and that Natura Inovação will enter into contracts with the university for exclusive
use of the patented technologies for a specific period. To the extent possible, we expect to co-finance
these projects with Brazilian governmental development agencies like Financiadora de Estudos e Projetos
(Agency for Financing of Studies and Projects, or FINEP), an agency of the Brazilian Ministry of Science
and Technology.
We also expect to pursue associations with private research centers under which we would provide
financing to the centers and would pay royalties for the right to use inventions developed by those
centers.
We believe arrangements with universities and research centers can effectively complement our in-house
research efforts and are more cost effective than supporting a larger onsite laboratory.
BRAZILIAN BIODIVERSITY
Brazil possesses a disproportionate amount of the world’s biodiversity. Even as much of Brazil’s
biodiversity remains to be discovered, biodiversity presents business opportunities in several sectors,
including pharmacology, food, cosmetics and tourism. We believe that the sustainable use of Brazil’s
biodiversity will be an important source of business in our sector and for Brazil, and we intend to be
leaders in this area in the cosmetics industry.
Particularly in connection with our Natura Ekos line, which is one of our primary product lines and is
based on the sustainable use of active ingredients from Brazil’s biodiversity, we have worked to interact
and become involved with the communities that form our supply chain. In 2001, as an incentive to
regional development and consistent with our principles, we adopted a program in which we seek to
certify raw materials drawn from Brazil’s biodiversity that we use in our Natura Ekos line in order to
ensure that their extraction is economically feasible, environmentally correct and socially just. Our Raw
Materials Certification Program was developed in accordance with the principles of the Forest
Stewardship Council, a non-governmental organization. Our sustainability management plans for
cultivated raw materials are developed in accordance with the principles of the Sustainable Agriculture
Network and the Instituto Biodinâmico (Biodynamic Institute), both non-governmental organizations.
Our Raw Materials Certification Program is divided into three stages:
➤
identifying potential regions for obtaining raw materials by evaluating the potential producers in those
areas and their existing forest or agricultural management efforts;
➤
gathering socio-environmental data that will enable us to develop a forest or agricultural management
plan for the extraction or cultivation of a specific raw material; and
➤
offering support to the local community to implement the sustainability management plan.
We are supported in our certification efforts by outside monitors from non-governmental organizations
and Brazilian universities. In 2003, we certified three raw materials: mate verde (an extract used in tea),
cocoa and guaraná. We currently have 16 raw materials identified from Brazil’s biodiversity in process of
certification.
99
LOGISTICS AND MANUFACTURING
We manufacture the majority of our products at our integrated research, production and logistics center
in Cajamar, São Paulo, which we inaugurated in 2001. We produced approximately 136 million units in
2003, compared to 107 million units produced in 2002 and approximately 91 million units produced in
2001. Our facilities were designed to enable us to expand efficiently as our operations grow, thereby
achieving greater economies of scale from our installed physical plant.
Our Cajamar site includes a total of five manufacturing plants, four for our cosmetics, fragrances and
toiletry products and one for Flora Medicinal’s phytotherapeutic products. To produce our products, we
separate the raw materials, mix the materials according to our formulas and fill and package the
products, all in a carefully controlled environment. We use a similar process for our Flora Medicinal
products and with microbiological controls that meet pharmaceutical standards. In 2003 we began a
process of bringing all our plants to pharmaceutical standards of microbiological control. We believe that
these tighter controls will allow us to reduce losses from contamination, extend the expiration dates of
our products and potentially reduce the use of preservatives in our products.
We contract third parties to produce the remainder of our products, including bar soaps, products in
aerosol form and some cosmetics. In 2003, products produced by third parties accounted for 5.7% of
our gross revenues.
We received an average of over 20,000 orders per day in 2003, and we shipped approximately 98% of
those orders within 24 hours of when they were received. When a independent sales representative places
an order, our stock management system allows her to determine whether we currently have the item in
stock.
Our vertical warehouse uses an automated system that retrieves raw materials and finished products
from the shelves and sends manufacturing orders to our production facilities. Our order sourcing line
automatically separates the orders from independent sales representatives for delivery. Our order
sourcing line processed 7.5 million boxes for shipment in 2003. Orders are automatically checked (and,
if necessary, manually) and are then packed and labeled for delivery to the independent sales
representative. We currently ship our products to more than 5,000 municipalities in Brazil.
We use 26 different companies and the national mail service to deliver our products to the residences of
our independent sales representatives. Recently, we have begun to rationalize further the delivery of our
products, moving toward a model in which a limited number of contracted companies will deliver our
products. We continually monitor the success and efficiency of the delivery of our products. Delivery
time in Brazil ranges from delivery in one to two days in the City of São Paulo to five to six days for
more distant areas of the country. Delivery to a few regions that are difficult to access can take up to 10
days.
Our costs for logistics were equal to 7.2% of our net operating revenues in 2003, compared to 6.9% in
2002 and 7.2% in 2001. The logistics systems we have put in place at our Cajamar site have allowed us
increasing efficiency and flexibility in recent years. For example, our increasing ability to respond quickly
to orders from our independent sales representatives has allowed our rate of stock turnover to increase to
5.5x in 2003 from 5.0x in 2002 and 4.9x in 2001. We implemented a rotating inventory system in 2001,
which has significantly reduced the need for periodic stock adjustments.
Our ability to respond flexibly to orders from our independent sales representatives is particularly
important due to the peaks in demand during the Mother’s Day and Christmas seasons. It is not cost
100
effective for us to maintain large inventories, so we focus on minimizing production times to enable us to
respond quickly to changes in demand.
Our losses from inventory for discontinued products and products beyond their period of usefulness were
R$4.3 million in 2003, R$9.7 million in 2002 and R$8.4 million in 2001, and our losses from inventory
that did not pass our rigorous quality standards were R$1.1 million in 2003, R$1.3 million in 2002 and
R$1.8 million in 2001.
SUPPLIERS
We value the quality of our relationships with our suppliers, some of whom have been our partners for
over 20 years. Our relations with our suppliers are informed by our values and beliefs.
Our raw materials and suppliers
The table below identifies the relative importance of our raw materials as a percentage of total expenses
on raw materials in 2003.
Percentage of raw material
expenses in the year
ended December 31, 2003
Plastic packaging.................................................................
Fragrances...........................................................................
Glass packaging ..................................................................
Spray tops ...........................................................................
Packaging labels and boxes .................................................
Other ..................................................................................
24%
17
12
11
8
28
Total ............................................................................
100%
Number of suppliers
29
8
9
7
13
128
We buy these raw materials from a variety of suppliers. Approximately 90% of our expenses for raw
materials in 2003 were from suppliers located in Brazil. In 2003, our top ten suppliers represented
42.8% of our net expenses on raw materials. To date, we have not generally experienced high volatility
in the price of our raw materials. Some of our expenses for raw materials are linked to the real-U.S.
dollar exchange rate and the U.S. dollar-euro exchange rate, as we explain in “Management’s discussion
and analysis of financial condition and results of operations—Overview—Effects of exchange variations
and inflation on our results of operations and financial condition.”
For our products that draw upon Brazil’s biodiversity resources, particularly our Natura Ekos line, we
buy many of the ingredients from suppliers who cultivate them or who purchase them from communities
that extract those resources. We register the regions in which ingredients are extracted with the Instituto
Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute for the
Environment and Natural Renewable Resources, or IBAMA), an agency of the federal Ministry of the
Environment. We do not depend on any single community or supplier for the success of any of our
product lines as a whole. However, if the communities that provide the raw materials to intermediate
suppliers were to cease doing so, or if we were unable to renew our contracts with those suppliers, we
would be required to seek other sources of those raw materials or we might find it necessary to
discontinue a particular product. We plan to develop relationships with back-up suppliers of the primary
natural raw materials for our Natura Ekos line. At the same time, as our need for raw materials
increases, we expect to limit the number of communities that cultivate or extract these raw materials in
order to allow us to administer our relationships with those communities efficiently.
101
ENVIRONMENT
We continue to seek ways to maintain and strengthen a healthy relationship with the environment. We
identify the environmental impact of our activities in order to minimize the negative impact and
maximize the positive impact. We seek to encourage a culture of environmental responsibility at the
individual and community level among our suppliers, and we increasingly use contractual provisions to
increase the commitment of our suppliers to these values and increasingly measure their compliance with
environmental regulations.
We actively monitor the flow of effluents from our manufacturing facilities in Cajamar, which are treated
by an effluent treatment station that we built in accordance with applicable environmental law. We also
continue to try to reduce our consumption of water, energy, toxic substances and raw materials by, for
example, reusing water for secondary uses. We succeeded in reducing our total water consumption in
Cajamar to approximately 110,000 cubic meters in 2003 from 130,000 cubic meters in 2001 and
116,000 cubic meters in 2002, in spite of an increase in production over the period.
We have processes in place to dispose adequately of solid wastes, and we constantly revise our targets for
minimizing that waste. We promote recycling and reuse of our production materials where possible, and
we believe our wide range of refillable products makes us leaders in the cosmetics industry in reducing
the environmental impact of consumer products. We are currently implementing a management system
based on NBR (Brazilian Norms) ISO 14001, which includes environmental management actions such as
the identification and compliance with applicable legislation, operational control of environmental
impacts, environmental monitoring, responding to concerns and claims of interested parties and other
actions.
We identified and are remedying some contamination of the soil at our Itapecerica da Serra site. See
“—Legal Proceedings—Environment.”
TRADITIONAL COMMUNITIES THAT SUPPLY RAW MATERIALS
In our relationships with the traditional communities that supply some of our raw materials, from which
we gather information and acquire natural ingredients, we are developing a model for the sustainable use
of Brazil’s biodiversity.
We seek to establish commercial relationships with the these communities that are based on ethical and
transparent practices, clear lines of communication and open dialogue in negotiation. At the same time,
we seek to structure these relationships using an economical model that helps organize and enable these
communities to experience sustainable economic and social development, supported by the
environmental certification processes described above in “—Biodiversity.”
This model will allow us to make a positive contribution to those communities beyond payment for the
raw materials they produce. Our model has four basic principles:
➤
sharing the benefits of access to genetic assets and the use of traditional knowledge;
➤
paying for the raw materials;
➤
investing in sustainable development by forming a fund for the sustainable development of these
traditional communities; and
➤
obtaining licenses for the use of images and other cultural attributes of these communities and
compensating the communities for that use.
This model is being implemented in 2004 in five local communities in the States of Amapá, Pará and
Amazonas.
102
PROPERTY
Our facilities
In 2001, we inaugurated our integrated production, logistics and research center in Cajamar, located
approximately 20 kilometers from the City of São Paulo. Our Cajamar facility, which was constructed at
a cost of approximately R$200 million, includes 18 buildings, which occupy approximately 77,000
square meters on approximately 643,000 square meters of land. Designed by noted Brazilian architect
Roberto Loeb, our Cajamar site, which we call Espaço Natura, is a state-of-the-art manufacturing
facility and corporate campus that we believe contributes to the high levels of satisfaction of our
employees. Our production, vertical storage and order sourcing activities are carried out exclusively at
our Cajamar plant. We use modern manufacturing equipment designed to ensure worker safety and
environmental responsibility. We acquired much of our equipment recently when we moved our
manufacturing operations to Cajamar.
We carry out our commercial and marketing activities primarily at our Itapecerica da Serra site, located
approximately 25 kilometers from the City of São Paulo. Our Itapecerica da Serra facility includes 10
buildings, which occupy 14,571 square meters on 96,543 square meters of land. We also rent
distribution centers in the State of Minas Gerais. We rent warehouses and administrative offices in
Argentina, Peru and Chile.
During the construction of our manufacturing facilities in Cajamar, we noticed shifts in the foundations
of the vertical storage warehouse and order sourcing line because of the geological features of the land.
We ordered an in-depth study of the causes of the shifts and implemented a plan to address them,
including injecting cement at high pressure into the soil to create soil-cement support columns. We
finished these measures in 2002, and we have not noted any soil movements since 1999. However, we
continue to monitor the soil periodically for any movements so that we can quickly address the problem
if it arises. Because the automated systems in our warehouse and order sourcing line are highly sensitive
to changes in position, we installed hydraulic devices that enable us to adjust the structure of the building
in the event of slight soil shifts. However, a very large shift in the soil in the future could require us to
make adjustments to those systems and could affect the efficiency of our product delivery system. In such
a case, we might have to incur costs to implement contingency measures, such as hiring temporary
workers to perform tasks usually performed by our automated systems until the automated systems are
fully operational again.
Production capacity and expansion potential
With our existing facilities and by carrying out capital expenditures budgeted for 2004 in machinery and
equipment, we expect to reach a production capacity of 200 million items per year.
Our Cajamar plant is designed to allow modular expansion of our manufacturing and storage facilities.
We conducted a study in 2004 that estimates that we would need to invest approximately R$400 million
(using April 2004 prices and including the investments we plan for 2004) to reach a production capacity
of 450 million items per year. This study assumed that there would be no changes to our current mix of
products and that the production capacity of new machinery to be installed would be 50% higher than
that of our current machinery.
The principal investments contemplated by the recent study were (1) the construction of three additional
buildings for manufacturing plants, (2) the construction of two more vertical warehouses, (3) the
acquisition of three new automatic order sourcing lines and an expansion of our vertical warehouse,
103
(4) the construction of another administrative building, another restaurant (and the expansion of service
areas) and another station for the treatment of effluents and (5) the acquisition of information
technology equipment to support the volume of orders and transactions of our operational and
administrative systems. For a description of our investments planned for 2004, see “Management’s
discussion and analysis of financial condition and results of operations—Liquidity and capital
resources—Investments.”
We divide investments in production capacity into two types: investments in manufacturing and
investments in product movement within our facilities. We make investments in manufacturing
continually throughout the year based on our existing infrastructure without significant expenditures,
such as acquisitions of individual machines whose price is not significant. However, we invest in product
movement in stages. That is, these investments require larger expenditures and involve renovating or
altering our existing infrastructure, such as our plan to construct a new vertical storage warehouse. Of
the total R$400 million we believe we would need to reach a production capacity of 450 million items
per year, R$190 million represents investment in manufacture, R$125 million represents investment in
product movement and the remaining amount represents investment in information technology
equipment, building of new administrative buildings and other investments.
INTELLECTUAL PROPERTY
Our most important intellectual property is our brands, such as Natura, Natura Ekos and Chronos. We
carefully manage our brands to preserve the appeal of our products across broad demographic lines and
the association of our brands with innovative products and social and environmental responsibility.
Although we hold 13 patents that are used mainly in our skin treatment products, most of our products
or processes are in the public domain or are used pursuant to licenses. In 2003, we obtained two French
patents for Elastinol®, an exclusive ingredient of our Chronos products that aids in preventing skin
aging. We also obtained a U.S. patent in 2000 relating to the use of vitamin C in skin treatment. We also
hold U.S. patents relating to cosmetics and packaging.
As we develop our network of universities and private research centers, we expect that those parties will
generally retain the patents to new technologies discovered as part of those efforts and grant us exclusive
licenses for a specific period. See “—Innovation and product development—Collaborative research
efforts.”
INSURANCE
We insure all our facilities and equipment for loss and replacement. We also carry natural disaster and
business interruption insurance covering property damage and related loss of income, as defined in the
policy, and additional expenses, as well as civil liability insurance. We consider the amounts of our
insurance coverage to be adequate for a company of our size and activities and to meet the risks
associated with our operations.
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EMPLOYEES
The table below shows the number of our employees and their locations on the dates indicated. The
reduction in the number of our employees in Brazil from 2001 to 2002 occurred primarily because of the
outsourcing of our call center, which is described in “—Distribution of our products.”
Location
At December 31,
2001
2002
2003
Brazil .................................................................................................................... 3,041
Argentina..............................................................................................................
134
Chile.....................................................................................................................
58
Peru ......................................................................................................................
60
Total .............................................................................................................
2,641 2,696
129
157
54
61
60
72
3,293 2,884 2,986
We seek to create ideal conditions that will attract and retain creative, talented employees, and we
encourage diversity among our employees. We endeavor to create a work environment that promotes
initiative, satisfaction with one’s work, confidence, friendship and respect for others. Workplace safety is
also a high priority at all our facilities. We view continuing education and training as vitally important in
transforming the individual, our company and our society.
Our employee turnover rate in Brazil was 6.5% in 2003. We invested approximately R$5.0 million in
employee training programs in 2001, R$5.0 million in 2002 and R$6.7 million in 2003. Our employees
completed an average of 36 hours of training per employee in 2001, 34 hours in 2002 and 37 hours in
2003.
Remuneration at our company is partly linked to our results and the increase in value of our company.
We believe the variable portion of the compensation we offer allows us better to attract and retain talent.
The variable portion of an employee’s compensation varies according to his or her position with our
company.
We believe the success of our human resources policies are reflected in the results of the annual survey of
our corporate culture performed by the independent consulting firm HayGroup, which survey has shown
employee satisfaction levels comparable to companies classified by HayGroup as having “best practices.”
We were also among the ten best companies for which to work and the best company for working
women in 2003, according to rankings published by Exame, the Brazilian business magazine.
At March 31, 2004, approximately 6% of our employees in Brazil were unionized. Our unionized
employees are represented by three different unions (sindicatos) and professional representation entities
(entidades de classe), and we have collective bargaining agreements with each union that we negotiate
annually. We believe our relations with these unions are good.
COMPETITION
The cosmetics, fragrances and toiletries businesses are highly competitive, both in Brazil and in the rest of
Latin America. Brand positioning, brand image, launching of new products and advertising are all
important competitive factors. We face significant competitions on two levels—competition in direct
sales and competition with specific products in our portfolio.
In marketing our products through direct sales, we compete primarily with Avon, the maker of Avon
Color, Anew, Renew, Skin-so-Soft, Mark, Avon Wellness, BeComing and other products. Avon has
extensive operations in Brazil and in the rest of Latin America.
105
Our competitors for specific categories of products vary among Brazilian and multinational producers
that sell through retailers, franchises and direct sales (Avon). These competitors include the following:
➤
Fragrances. Avon and O Boticário, a Brazilian company that operates primarily through franchises
in Brazil and other countries;
➤
Skin and body care. Avon, Beiersdorf AG (producer of Nivea and other products), L’Oréal S.A.,
Unilever N.V. and Monange, a Brazilian company that primarily produces body lotions and hair care
products;
➤
Hair care.
➤
Make-up. Avon, O Boticário and Contém 1g, a Brazilian company that operates primarily through
franchises.
Unilever N.V., L’Oréal S.A., Colgate-Palmolive Company and Johnson & Johnson; and
Several of these competitors have significantly greater resources than we do.
Calculation of our market share depends on the methodology used to calculate the size of the cosmetics,
fragrances and toiletries market in Brazil. For details, see “Cosmetics, fragrances and toiletries industry—
Size of the market—Methodologies.” Using the total market as calculated by ABIHPEC/Sipatesp, our
total market share in 2003 was approximately 12%. If we consider only the product categories in which
we operate, we believe that our market share in 2003 was approximately 15% in the same period. Using
the total market as calculated by Euromonitor International, we must first estimate the margin that our
independent sales representatives charge above the price at which we sell products to them (which we
estimate is 30% over that price) so that we may then make a comparison to the total market based on
prices to end consumers. Using Euromonitor International’s methodology, our market share was 10.7%
in 2002, compared to 10% in 2002 using the ABIHPEC/Sipatesp methodology. Our share of the direct
sales market for cosmetics, fragrances and toiletries in Brazil was 48% in 2003 using the ABIHPEC/
Sipatesp methodology.
REGULATORY MATTERS
Regulation of our business
The Brazilian cosmetics industry is regulated by the Agência Nacional de Vigilância Sanitária—Anvisa
(Brazilian National Agency for Sanitary Supervision), which was created by Law No. 9,782, enacted on
January 26, 1999. Our operations are therefore subject to authorization and inspection by Anvisa.
Anvisa also sets standards for the manufacturing and storage of cosmetics, fragrances and toiletries.
The Brazilian pharmaceutical industry is also regulated by Anvisa. Flora Medicinal, our subsidiary that
manufactures phytotherapeutic products, is therefore regulated by Anvisa and by Law No. 6,360,
enacted September 23, 1976, which regulates pharmaceutical activities.
There is no specific Brazilian law regulating the direct sale of consumer goods. Law No. 6,586, of
November 6, 1978, regulates the independent taxpayer status of our independent sales representatives,
and the Brazilian tax legislation provides for the withholding and payment of ICMS taxes on behalf of
our independent sales representatives.
We are subject to Brazilian labor, environmental, commercial, tax and other laws in the ordinary course
of our business, and our operations in Argentina, Chile and Peru are subject to the laws of those
countries.
106
Legal status of our independent sales representatives
Our independent sales representatives are independent businesspeople with whom we maintain
commercial relationships that entitle them to resell our products on a non-exclusive basis at their own
expense and risk. Our independent sales representatives do not receive any kind of compensation from
us. In addition, there is no subordination in our relationship with our independent sales representatives,
another characteristic that would be necessary for there to be an employment relationship. Rather, our
independent sales representatives enjoy great flexibility in the manner in which they resell our products
and are not accountable to us for any aspect of their resales.
Our independent sales representatives have an independent obligation to contribute to the Instituto
Nacional da Seguridade Social, or INSS, the Brazilian social security system, and we are not required to
withhold payments to the INSS on their behalf. We withhold and pay on their behalf, as substitute
taxpayers, the ICMS tax owed by our independent sales representatives, calculated based on the margins
at which they sell our products, as estimated by each applicable Brazilian state. See “Management’s
discussion and analysis of financial condition and results of operations—Overview—Taxes on sales,
returns and rebates.”
In the past, six labor lawsuits were commenced by former independent sales representatives seeking the
recognition of employee status. In five of those cases, we obtained judgments confirming the
non-employee status of the independent sales representative and the lack of any obligation on our part to
contribute to social benefit funds on her behalf. We settled the remaining case after an adverse
determination in the first instance. In all six cases, only the status of the specific independent sales
representative was in question. Any regulatory change requiring the establishment of an employee
relationship with our independent sales representatives, or numerous adverse decisions finding that an
employee relationship exists, would result in contributions and incremental costs so substantial that we
would have to restructure our operations.
Regulation of Brazilian biodiversity
Under the Brazilian Federal Constitution, environmental matters can be legislated at both the federal and
state levels, and municipalities are allowed to enact their own legislation on a supplementary basis if
local interests so require.
On March 16, 1998, the Convention on Biological Diversity, or CBD, was introduced into the Brazilian
legal framework by means of Decree No. 2,519. The CBD, which was drafted by world leaders in 1992
at the Earth Summit held in the City of Rio de Janeiro, establishes as its three main goals: the
conservation of biological diversity, the sustainable use of its components and the fair and equitable
sharing of the benefits derived from the use of genetic resources. The CBD provides for general measures
that can be implemented by each of the signatory parties with a view to promoting the convention’s
goals, which include drafting and enacting appropriate legislation, introducing public education and
awareness campaigns, periodically monitoring available resources and financial cooperation between the
signatory parties.
The CBD also charges signatory states with regulating access to their genetic resources. In spite of the
CBD, Brazilian legislation concerning access to and exploration of Brazil’s biodiversity is broadly drafted
and is still developing. On August 23, 2001, by means of Provisional Measure No. 2186-16, the
Brazilian government initially regulated access to resources drawn from Brazil’s biodiversity and created
the Conselho de Gestão do Patrimônio Genético (Genetic Heritage Management Council, or CGEN) to
serve as the regulatory and supervisory body, as well as policy coordinator, of the Ministry of the
107
Environment with respect to the matters set forth in the provisional measure. The provisional measure
established, in general terms, the concepts of access to genetic heritage and to knowledge about that
heritage, with a view to enabling scientific research, technological developments and the development of
biological processes and methodologies for use in industrial and other applications, as well as the various
conditions under which such activities could be undertaken. On September 28, 2001, Decree No. 3,945
established the Genetic Heritage Department within the Ministry of the Environment to serve as
Executive Secretariat of the CGEN and to perform certain activities on behalf of the CGEN. Up to 2002,
the CGEN had regulated issues concerning access to Brazil’s biodiversity by means of resolutions, and
the majority of the concepts contained in the provisional measure remain unregulated.
Currently, only the states of Amapá and Acre have enacted regulations governing access to genetic
resources drawn from their local biodiversity.
LEGAL PROCEEDINGS
General
We are subject to various civil, tax and labor lawsuits and administrative proceedings. At March 31,
2004, our provisions for legal proceedings were approximately R$34.1 million, of which R$29.9 million
related to tax proceedings, R$2.5 million related to labor proceedings and R$1.7 million related to civil
proceedings. We believe that our provisions for legal and administrative proceedings are sufficient to
meet probable losses. We do not believe that any individual pending lawsuit or administrative
proceeding, if adversely decided, would have a material adverse effect on our financial condition or
results of operations, except the proceeding relating to our subordinated debentures described below. We
do not believe that any adverse decision would materially affect our corporate image.
Tax
We were parties to 110 tax lawsuits as of March 31, 2004, the total value of which was R$259.6
million. At March 31, 2004, the amount of our reserve for losses resulting from tax litigation pending
against us was R$29.9 million. We create reserves in respect of lawsuits where losses are considered
probable, based on the advice of independent legal counsel. The tax proceedings for which we have not
created reserves include 13 violation notices (autos de infração) issued by the federal tax authorities for
taxes we have paid but for which the tax authorities were unable to locate a record of payment. We have
submitted proof of payment in these proceedings, and we believe, therefore, that our chances of loss with
respect to these proceedings are remote. The aggregate amount subject to these proceedings, including
penalties and interest, was R$112.4 million at March 31, 2004. Of the R$259.6 million, the most
significant individual case is a R$33.3 million administrative proceeding relating to our subordinated
debentures. In 1998, we issued subordinated debentures that were fully subscribed by our controlling
shareholders. Under Brazilian law, payments in respect of debt instruments are deductible for income and
social contribution tax purposes. In 2003, the Brazilian tax authorities issued a violation notice (auto de
infração) to us claiming that remuneration payments made in respect of our subordinated debentures
were not deductible for income and social contribution tax purposes for the fiscal year ended December
31, 1999. The tax authorities claimed, among other things, that because the debentures were subscribed
by related parties, the payments were not necessary and usual for our operations and, therefore, were not
deductible for income and social contribution tax purposes. We received an unfavorable decision in the
first instance and appealed to the Taxpayers’ Council, a higher administrative body. We believe that the
ultimate chances of loss are remote and, therefore, have made no provision on our balance sheet for this
proceeding. The Brazilian tax authorities have not begun administrative proceedings against us relating
to any fiscal year after 1999, and we cannot predict whether they will do so in the future.
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Labor
We were also the defendant in 156 labor lawsuits at March 31, 2004, and the total amount claimed
under those proceedings was approximately R$13.6 million. Of this amount, we had reserves for losses
in the amount of R$3.0 million. Approximately 48% of the labor litigation pending against us was
brought by employees of third-party service providers who render security, transportation, cleaning and
other services to us. Under Brazilian labor legislation, we are jointly and severally responsible for the
fulfillment of the labor obligations of our contracted service providers’ employees.
Civil
At March 31, 2004, we were the defendant in 325 civil legal proceedings, and the total amount claimed
under those proceedings was approximately R$17 million. Of this amount, we had reserves for losses in
the amount of R$2.6 million. The vast majority of these proceedings are claims for indemnification and
moral damages, of which 13.8% have arisen in connection with the use of our products, 60.7% relate to
the allegedly improper inclusion of the names of independent sales representatives in the database of the
Serviço de Proteção ao Crédito (Credit Protection Service) as defaulting debtors, 6.8% are related to
workplace accidents or repetitive strain injuries and the remaining 12.7% relate to other claims.
Our civil proceedings include seven actions involving a former holder of quotas (shares), or quotaholder,
of Flora Medicinal. We are defendants in six of these seven legal proceedings, which seek a valuation of
the quotaholder’s stake in Flora Medicinal and the settlement of credits allegedly owned by the
quotaholder because of his withdrawal from Flora Medicinal. Of these six legal proceedings, two have
been dismissed as moot, and the remaining four are at a stage in which experts are finishing their
valuations. We are plaintiffs in the remaining proceeding, in which we seek to receive indemnification
and penalties due as a result of contractual violations by the former quotaholder. This proceeding is also
at a stage in which experts are finishing their valuations. Because these remaining four proceedings are at
stage of expert assessment, it is difficult to estimate the values involved. We classify our probability of
success in all these legal proceedings as “possible.” In addition, we do not believe that an adverse
decision in these legal proceedings would have a material impact on our business due to (1) the provision
of R$0.97 million that we have established for losses in connection with these proceedings and (2) the
probable set-off of amounts that we may receive in the proceeding in which we are plaintiffs against the
amounts we may have to pay in connection with the proceedings in which we are defendants.
Environment
At our Itapecerica da Serra site, where we manufactured our products until the inauguration of our
Cajamar facilities in 2001, we identified some possible contamination of the water table from effluents of
the manufacturing plant. We registered this fact with the Agência de Controle Ambiental—Companhia
de Tecnologia de Saneamento Ambiental (the Brazilian Agency for Environmental Control—
Environmental Remediation Technology Company, or CETESB) on September 17, 2001, implemented a
system to monitor the water table and installed an effluent treatment station. These remedial measures
were accepted by CETESB on February 10, 2004. We estimate that remediation of the site will cost up to
R$100,000 per year for the next three years.
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Management
BOARD OF DIRECTORS
The Conselho de Administração, or board of directors, is our decision-making body responsible for
formulating general guidelines and policies for our business, including our long-term strategies. Among
other things, our board of directors is also responsible for appointing and supervising our executive
officers.
Decisions of our board of directors are taken by majority vote of those directors present at the meeting.
Under the Brazilian corporation law, a company’s board of directors must have at least three members,
and each member of the board of directors must be a shareholder of the company, although there is no
requirement as to the minimum number of shares that an individual must hold in order to serve as a
director. Our bylaws provide that our board of directors must consist of no less than five and no more
than seven members. Directors are elected at our annual shareholders’ meeting for one-year terms and
are subject to removal at any time by our shareholders at a special shareholders’ meeting.
In addition, pursuant to the Brazilian corporation law, a member of the board of directors is prevented
from voting in any shareholders’ meeting, or from acting in any business or transaction, that may have a
conflict of interests with the company.
Our board of directors currently consists of five members. Each of our current directors was elected at
the annual shareholders’ meeting held on March 5, 2004 and will remain in office until our 2005 annual
shareholders’ meeting. Set forth in the table below are the names, ages and positions of our current
directors. All of our directors were directors of Natura Participações prior to the corporate
reorganization of March 2004.
Name
Age
Position
Antonio Luiz da Cunha Seabra .....
62
Guilherme Peirão Leal...................
Pedro Luiz Barreiros Passos ..........
Edson Vaz Musa ...........................
José Guimarães Monforte .............
54
52
65
56
Co-Chairman of the Board of Directors and
Founder
Co-Chairman of the Board of Directors
Director
Director
Director
Year first
elected
2004
2004
2004
2004
2004
There is no family relationship among our directors and executive officers.
None of our directors or executive officers has the right to receive any payment upon termination of
service or employment.
For a description of contracts or other material obligations between our management and our company,
see “Related party transactions—Transactions with our directors and officers.”
For a description of our stock option plans, see “—Compensation.”
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established two committees, the Audit and Risk Management Committee and
the Human Resources Committee. Although each of these committees is coordinated by a member of our
board of directors, each committee includes members that are not members of our board of directors.
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Management
The committee members are appointed and remain subject to removal by our board of directors at any
time.
Audit and Risk Management Committee
The Audit and Risk Management Committee is responsible for approving the financial statements and
evaluating and reviewing the critical processes of our business management. Our internal audit
department reports to the Audit and Risk Management Committee, which is responsible for making
recommendations regarding the external auditors to be retained by our company. Although we were not
required under Brazilian law before the offering to contract external auditors because we were a private
company, since 1989 Natura Empreendimentos (which historically disclosed the financial results of our
group prior to the corporate reorganization of March 2004) and its predecessors have hired an
internationally known audit firm to audit our annual financial statements.
The table below sets forth the names, ages and appointment dates of the members of our Audit and Risk
Management Committee.
Name
Age
Date appointed(1)
José Guimarães Monforte (Coordinator)...............................................................
Eliseu Martins .......................................................................................................
56
59
2004
2004
(1) An Audit and Risk Management Committee existed at the level of Natura Participações, our
controlling company until March 2004. The members of our Audit and Risk Management
Committee were members of that committee of Natura Participações beginning in 1999.
Human Resources Committee
The Human Resources Committee is responsible for determining employee development strategies. The
Human Resources Committee also supports the board of directors in evaluating the performance of our
vice presidents and making recommendations for their compensation.
The table below sets forth the names, ages and appointment dates of the members of our Human
Resources Committee.
Name
Age
Date appointed(1)
Edson Vaz Musa (Coordinator).............................................................................
Fernando Porchat..................................................................................................
Pedro Luiz Barreiros Passos...................................................................................
65
63
52
2004
2004
2004
(1) A Human Resources Committee existed at the level of Natura Participações, our controlling
company until March 2004. The members of our Human Resources Committee were members of
that committee of Natura Participações beginning in 2001.
EXECUTIVE OFFICERS
The members of our board of executive officers are our legal representatives and are primarily
responsible for managing our day-to-day operations and implementing the general policies and guidelines
set forth by our board of directors.
Under the Brazilian corporation law, each executive officer must be a Brazilian resident but need not be a
shareholder of our company. Furthermore, not more than one-third of our directors may serve as
members of our board of executive officers at any given time.
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Management
Our executive officers are appointed by our board of directors for three-year terms and may be removed
by the board of directors at any time.
Currently, our board of executive officers consists of four members, each of whom was appointed at a
meeting of our board of directors on March 8, 2004. The term of our current executive officers will
expire at our 2007 annual shareholders’ meeting. Set forth below are the names, ages and positions of
our executive officers, and the years in which they were elected.
Name
Age
Position
Pedro Luiz Barreiros Passos ..............
Alessandro Giuseppe Carlucci ..........
José David Vilela Uba.......................
52
37
52
Antonio Carlos Siqueira da Silva ......
43
Chief Executive Officer
Commercial Officer
Chief Financial Officer and Investor Relations
Officer
Officer for Legal Matters
Year first
appointed
2004
2004
2004
2004
BIOGRAPHICAL INFORMATION
Set forth below are the principal occupations and employment histories of our directors and executive
officers.
Directors
Antonio Luiz da Cunha Seabra, 62, Co-Chairman of the Board of Directors and Founder. Mr. Seabra
has a bachelor’s degree in economy and began his professional career when he was 15 years old. Mr.
Seabra worked for eight years at Remington Rand, beginning as a trainee and eventually becoming a
manager. He managed a small cosmetics laboratory for three years and, through that experience, entered
the cosmetics sector. In 1969, Mr. Seabra founded Natura Cosméticos, whose operations began with a
small store in São Paulo where Mr. Seabra noticed the transformative potential of cosmetics when the act
of treating one’s skin is seen as an expression of self-esteem. Mr. Seabra was responsible for the adoption
of direct sales as the distribution channel for Natura products. Over the years, Mr. Seabra established the
principles of Natura’s relationship with the community of independent sales representatives, which we
believe is one of the differentiating characteristics of our company. Mr. Seabra also articulated the
strategy of developing products that transcend their function and are based on concepts that reflect the
values and beliefs of our company.
Guilherme Peirão Leal, 54, Co-Chairman of the Board of Directors. Mr. Leal has a degree in business
administration from the University of São Paulo. He is one of the founders of our company, having
joined the company in 1979. Mr. Leal participates in various business and social organizations. He is the
founder and was chairman of the board of directors of Instituto Ethos—Empresas e Responsabilidade
Social (Ethos Institute of Businesses and Social Responsibility) and participates in the Fundação Abrinq
Pelos Direitos da Criança (Abrinq Foundation for the Rights of Children) and currently serves on the
board of directors of both organizations. Mr. Leal was also a founder of the Brazilian Association of
Direct Sales Companies, of which he was president for eight years, and is a member of the board of
directors of World Wildlife Fund-Brazil, FUNBIO—Fundo Brasileiro para a Biodiversidade (Brazilian
Fund of Biodiversity), Instituto Akatu pelo Consumo Consciente (Akatu Institute for Conscious
Consumption), IEDI—Instituto de Estudos para o Desenvolvimento Industrial (Institute for Industrial
Development Studies), CEAL—Conselho de Empresários da América Latina (Businessmen’s Council of
Latin America) and Nueva Holding Inc., a Costa Rican company.
Pedro Luiz Barreiros Passos, 52, Director and Chief Executive Officer. Mr. Passos has a degree in
production engineering from the Polytechnic Institute of the University of São Paulo and a degree in
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Management
business administration from the Fundação Getúlio Vargas. He began his career in 1974 at Metalúrgica
La Fonte S.A. as an assistant to the board of executive officers. Since that time, he has worked at several
Brazilian companies, including Macisa Com. e Ind. de Metais, Companhia Paulista de Estradas de
Ferro—FEPASA and Filtrona Brasileira Ind. e Com. Ltda. Mr. Passos began working in the cosmetics
industry in 1983, when he became general manager of YGA, one of the distribution companies that sold
our products and was ultimately acquired by our company. In 1988, he became Managing Director of
the new company. In 1998, Mr. Passos became our Chief Executive Officer and also became Vice
President of Sipatesp (the Union for the Perfume and Toiletries Industry in the State of São Paulo). In
2003, he was a member of the Curator Council of the Fundação para o Prêmio Nacional da Qualidade
(Foundation for the National Quality Award, or FNPQ).
Edson Vaz Musa, 65, Director and Coordinator of our Human Resources Committee. Mr. Musa has a
degree in engineering from the Instituto Tecnológico de Aeronáutica—ITA. Mr. Musa has worked for
several companies and was chief executive officer of Rhodia and a member of the Rhône Poulenc
Group’s executive committee. Currently, he is the majority shareholder of EVM Empreendimentos,
which controls Caloi S.A. (a Brazilian manufacturer of bicycles). In addition, Mr. Musa is a member of
the board of directors of WEG Motores S.A. and of several non-profit organizations, including TV
Cultura, Fundação Antonio Prudente, Instituto Uniemp, Aliança Francesa, FNPQ, Fundação Dom
Cabral, Movimento Brasil Competitivo, Brasil Premium, ICC-International Chamber of Commerce in
Brazil, Fundação Casimiro Montenegro, Fundação Educacional Inaciana “Pe. Sabóia de Medeiros,”
Centro de Integração Empresa Escola (Business Schools Integration Center), Instituto Roberto Simonsen,
Conselho Estadual de Micro e Pequenas Empresas—CEMPE (State Council for Micro and Small
Enterprise), Centro Brasileiro de Estudos em Liderança—CEBL (Brazilian Center for Studies in
Leadership), ABERJE—Associação Brasileira de Comunicação Empresarial (Brazilian Association for
Business Communication) and Associação dos Dirigentes de Vendas e Marketing do Brasil (Brazilian
Association of Sales and Marketing Managers). In addition, he is a member of the Legion of Honor of
France and a member of the Ordem Nacional do Mérito Científico (Brazilian National Order of
Scientific Merit)—Classe da Grã-Cruz 2002.
José Guimarães Monforte, 56, Director and Coordinator of our Audit and Risk Management
Committee. Mr. José Monforte has a degree in economics from Santos Catholic University. In 1973, he
began working for the Banco do Estado de São Paulo—Banespa as a manager, and in 1979 he became
Executive Director of Merrill Lynch in Brazil. In 1998, he joined Citibank, N.A. as manager of its
Brazilian operations, and in 1991 he was transferred to New York, where he managed the Western
Division of Citibank’s Product Development group. In 1994, he returned to Brazil as Director of Capital
Markets, responsible for areas of international capital markets, corporate finance, domestic funding,
institutional research and sales and brokerage. From September 1997 to July 1998, he was chief
executive officer of VBC Energia S.A. In 1999, he joined Janos Participações Ltda. Currently, he is the
President of Janos Participações Ltda., Vice President of the Board of Directors of the Instituto Brasileiro
de Governança Corporativa (Brazilian Institute of Corporate Governance) and member of the board of
directors of several companies, including our company, Companhia de Saneamento Básico do Estado de
São Paulo—Sabesp (Basic Sanitation Company of the State of São Paulo), Caramuru Alimentos S.A.,
Klicknet S.A. and Companhia Canbrás de Comunicações.
Member of our Audit and Risk Management Committee (who is not a director or
executive officer)
Eliseu Martins, 59, Member. Mr. Martins has bachelor’s, doctoral and post-doctoral degrees from
the School of Economics, Business Administration and Accounting of the University of São Paulo
(FEA-USP) and undertook post-graduate study in the United States and in France. He has acted as a
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Management
director of the FEA-USP and is currently the post-graduate coordinator and Chairman Professor of the
Accounting and Actuarial Department of the FEA-USP. Mr. Martins was a director of the CVM,
Supervisory Director of the Central Bank of Brazil, Brazil’s representative before the United Nations for
certain matters, a director of IBRACON (Brazilian Institute of Accountants – São Paulo) and
ANEFAC—Associação Nacional dos Executivos de Finanças, Administração e Contabilidade (Brazilian
Association for Finance, Business and Accounting Executives). Mr. Martins is a consultant and lecturer
in accounting matters and is a member of boards of directors, consulting committees and fiscal councils
of several private and government-owned companies and non-profit organizations. He is also the author
and co-author of numerous books and articles.
Member of our Human Resources Committee (who is not a director or executive
officer)
Fernando Porchat, 63, Member. Mr. Fernando Porchat has a degree in business administration. He
worked for 22 years for Johnson & Johnson as products manager and national sales manager until he
became a Director of the Quality Institute, an organization covering a number of Portuguese- and
Spanish-speaking countries. Mr. Porchat joined our company in 1994 as Total Quality Director and later
became our Human Resources Director, a position he held until 2000.
Executive officers (other than officers who are also members of the board of directors)
Alessandro Giuseppe Carlucci, 37, Commercial Officer. Mr. Carlucci has a degree in business
administration from Fundação Getúlio Vargas. He began his career at Pirelli, as a Market Assistant. In
1989, he joined Natura as Marketing Support Analyst, and in 1991 he became Products Manager. In
1993, he was promoted to Marketing Manager for the Distribution Channel, also becoming manager for
sales training and direct sales, communications, customer service and the sales force. In 1997 he became
Brazil Sales Officer, and in 1999 he assumed responsibility for our international operations, working
from our offices in Buenos Aires, Argentina. In June 2002, he returned to Brazil and became our
Commercial Vice President. Finally, in 2003 he also became our Innovation and Business Vice President,
which includes officer-level responsibility for innovation, sales and marketing to our independent sales
representatives and for our southern region.
José David Vilela Uba, 52, Chief Financial Officer and Investor Relations Officer. Mr. Uba has a
degree in electronic engineering from the Instituto Tecnológico de Aeronáutica—ITA, a post-graduate
certificate from the Graduate School of Business Administration of the New York University and a
masters degree in business administration from COPPEAD/URJ. Mr. Uba joined our company in 1996 as
Officer for our Corporate Center and became Information Technology Officer in 1998. Since 2000, he
has been Vice President for Finance and Information, which includes responsibility for the finance,
information technology and legal departments. Mr. Uba began his professional career in 1977 as an
Investment Analyst at Embramec, and in 1978 he joined Grupo Cataguases Leopoldina as Director of
Projects, becoming Business Director in 1981 and Industrial Director in 1987. Also in 1987, he became
the Business and Finance Officer of Lojas Americanas, the Brazilian department store, ultimately
becoming Commercial Officer at Lojas Americanas in 1992. In 1994, he became the Business and
Finance Officer of Wal-Mart Brasil S.A., a position he held until joining our company.
Antonio Carlos Siqueira da Silva, 43, Officer for Legal Matters. Mr. Silva has a degree in law from the
University of São Paulo—USP and specializes in business and tax matters. Mr. Silva joined our company
in 2002 as Officer for Legal Matters. Before working for our company, Mr. Silva served as in-house
counsel for a variety of Brazilian and multinational companies, including Bardella, Promon, Oxiteno,
Sade, Lilly and Itautec Philco.
114
Management
FISCAL COUNCIL
Under the Brazilian corporation law, the Conselho Fiscal, or fiscal council, is a corporate body
independent from the management of the company and the company’s external auditors. The primary
responsibility of the fiscal council is to review management’s activities and the company’s financial
statements and to report its findings to the shareholders. The fiscal council is not intended to be
equivalent to an audit committee contemplated by the U.S. Securities Exchange Act of 1934, as amended.
The fiscal council is not a permanent body, and, whenever installed, it must consist of no less than three
and no more than five members, with an equal number of alternates. Under the Brazilian corporation
law, a fiscal council must be established at a shareholders’ meeting upon the request of shareholders
who, in the aggregate, hold at least 10% of the voting shares, and its members shall remain in office until
the ordinary shareholders’ meeting of the year following their election. Shareholders holding at least
10% of a company’s voting shares also have the right to elect one member to the fiscal council. We
currently do not have a fiscal council installed.
Generally, the fiscal council cannot include members of our board of directors or board of executive
officers, or employees of, any company that we control or that is under common control with us or
spouses or relatives of our management. In addition, each member of the fiscal council is entitled to
receive as compensation an amount equal to at least 10% of the average amount paid to each executive
officer.
SHARE OWNERSHIP
The following table indicates the number of shares directly or indirectly held by each of our directors and
executive officers, or the number of shares which voting powers are held by our directors and executive
officers, as well as the percentage that their individual holdings represent of the total number of our
common shares as of May 24, 2004. Some of these directors and executive officers are selling
shareholders who will be selling shares in this offering. See “Principal and selling shareholders.”
Directors
Number of
shares
Antonio Luiz da Cunha Seabra ....................................................................... 31,457,415(1)
Guilherme Peirão Leal .................................................................................... 30,021,054(2)
Pedro Luiz Barreiros Passos ............................................................................
7,405,780(3)
José Guimarães Monforte ...............................................................................
12,283
Edson Vaz Musa.............................................................................................
153
Executive officers (other than executive officers who are also directors)
Alessandro Giuseppe Carlucci.........................................................................
José David Vilela Uba.....................................................................................
Antonio Carlos Siqueira da Silva(4) ................................................................
(1)
(2)
(3)
(4)
Number of
shares
415,925
451,739
—
Percentage
of class
36.82%
35.14%
8.67%
0.01%
—
Percentage
of class
0.49%
0.53%
—
Includes 24,175,984 shares held by Lisis Participações S.A., a company controlled by Mr. Seabra.
Includes 23,070,076 shares held by Utopia Participações S.A., a company controlled by Mr. Leal.
Includes 5,690,291 shares held by Passos Participações S.A., a company controlled by Mr. Passos.
Mr. Antonio Siqueira owns 32,423 options to buy common shares.
In addition, Mr. Fernando Porchat, a member of our Human Resources Committee who is not a director
or executive officer, owned 68,169 of our common shares as of May 24, 2004, representing 0.08% of
our common shares.
115
Management
COMPENSATION
According to our bylaws, our shareholders are responsible for establishing the aggregate compensation
we pay to our directors and executive officers at our annual shareholders’ meeting. The board of
directors is then responsible for distributing such aggregate compensation individually to its members
and our executive officers, taking into consideration the recommendations made by the Human
Resources Committee.
For our fiscal year ended December 31, 2003, aggregate compensation for our management totaled
R$3.6 million. In addition, our management received a participation in our profit in the total amount of
R$0.7 million. We paid R$1.0 million to our directors who, at the time, were directors of Natura
Participações, excluding the compensation paid to our directors who are also executive officers for their
services as executive officers.
In addition, Mr. Eliseu Martins, a member of our Audit and Risk Management Committee and
Mr. Fernando Porchat, a member of our Human Resources Committee earn R$9,288.00 and
R$3,500.00 per month respectively, as compensation for their services to us.
We assumed the stock option plans of Natura Participações and Natura Empreendimentos existing prior
to our corporate reorganization. We also approved a new stock option plan on April 26, 2004. Under
the terms of our stock option plan approved on April 26, 2004, our board of directors may grant stock
options to our executive officers, as well as to certain other eligible employees of our company and of
our subsidiaries, subject to the aggregate limit of 3% of our common shares. Each stock option
represents the right to acquire one common share, and the options are granted upon the achievement of
objectives determined by the company. One-half of the options granted to a person becomes exercisable
three years after the date of the grant, and the remaining half becomes exercisable four years after the
date of the grant. Options expire six years after the date of the grant. The exercise price of the options is
established by our board of directors and is currently based on a financial model designed to
approximate the market value of our common shares, and we ensure liquidity for the shares by agreeing
to repurchase shares received upon the exercise of stock options. The stock option plans from before
April 26, 2004 that we assumed have terms substantially the same as those described for our new stock
option plan. After this offering, the exercise price of new options granted will be based on the average
market price of our common shares on BOVESPA in the last ten days prior to the grant date on which
our common shares were traded. After this offering we will no longer ensure liquidity of the shares under
the stock options, which must be traded in the market. The exercise price of our stock options is adjusted
for inflation according to the IPCA. Pursuant to amendments to the stock option plans of Natura
Participações and Natura Empreendimentos existing prior to our corporate reorganization, which we
assumed, the options for shares of Natura Participações and Natura Empreendimentos that were granted
under these stock option plans were converted into stock options for our common shares. At May 24,
2004, the total number of options outstanding was 1,882,639, and these options were held by
approximately 53 persons.
116
Transactions with related parties
TRANSACTIONS WITH OUR RELATED COMPANIES
On March 5, 2004, we completed a corporate reorganization in which Natura Cosméticos merged with
Natura Empreendimentos and then merged with Natura Participações, with our company, Natura
Cosméticos, as the surviving company. We undertook this reorganization primarily to simplify our
corporate structure in preparation for this offering by eliminating our holding companies and bringing
Natura Inovação under our company. Our corporate structure prior to this reorganization and our
current corporate structure are described in “Description of our business—History.” These transactions
will, under Brazilian tax law, allow us to amortize for tax purposes the goodwill originally recorded by
Natura Participações when Natura Empreendimentos became its wholly owned subsidiary and thereby to
reduce our income and social contribution tax obligations. On January 31, 2004, before its merger with
our company, Natura Participações recorded a provision to maintain the shareholders’ equity capacity to
distribute future dividends, in accordance with CVM Instruction No. 349 of March 6, 2001 that offsets
the full amount of the goodwill recorded. We expect to deduct for tax purposes portions of the goodwill
in the amount of R$125.4 million in 2004 and of R$150.4 million per year thereafter through 2010.
Before Natura Inovação became our subsidiary in the corporate reorganization on March 5, 2004, our
company and Natura Inovação were controlled by Natura Empreendimentos. We entered into service
agreements with Natura Inovação for research and development of new products. We expect our
company and our subsidiaries to enter into agreements for this same purpose with Natura Inovação in
the future, even though Natura Inovação became our subsidiary. We generally enter into agreements in
connection with these transactions, which are generally carried out under market prices and conditions.
Note 11 to our consolidated financial statements included in this offering memorandum contains more
information about these transactions.
In the ordinary course of our business, we and our subsidiaries enter into a number of intercompany
commercial and financial transactions. We generally document these transactions and use market prices
and terms. For example, we generally purchase products we sell from our subsidiary Natura Indústria,
and we lease space at our Itapecerica da Serra facilities from Natura Indústria. Our subsidiary Natura
Logística renders logistics, order sourcing and administrative services to us and to other subsidiaries of
our company.
Prior to our corporate reorganization in March 2004, we used to enter into financing agreements with
Natura Empreendimentos and Natura Participações. Note 11 to our consolidated financial statements
included in this offering memorandum contains more information about these transactions. Natura
Empreendimentos and Natura Participações were also guarantors in certain financings assumed by us
and our subsidiaries with third parties, as described in “Management’s discussion and analysis of
financial condition and results of operations—Liquidity and capital resources—Debt.” After our
corporate reorganization of March 5, 2004, we assumed the guarantees granted by Natura
Empreendimentos and Natura Participações in connection with our subsidiaries’ indebtedness.
TRANSACTIONS WITH OUR DIRECTORS, OFFICERS AND SELLING SHAREHOLDERS
On September 29, 2000, December 30, 2002 and January 5, 2004, we extended loans to Mr. Alessandro
Giuseppe Carlucci, one of our executive officers, to finance his acquisition of common shares of the
capital stock of Natura Empreendimentos and Natura Participações. On April 30, 2002 and on January
5, 2004, we also extended loans to Mr. José David Vilela Uba, one of our executive officers, to finance
117
Transactions with related parties
his acquisition of common shares of the capital stock of Natura Participações. In our corporate
reorganization of March 2004, Mr. Uba and Mr. Carlucci, like our other shareholders, received common
shares of Natura Cosméticos in exchange for their shares in Natura Participações. Mr. Uba’s loans from
us amounted to R$3,087,339.36, at an interest rate of 3% per annum, the principal being due on April
30, 2009. At March 31, 2004 the outstanding balance of this financing was R$2,483,823.17. Mr.
Carlucci’s loans from us amounted to R$3,087,339.36, at an interest rate of 3% per annum, the
principal being due on September 30, 2010. At March 31, 2004 the outstanding balance of this financing
was R$2,488,147.81. The loans extended to Mr. Uba and Mr. Carlucci are repaid through allocation of
the full amount of dividends and interest on capital received by Mr. Uba and Mr. Carlucci from us to the
payment of the outstanding balance of their respective loans. We hold an option to purchase all shares
held by Mr. Uba and Mr. Carlucci whose exercise is conditioned upon the occurrence of certain events,
including Mr. Uba or Mr. Carlucci not being reelected to their respective offices, their resignation or
dismissal from their respective offices or in the event of death.
In addition, Mr. Uba holds an option to sell all his shares of our capital stock to us (in proportion to the
shares whose purchase price has been paid through the amortizing of the loans we granted to him). The
exercise of this option is conditioned upon the occurrence of certain events, including termination,
resignation or failure to be reelected to our board of executive officers, or in the event of his death.
In January 2004, Mr. José Guimarães Monforte, one of our directors, received shares of Natura
Participações in exchange for shares of Nova Flora Participações Ltda. that he held at the time. This
share exchange was undertaken in order to consolidate at the level of Natura Participações share
ownership of companies in the Natura group by shareholders who are natural persons. In connection
with our March 2004 corporate reorganization, Mr. Monforte, like our other shareholders, received
shares of our company for the shares of Natura Participações he held. Mr. Monforte’s shares are listed in
the table in “Management—Share Ownership.”
In addition, Mr. Monforte is the President of Janos Participações Ltda., a company that manages certain
investments held by Antonio Luiz da Cunha Seabra, Guilherme Peirão Leal and Pedro Luiz Barreiros
Passos, who are directors of our company and selling shareholders in this offering. Mr. Passos is our
Chief Executive Officer.
We agreed with the selling shareholders, certain of whom are members of our board of directors or our
board of executive officers, to pay certain expenses in connection with this offering. The selling
shareholders will pay all underwriting discounts in connection with the offering.
Our bylaws contain restrictions on certain transactions that are outside our corporate purposes. See
“Description of capital stock—Restriction on certain transactions outside our corporate purposes.”
In connection with our corporate reorganization, we assumed the obligations of Natura
Empreendimentos under the debentures it had issued to BNDESPAR, as described in “Management’s
discussion and analysis of financial condition and results of operations—Liquidity and capital
resources—Debt—BNDESPAR debentures.” On May 24, 2004, these debentures were converted into
2,172,550 common shares of our company, representing 2.54% of our capital stock.
At March 31, 2004, we had consolidated loans and financing from BNDES, the parent company of
BNDESPAR, in the amount of R$49.8 million (excluding the debentures converted by BNDESPAR on
May 24, 2004), including:
➤ a loan from BNDES to our company with the outstanding amount of R$39.9 million at March 31,
2004 that is described in “Management’s discussion and analysis of financial condition and results of
operations—Liquidity and capital resources—Debt—BNDES financing”; and
➤ a loan to Natura Indústria for export finance (BNDES-EXIM) in an outstanding amount of
R$4.4 million at March 31, 2004.
118
Principal and selling shareholders
SHARE OWNERSHIP
Our capital stock consists exclusively of common shares. The following table shows our principal
shareholders as of May 24, 2004 and the expected holdings of each such person after completion of this
offering. Some of the shareholders in the table below are selling shareholders described under “—Selling
shareholders.”
Shareholders
At May 24, 2004
Shares(1)
(%)
Lisis Participações S.A.(3).................................................... 24,175,984 28.30
Utopia Participações S.A.(4) ................................................ 23,070,076 27.00
Passos Participações S.A.(5).................................................
5,690,291
6.66
ANP Participações S.A.(6) ...................................................
5,690,445
6.66
RM Futura Participações S.A.(7) .........................................
4,011,086
4.69
Antonio Luiz da Cunha Seabra(*) .......................................
7,281,431
8.52
Guilherme Peirão Leal(*).....................................................
6,950,978
8.14
Pedro Luiz Barreiros Passos(*).............................................
1,715,489
2.01
Anizio Pinotti(*)..................................................................
1,715,335
2.01
Ronuel Macedo de Mattos(*) ..............................................
1,208,622
1.41
BNDESPAR(*) ....................................................................
2,172,550
2.54
Other directors and executive officers as a group.................
880,100
1.03
Other shareholders ..............................................................
188,375
0.22
Treasury shares ...................................................................
687,849
0.81
Total ............................................................................
85,438,611
After completion of
the offering(2)
Shares
(%)
24,175,984 28.30
23,070,076 27.00
5,690,291
6.66
5,690,445
6.66
4,011,086
4.69
2
—
1
—
1
—
—
—
—
—
—
—
880,100
1.03
21,232,776 24.85
687,849
0.81
100% 85,438,611
100%
(1) The number of stock options that are not yet exercisable under the Stock Option Plans for 2002,
2003 and 2004 is 607,608, 763,878 and 380,292, respectively.
(2) Considering the exercise in full of underwriters’ over-allotment option.
(3) Company controlled by Antonio Luiz da Cunha Seabra.
(4) Company controlled by Guilherme Peirão Leal.
(5) Company controlled by Pedro Luiz Barreiros Passos.
(6) Company controlled by Anizio Pinotti.
(7) Company controlled by Ronuel Macedo de Mattos
(*) Selling shareholders
Our directors and executive officers, directly or indirectly, as a group held 69,764,349 common shares at
May 24, 2004, representing 81.65% of our outstanding common shares, and we expect them to hold
53,816,454 common shares after completion of this offering, representing 62.99% of our outstanding
common shares.
We are controlled by Antonio Luiz da Cunha Seabra, Guilherme Peirão Leal, Pedro Luiz Barreiros
Passos, Ronuel Macedo de Mattos and Anizio Pinotti, both directly and indirectly through the entities
listed in the table above. Although our shareholders Lisis Participações S.A., Utopia Participações S.A.,
Passos Participações S.A., RM Futura Participações S.A. and ANP Participações S.A. are the record
holders of their shares listed in the table above, these shareholders have transferred the economic rights
under these shares (including rights to receive dividends and interest on shareholders equity) to their
respective controlling shareholders, in a transaction called “usufruto de ações” under Brazilian law. Our
controlling shareholders have entered into a shareholders’ agreement with respect to our shares that is
described in “—Shareholders’ agreement” below.
119
Our controlling shareholders do not have different voting rights from our other common shares by virtue
of the percentage of our outstanding common shares that they own, except that the Brazilian corporation
law provides that any person that, individually or in blocs with other shareholders, owns at least 15% of
our issued and outstanding common shares has the right to elect one director and his or her alternate at
our annual shareholders’ meeting. See “Description of capital stock—Directors—Election of directors.”
There has been no significant change in the holdings of the major shareholders in the past three years.
SELLING SHAREHOLDERS
Our common shares being offered in this offering are being sold by Antonio Luiz da Cunha Seabra,
Guilherme Peirão Leal, Pedro Luiz Barreiros Passos, Ronuel Macedo de Mattos, Anizio Pinotti and
BNDESPAR.
Antonio Luiz da Cunha Seabra. Mr. Seabra is the Founder of our company and Co-Chairman of our
Board of Directors. Mr. Seabra has an office located at Rua Amauri, n° 255, 4th floor, São Paulo, SP,
Brazil. A brief biography of Mr. Seabra is provided in “Management—Biographical information.”
At May 24, 2004, Mr. Seabra held 36.82% of our outstanding common shares, directly and indirectly.
Guilherme Peirão Leal. Mr. Leal is Co-Chairman of our Board of Directors. Mr. Leal has an office
located at Rua Amauri, n° 255, 4th floor, São Paulo, SP, Brazil. A brief biography of Mr. Leal is provided
in “Management—Biographical information.”
At May 24, 2004, Mr. Leal held 35.14% of our outstanding common shares, directly and indirectly.
Pedro Luiz Barreiros Passos. Mr. Passos is our Chief Executive Officer and is a member of our board
of directors. Mr. Passos has an office located at Rua Amauri, n° 255, 4th floor, São Paulo, SP, Brazil. A
brief biography of Mr. Leal is provided in “Management—Biographical information.”
At May 24, 2004, Mr. Passos held 8.67% of our outstanding common shares, directly and indirectly.
Anizio Pinotti. Mr. Pinotti has a degree in industrial chemistry from Eduardo Prado School of
Chemistry, in business administration from ESAN—Escola Superior de Administração de Negócios
(Superior School of Business Administration) and in chemical engineering from Faculdade de Engenharia
Química Oswaldo Cruz. Mr. Pinotti began his activities in the cosmetics and fragrances industry in 1965
as a technical manager for Christian Gray Cosméticos Ltda. In 1972, Mr. Pinotti joined our company as
technical officer, and in 1981 he founded YGA, which in 1989 became part of our group. Mr. Pinotti
was our Research and Development Officer until the end of 1998. Mr. Pinotti has an office located at
Rua João Cachoeira, n° 488, conjunto 709, 7th floor, São Paulo, SP, Brazil.
At May 24, 2004, Mr. Pinotti held 8.67% of our outstanding common shares, directly and indirectly.
Ronuel Macedo de Mattos. Mr. Mattos has a degree in agronomy from the Luiz de Queiroz de
Piracicaba Superior School of Agriculture—USP in the State of São Paulo. Mr. Mattos began his career in
1971, at Cia. Paulista de Estradas de Ferro—FEPASA, where he worked until 1979. He entered the
cosmetics industry in 1979 as a shareholder of one of the companies that became part of our group,
having occupied positions in the administrative and finance departments of Natura until 1990. Mr.
Mattos has an office located at Rua Amauri, n° 255, 4th floor, São Paulo, SP, Brazil.
At May 24, 2004, Mr. Mattos held 6.10% of our outstanding common shares, directly and indirectly.
120
BNDES Participações S.A. – BNDESPAR. BNDESPAR, a subsidiary of BNDES, primarily makes
temporary, minority investments in Brazilian companies. The headquarters of BNDESPAR is located in
Brasília, Brazil, and the principal place of business of BNDESPAR is located at Av. República do Chile,
100, 19th floor, 20139-900 Rio de Janeiro, RJ, Brazil.
At May 24, 2004, BNDESPAR held 2.54% of our common shares, directly and indirectly. BNDESPAR
intends to sell 2,172,550 common shares in this offering.
The selling shareholders intend to sell jointly 18,582,856 common shares in this offering, and this
amount may be increased by an additional 2,461,545 common shares held by the selling shareholders,
other than BNDESPAR, if the over-allotment option is exercised.
SHAREHOLDERS’ AGREEMENT
On April 26, 2004, a shareholders’ agreement was entered into among Lisis Participações S.A., Utopia
Participações S.A., Passos Participações S.A., RM Futura Participações S.A., ANP Participações S.A.,
Antonio Luiz da Cunha Seabra, Guilherme Peirão Leal, Pedro Luiz Barreiros Passos, Anizio Pizotti and
Ronuel Macedo de Mattos, with our company as an intervening party. The shareholders’ agreement has
a term of ten years and is renewable for additional ten-year periods unless shareholders representing at
least 60% of the shares subject to the agreement vote not to renew it.
The shareholders’ agreement requires that (1) our management be performed by ethical, experienced and
independent professionals; (2) our strategy be dictated by the principle of sustainable growth and in line
with our economic, environmental and social undertakings; (3) any related party transactions be
conducted in accordance with market conditions and on an arm’s length basis; and (4) our management
seek profit and efficiency in a competitive environment, with a view to economic, environmental and
social development.
The shareholders’ agreement also provides that:
➤
any shareholder willing to sell his or her shares must grant preemptive rights to signatory shareholders
holding more than 5% of the shares subject to the shareholders’ agreement to purchase such shares
under the same conditions offered by a third party within 60 days, provided that such preemptive
rights may only be exercised if holders of at least 30% of the shares subject to the shareholders
agreement are willing to exercise such preemptive rights;
➤
shareholders representing at least 60% of the shares subject to the shareholders’ agreement have the
right to require that the remaining shareholders sell their respective shares upon a sale of the shares
representing at least 60% of the shares subject to the shareholders’ agreement (drag-along rights);
➤
if any shareholder signatory to the shareholders’ agreement is willing to sell his shares to a third party
who is our competitor or a related party to the shareholder willing to sell his shares, the exercise price
of the preemptive rights will be based on an independent valuation; and
➤
the shareholders signatory to the shareholders’ agreement shall meet prior to each of our general
shareholders’ meeting to discuss their position in relation to the matters to be resolved upon in each
such meeting. If shareholders holding at least 60% of the shares subject to the shareholders’ agreement
resolve, in a previous meeting, to take a certain position with respect to a matter to be resolved in a
general shareholders’ meeting, all the other signatories to the shareholders’ agreement shall vote as a
bloc in accordance with the decision taken by the shareholders holding at least 60% of our shares.
121
Description of capital stock
GENERAL
We are currently a privately held corporation (sociedade por ações de capital fechado) incorporated
under the laws of Brazil. After the CVM approves our listing as a public company and the registration
statement for our public offering in Brazil, we will be a publicly held corporation (sociedade por ações de
capital aberto) incorporated under the laws of Brazil.
Issued share capital
As of May 24, 2004, our capital stock was R$230,761,985.57, all of which was fully subscribed and
paid in. Our share capital is comprised of 85,438,611 common shares, without par value, including
687,849 shares held in treasury with a book value at March 31, 2004 of R$3.8 million. Under our
bylaws, our board of directors may increase our share capital up to the limit of our authorized share
capital by issuing up to 2,823,414 common shares without seeking specific shareholder approval. The
shareholders must approve any capital increase above that amount at a shareholders’ meeting. Pursuant
to the agreement entered with BOVESPA on April 26, 2004 for the listing of our shares on the Novo
Mercado, we are not allowed to issue preferred shares.
History of share capital
Our share capital at December 31, 2000, 2001 and 2002 was R$56,387 thousand. On March 2, 2004,
we increased our share capital to R$194,955 thousand through the capitalization of credits of the selling
shareholders, other than BNDESPAR, obtained from the redemption of the debentures and from the net
remuneration on the debentures through January 31, 2004. On March 5, 2004, we increased our share
capital to R$196,370 thousand through the corporate reorganization in which Natura Cosméticos
merged with Natura Empreendimentos and then merged with Natura Participações, with our company,
Natura Cosméticos, as the surviving company. On May 24, 2004, we increased our capita stock to
R$230,761,985.57 in connection with the conversion into common shares of our company of convertible
debentures held by BNDESPAR. There was no change in the voting rights attached to our common
shares, and there was no other change in our share capital during the three years ended December 31,
2003. See “Management’s discussion and analysis of financial condition and results of operations—
Overview—Recent corporate reorganization.”
Trading policy for shares of our own issuance
On May 24, 2004, we held 687,849 common shares in treasury with a book value at March 31, 2004 of
R$3.8 million. On April 26, 2004, we implemented a Trading Policy for Shares of our Own Issuance,
which regulates the trading of shares of our capital stock so as to avoid the improper use of relevant
information about our company in the trading of our shares. Among other provisions, this policy sets
forth:
➤
the prohibition for the trading of our shares by ourselves, our controlling shareholders, members of
our Board of Directors, Executive Committee and Fiscal Council, managers and employees who may
have knowledge of relevant information regarding our company (“Restricted Persons”);
➤
the prohibition for the trading of our shares by the Restricted Persons who are no longer members of
our management for a 6-month period following the date when such person ceases to be part of our
management or the date when relevant information regarding our company is disclosed;
➤
the prohibition for the trading of our shares by the Restricted Persons whenever a public offering for
the acquisition or sale of our shares by one of the Restricted Persons, or a process for the transfer of
our shareholding control is in course, or the intent to promote a merger, amalgamation, spin-off or
corporate reorganization exists; and
122
➤
the prohibition for the trading of our shares by any of the Restricted Persons during the 15-day period
prior to the disclosure of the quarterly and annual information required by the CVM.
Objects and purposes
Article 3 of our bylaws (estatuto social) provides that our corporate purpose is to:
➤
undertake the commercialization and export and import of beauty, hygiene, toiletry and cosmetics
products, clothing, jewelry, house ware, foodstuffs, nutritional supplements, software, books, editorial
material, entertaining and phonographic products, medicines, including homeopathic and
phytotherapeutic medicines, and household cleaning products;
➤
render services of any nature, such as aesthetic treatments, market consulting, planning and risk
analysis; and
➤
organize, participate and manage, in any form, companies and businesses of any nature as a partner or
shareholder.
Rights of common shares
Each of our common shares entitles its holder to one vote at an annual or special shareholders’ meeting
(assembléia geral ordinária ou extraordinária). Pursuant to the agreement entered into between us and
BOVESPA on April 26, 2004 in connection with the listing of our shares in the Novo Mercado, we
cannot issue shares with no voting rights or restricted voting rights. In addition, our bylaws and the
Brazilian corporation law provide that common shares are entitled to dividends or other distributions
made in respect of common shares in proportion to their share of the amount for the dividend or
distribution. See “Payment of dividends and interest on capital” for a more complete description of
payment of dividends and other distributions on our common shares. In addition, upon our liquidation,
the common shares are entitled to return of capital in proportion to their share of our net worth, after
payment of all our liabilities. Holders of our common shares are not liable for future capital calls by our
company.
Options
We have issued options to purchase common stock to approximately 53 persons, including members of
our management and employees under our stock option plans. See “Management—Compensation.”
MEETINGS OF SHAREHOLDERS
At our shareholder meetings, shareholders are generally empowered to take any action relating to our
corporate purpose and to pass such resolutions as they deem necessary. Shareholders at the annual
shareholders’ meeting have the exclusive power to approve our financial statements and to determine the
allocation of our net profits with respect to the fiscal year ended immediately prior to the shareholders’
meeting. The election of our directors typically takes place at the annual shareholders’ meeting, although
under Brazilian law it may also occur at a special shareholders’ meeting. Members of the fiscal council, if
the requisite shareholders request its establishment, may be elected at any shareholders’ meeting.
A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting. The
following actions, among others, may be taken only at a shareholders’ meeting:
➤
amendment of our bylaws;
➤
election and dismissal of the members of our Board of Directors;
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➤
determining the aggregate compensation of the Board of Directors and Executive Committee, as well
as the Fiscal Council’s compensation, if the requisite shareholders request its establishment;
➤
granting of shares bonuses;
➤
approval of share splits;
➤
approval of a stock option plan or the subscription of shares by the management and employees;
➤
approval of the management’s accounts and the financial statements prepared by the management;
➤
resolution upon the destination of our net income and the distribution of dividends;
➤
election of the liquidator and election of the Fiscal Council to function in the event of our dissolution;
➤
resolution to delist from BOVESPA’s Novo Mercado;
➤
appointment, from among institutions identified by our board of directors, of an evaluation company
responsible for determining the value of our shares for the purposes of any public offering provided for
in our bylaws;
➤
authorization of the issuance of convertible debentures or secured debentures;
➤
suspension of the rights of a shareholder who has violated the Brazilian corporation law or our
bylaws;
➤
acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in
consideration for issuance of shares of our capital stock;
➤
approval of our transformation into a sociedade limitada or any other corporate form;
➤
approval of any merger with another company (incorporação or fusão) or a spin-off (cisão);
➤
approval of any dissolution or liquidation, and the appointment and dismissal of the respective
liquidator and review of the reports prepared by him or her; and
➤
authorization to petition for our bankruptcy or request the compulsory rescheduling of our debts.
According to the Brazilian corporation law, neither a company’s bylaws nor actions taken at a
shareholders’ meeting may deprive a shareholder of the following rights:
➤
the right to participate in the distribution of profits;
➤
the right to participate equally and ratably in any remaining residual assets in the event of liquidation
of the company;
➤
the right to preemptive rights in the event of subscription of shares, convertible debentures or
subscription bonuses, except in some specific circumstances under Brazilian law described in
“—Preemptive rights”; and
➤
the right to withdraw from the company in the cases specified in the Brazilian corporation law, which
are described in “—Withdrawal rights and redemption.”
Quorum
As a general rule, the Brazilian corporation law provides that a quorum at a shareholders’ meeting
consists of shareholders representing at least 25% of a company’s issued and outstanding voting capital
on the first call and, if that quorum is not reached, any percentage on the second call. If the shareholders
are called to amend our bylaws, a quorum at a shareholders’ meeting consists of shareholders
representing at least two-thirds of our issued and outstanding voting capital on the first call and any
percentage on the second call.
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As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and
outstanding common shares present in person or represented by proxy at a shareholders’ meeting is
required to ratify any proposed action, and abstentions are not taken into account. However, the
affirmative vote of shareholders representing one-half of our issued and outstanding voting capital is
required to:
➤
reduce the percentage of mandatory dividends;
➤
change our corporate purpose;
➤
merge our company with another company;
➤
spin off a portion of our assets or liabilities;
➤
approve our participation in a group of companies;
➤
apply for cancellation of any voluntary liquidation;
➤
approve our dissolution; and
➤
approve the merger of our shares by another company.
As long as we are listed in the Novo Mercado, we cannot issue preferred shares. In order to delist from
the Novo Mercado, we must conduct a public offering. See “Delisting from the Novo Mercado”.
Notice of our shareholders’ meetings
Notice of our shareholders’ meetings must be published at least three times in the Diário Oficial do
Estado de São Paulo, the official newspaper of the State of São Paulo, and in another widely circulated
newspaper, currently the newspaper Valor Econômico, the first notice must be published no later than
15 days before the date of the meeting on the first call, and no later than eight days before the date of the
meeting on the second call. However, in certain circumstances, the CVM may require that the first notice
be published 30 days in advance of the meeting.
Location of our shareholders’ meetings
Our shareholders’ meetings take place at our head offices in the City of Itapecerica da Serra, State of São
Paulo. The Brazilian corporation law allows our shareholders to hold meetings outside our head offices
in the event of force majeure, provided that the meetings are held in the City of Itapecerica da Serra and
the relevant notice contains a clear indication of the place where the meeting will occur.
Who may call our shareholders’ meetings
Our board of directors may call a shareholders’ meetings. Shareholders’ meetings may also be called by:
➤
any shareholder, if our directors fail to call a shareholders’ meeting within 60 days after the date they
were required to do so under applicable laws and our by-laws;
➤
shareholders holding at least five percent of our capital stock, if our directors fail to call a meeting
within eight days after receipt of a request to call the meeting by those shareholders indicating the
proposed agenda;
➤
shareholders holding at least five percent of our shares if our directors fail to call a meeting within
eight days after receipt of a request to call the meeting for the creation of the fiscal council; and
➤
our fiscal council, if one is created, if the board of directors fails to call an annual shareholders’
meeting. The fiscal council may also call a special shareholders’ meeting if it believes that there are
important or urgent matters to be addressed.
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Conditions of admission
Shareholders attending a shareholders’ meeting must produce proof of their status as shareholders and
proof that they hold the shares they intend to vote.
A shareholder may be represented at a shareholders’ meeting by a proxy appointed less than a year
before, which must be a shareholder, a corporation officer, a lawyer or a financial institution. An
investment fund must be represented by its investment fund officer.
DIRECTORS
Election of directors
Our bylaws require that our board of directors consist of a minimum of five and a maximum of seven
directors. The exact number of directors is set by a vote of a majority of our common shares present in
person or represented by proxy at a shareholders’ meeting. The Brazilian corporation law allows
cumulative voting for directors at the request of at least 10% of our voting capital stock. If there is no
request for cumulative voting, directors are elected by a majority of our common shares present in person
or represented by proxy at a shareholders’ meeting, except that any shareholders that, individually or in
blocs, hold at least 15% of the common shares have the right to select one director and his or her
alternate. Directors are elected at the annual shareholders’ meeting for a period of one year.
The Brazilian corporation law requires that each director own at least one share of our company. There
is no mandatory retirement age for directors.
Transactions in which directors have an interest
Our bylaws contains a specific provision governing the power of a director to vote on a proposal,
arrangement or contract in which the director has an interest that conflicts with that of our company,
such as the granting of loans to directors by our company. In addition, the Brazilian corporation law
prohibits a director from:
➤
performing any act of generosity using corporate assets to the detriment of the corporation;
➤
by virtue of his or her position, receiving any type of direct or indirect personal advantage from third
parties without authorization in the bylaws or from a shareholders’ meeting; and
➤
taking part in any corporate transaction in which he or she has an interest that conflicts with an
interest of the corporation, or in the decisions made by other directors on the matter.
The compensation of directors is determined by the shareholders.
ALLOCATION OF NET INCOME AND DISTRIBUTION OF DIVIDENDS
Calculation of distributable amount
At each annual shareholders’ meeting, the board of directors is required to recommend how to allocate
our net profits for the preceding fiscal year. This allocation is subject to deliberation by our shareholders.
The Brazilian corporation law defines “net profits” for any fiscal year as net income after income and
social contribution taxes for that fiscal year, net of any accumulated losses from prior fiscal years and
any amounts allocated to employees’ and management’s participation in our net profits in such fiscal
year.
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Consistent with the Brazilian corporation law, our bylaws provide that an amount, known as the
distributable amount, equal to 30% of our net profits, as further reduced by amounts allocated to our
profits reserves and contingency reserves (if any), and increased by any reversals of the profits reserves
(except for amounts allocated to our legal reserve and statutory reserve (if any)) and reserve for
contingencies (if any) should be available for dividend distributions or payment of interest on capital in
any particular year, which correspond to the mandatory dividends. Our calculation of net profits and
allocations to reserves for any fiscal year are determined on the basis of our unconsolidated financial
statements prepared in accordance with the Brazilian corporations law.
On March 17, 2004, our board of directors adopted a dividends policy that establishes the payment of
dividends representing at least 45% of our net income in each financial year, as that amount may be
adjusted under certain circumstances in accordance with the Brazilian corporation law. However, our
dividends policy does not prevent us from declaring dividends in an amount lower than 45% of our
adjusted net income under certain circumstances. See “Payment of dividends and interest on capital—
Dividend policy.”
Reserve accounts
We have two principal reserve accounts—profits reserves and capital reserves.
Profits reserves. Our profits reserve account is comprised of legal reserves, unrealized profit reserves,
contingency reserves and retained profit reserves.
Legal reserves. Under the Brazilian corporation law and our bylaws, we are required to maintain a legal
reserve to which we must allocate 5% of our net profits for each fiscal year until the aggregate amount of
the reserve equals 20% of our paid-in capital. However, we are not required to make any allocations to
our legal reserve in a fiscal year in which the legal reserve, when added to our other established capital
reserves, exceeds 30% of our total capital. Any net loss may be offset with the amounts allocated in the
legal reserve. The amounts to be allocated in such reserve must be approved by our shareholders in a
shareholders’ meeting, and may be used for the increase of our capital stock, however they are not
available for the payment of dividends. At March 31, 2004, our legal reserves amounted to
approximately R$3.6 million, equivalent to approximately 1.85% of our capital stock on that date.
Unrealized profits reserves. Under the Brazilian corporation law, the amount by which the distributable
amount exceeds the “realized” net profits in a given fiscal year may be allocated to unrealized profits
reserves. The Brazilian corporation law defines “realized” net profits as the amount by which our net
profits exceed the sum of (1) our net positive results, if any, from the equity method of accounting for
earnings and losses of our subsidiaries and certain of our affiliates and (2) the profits, gains or returns
that will be received by our company after the end of the next fiscal year. The profits allocated to the
unrealized profits reserves must be added to the next mandatory dividend declared after those profits
have been realized, if they have not been used to absorb losses in subsequent periods. At March 31,
2004, our unrealized profits reserve had a zero balance.
Contingency reserves. Under the Brazilian corporation law, a percentage of our net profits may be
allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any
amount so allocated in a prior year either must be reversed in the fiscal year in which the loss had been
anticipated if the loss does not occur as projected or charged off in the event that the anticipated loss
occurs. At March 31, 2004, we did not have any contingency reserves.
Retained profits reserve. Under the Brazilian corporation law, our shareholders may decide at a general
shareholders’ meeting to retain a portion of our net income that is provided for in a capital expenditure
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budget. At our general shareholders’ meeting that approved our financial statements for the year ended
December 31, 2003, our shareholders approved the creation of a retained profits reserve in the amount
of approximately R$31.8 million for future investments in the expansion of our storage capacity and the
construction of a new order sourcing line. As a result of the assumption of liabilities from Natura
Empreendimentos and Natura Participações, which were merged into our company on March 5, 2004,
this reserve was fully used, and on March 31, 2004 we did not account for retained profits reserve.
Capital reserve account. Our capital reserve account consists of goodwill reserves, tax incentives and
investment reserves. Amounts allocated to our capital reserve account are not taken into consideration
for purposes of determining the mandatory distributable amount. At March 31, 2004, our capital reserve
account amounted to approximately R$110.0 million.
Payment of dividends and interest on capital
The bylaws of a Brazilian corporation must specify a minimum percentage of the distributable amount
that must be paid to shareholders as dividends, also payable as interest on capital. According to our bylaws, and as permitted by the Brazilian corporation law, the mandatory distributable amount is 30% of
our net profits, after adjustments are made to certain of our reserve accounts. See “—Calculation of
distributable amount.” In addition, at March 17, 2004 our Board of Directors adopted a suggested
dividends policy which determines a mandatory distributable amount of at least 45% of our net profits
after the adjustments provided for in the Brazilian corporation law. However, our dividends policy does
not prevent us from declaring dividends in an amount lower than 45% of our adjusted net income under
certain circumstances.
In addition to the mandatory distributable amount, the Board of Directors may recommend that the
shareholders approve the payment of additional distributions from other funds legally available for
distribution.
While we are required under the Brazilian corporation law to pay a mandatory distribution every year,
we are also allowed to suspend the mandatory distribution if the board of directors reports to our annual
shareholders’ meeting that the distribution would be inadvisable given our financial condition. Any
suspension of the mandatory distribution must be reviewed by the fiscal council if one is in place at the
time. In addition, management of companies with publicly traded securities must submit a report setting
out the reasons for the suspension to the CVM. Net profits not distributed by virtue of a suspension are
allocated to a separate reserve and, if not absorbed by subsequent losses, are required to be distributed as
soon as the financial condition of the company permits such payments.
The mandatory distribution may be made in the form of dividends or interest attributable to
shareholders’ equity, which is equivalent to a dividend but may be deducted by us in calculating our
income tax obligations.
Dividends. We are required by the Brazilian corporation law and by our bylaws to hold an annual
shareholders’ meeting no later than the fourth month after the end of each fiscal year, at which our
shareholders must vote to declare an annual dividend. The payment of annual dividends is based on our
unconsolidated audited financial statements prepared for the immediately preceding fiscal year.
Any holder of record of shares at the time that a dividend is declared is entitled to receive dividends.
Under the Brazilian corporation law, dividends are generally required to be paid within 60 days
following the date on which the dividend is declared, unless the shareholders’ resolution establishes
another date of payment, which, in any case, must occur before the end of the fiscal year in which the
dividend is declared.
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Our bylaws do not require that we adjust the amount of the dividend payment on account of inflation.
A shareholder has a three-year period from the date of the dividend payment to claim dividends or
interest payments with respect to its shares, after which the aggregate amount of any unclaimed
dividends legally reverts to us.
Our board of directors may declare interim dividends to be deducted from the accrued profits recorded
or the realized profits in our annual or semiannual financial statements. In addition, our board of
directors may pay dividends from the net income based on our unaudited quarterly financial statements.
These quarterly interim dividends may not exceed the amounts accounted for in our capital reserve
accounts. Any payment of interim dividends may be set off against the amount of mandatory
distributions relating to the net profit earned in the year in which the interim dividends were paid.
Interest on capital. Since January 1, 1996, Brazilian companies have been permitted to pay limited
interest to holders of equity securities and treat those payments as a deductible expense for purposes of
calculating Brazilian income tax and, since 1998, social contribution tax. The amount of the deduction is
limited to the greater of (i) 50% of our net income (before payment of any interest or any deduction for
income taxes or social contribution) and (ii) 50% of our accumulated profits, in each case only for the
relevant period. Our bylaws permit the payment of interest on capital as an alternative form of payment
of dividends to shareholders. The rate applied in calculating interest on capital cannot exceed the TJLP
for the applicable period. Under our bylaws, the amount distributed to shareholders as interest on
capital, net of any withholding tax, may be included as part of the mandatory distribution. In accordance
with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net
amount they receive in respect of interest on capital, after payment of the applicable withholding tax,
plus the amount of declared dividends is at least equivalent to the mandatory dividend amount.
Any payment of interest on capital to holders of shares, whether or not they are Brazilian residents, is
subject to Brazilian withholding tax at the rate of 15%, provided that a 25% withholding tax rate
applies if the person receiving this interest is a resident of a tax haven jurisdiction (i.e., a country that
does not impose income tax or that imposes it at a maximum rate lower than 20% or where the local
legislation imposes restrictions on disclosing the shareholding composition or the ownership of the
investment). See “Taxation—Brazil—Income tax—Interest on capital.”
Dividend policy
On March 17, 2004, our board of directors adopted a dividend policy pursuant to which we intend to
distribute as dividends and/or interest on capital net of income tax in the amount of approximately 45%
of our net income for each fiscal year, as this amount may be adjusted pursuant to the Brazilian
corporation law under certain circumstances.
WITHDRAWAL RIGHTS AND REDEMPTION
Withdrawal Rights
Shareholders who dissent from certain actions taken by our shareholders in a shareholders’ meeting have
the right to withdraw from our company and to receive the net worth value of their shares.
According to the Brazilian corporation law, shareholder withdrawal rights may be exercised in the
following circumstances, among others:
➤
a spin-off, or cisão, from our company;
➤
a reduction in the percentage of mandatory dividends;
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➤
a change in our corporate purpose;
➤
a merger (fusão or incorporação) with another company; or
➤
our participation in a group of companies (as defined in the Brazilian corporation law).
As long as we are listed in the Novo Mercado, we cannot issue preferred shares. In order to delist from
the Novo Mercado, we must conduct a public offering.
The Brazilian corporation law further provides that any resolution regarding a spin-off will also entitle
shareholders to withdraw from our company if the spin-off:
➤
causes a change in the purpose of the company, except if the equity is spun off to a company whose
primary activities are consistent with our corporate purpose;
➤
reduces our mandatory dividends; or
➤
causes us to join a group of companies.
In cases where we:
➤
merge with another company in circumstances in which we are not the surviving company; or
➤
participate in a group of companies (as defined in the Brazilian corporation law),
our shareholders will not be entitled to withdraw if their respective shares (1) are liquid, defined as being
part of the BOVESPA Index or other traded stock exchange index (as defined by the CVM), and (2) are
widely held, such that the controlling shareholder or companies it controls hold less than 50% of our
shares.
The right to withdraw expires 30 days after publication of the minutes of the relevant shareholders’
meeting. We are entitled to reconsider any action giving rise to withdrawal rights for 10 days after the
expiration of those rights if the redemption of shares of dissenting shareholders would jeopardize our
financial stability.
If they exercise withdrawal rights, shareholders are entitled to receive book value for the shares, based on
the last balance sheet approved by the shareholders. If the resolution giving rise to the rights is made later
than 60 days after the date of the last approved balance sheet, the shareholder may demand that his or
her shares be valued according to a new balance sheet dated no less than 60 days before the resolution
date. In this case, we must immediately pay 80% of the book value of the shares according to the most
recent balance sheet approved by our shareholders, and the balance must be paid within 120 days after
the date of the resolution of the shareholders’ meeting.
Redemption
According to the Brazilian corporation law, we are permitted to redeem our shares if our shareholders
decide to do so at a special meeting of the shareholders.
REGISTRATION OF OUR SHARES
Our shares are held in book-entry form with Banco Itaú S.A. Transfer of our shares is carried out by
means of an entry by Banco Itaú S.A. Banco Itaú S.A. requires presentation of a written order of the
transferor or a judicial authorization or order to effect such transfers.
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PREEMPTIVE RIGHTS
Except as described below, our shareholders have a general preemptive right to subscribe for shares in
any capital increase according to the proportion of their shareholdings, except in the event of the grant
or exercise of an option to acquire or subscribe for shares of our capital stock or the conversion of
debentures into shares. Our shareholders also have a general preemptive right to subscribe for any
convertible debentures, rights to acquire our shares and subscription warrants that we may issue. A
period of at least 30 days following the publication of notice of the capital increase is allowed for the
exercise of the preemptive right, and the right may be transferred or disposed of for consideration.
However, according to the Brazilian corporation law and our bylaws, our board of directors is
authorized to exclude preemptive rights or reduce the exercise period with respect to the issuance of new
shares, debentures convertible into shares and subscription warrants up to the limit of the authorized
capital stock if the distribution of those shares is effected through a stock exchange, through a public
offering or through an exchange of shares in a public offering the purpose of which is to acquire control
of another company. See “Notes to investors” regarding potential restrictions on the exercise of
preemptive rights.
PROTECTION AGAINST HOSTILE TAKEOVER ATTEMPTS AND MECHANISM TO PREVENT
SHAREHOLDER CONCENTRATION
Our bylaws contain provisions that have the effect of (1) making more difficult attempts to acquire our
company without negotiating with our current controlling shareholders and (2) avoiding concentration
of our shares in the hands of a small group of investors, in order to promote more widespread ownership
of our shares.
The first of these provisions requires that any shareholder (except for our current controlling
shareholders and other investors who become our shareholders in certain transactions specified in our
bylaws) that becomes the holder of a number of shares of our capital equal to or exceeding 15% of our
total capital stock, must make a public tender offer in accordance with CVM regulations for the
acquisition of all of our shares at a price per share equal to the sum of a 50% premium and the greater
of:
➤ the highest price paid for shares of our company in the previous 12 months before the commencement
of the public offering;
➤ the highest price per share or per lot of shares of our company paid by the acquiring shareholder at
any time; and
➤ an amount equivalent to 12 times our average consolidated EBITDA, less our consolidated net debt,
divided by the total number of shares of our capital stock.
The second of these provisions states that any shareholder who becomes the owner of a number of shares
equal to or exceeding 30% of our free float and wishes to acquire additional shares of our company in
the market may do so only by conducting a previously announced auction at BOVESPA in which third
parties and/or our company may also participate.
RESTRICTION ON CERTAIN TRANSACTIONS BY CONTROLLING SHAREHOLDERS, DIRECTORS
AND OFFICERS
Our controlling shareholders, directors, executive officers and members of our fiscal council, who are
considered insiders under Brazilian securities regulation, must abstain from trading in our securities,
including derivatives based on our securities, as follows:
before the public disclosure of any material act or fact with respect to our business;
➤ if we intend to merge with another company, consolidate, spin off part or all of our assets or
reorganize;
➤
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➤
during the 15-day period before the disclosure of our quarterly and annual financial statements; or
➤
with respect only to our controlling shareholders, directors and executive directors, in the event of
acquisition or sale of our shares by us or the acquisition or sale of our shares by any of our controlled
or affiliated companies or any other company under our common control.
RESTRICTION ON CERTAIN TRANSACTIONS OUTSIDE OUR CORPORATE PURPOSES
Our bylaws provide that we are prohibited from extending or granting any financing or guarantees of
any kind to third parties in connection with transactions that are outside our corporate purposes.
ARBITRATION
Any disputes or controversies relating to the Listing Rules of the Novo Mercado of BOVESPA, our
bylaws, any shareholders’ agreement registered at our company’s headquarters, the Brazilian corporation
law, the laws or regulations issued by Brazilian governmental authorities, the regulations of BOVESPA
and other rules applicable to the capital markets in general must be submitted to arbitration conducted in
accordance with the Rules of the Market Arbitration Chamber created by BOVESPA.
GOING PRIVATE PROCESS
We may become a private company if our controlling shareholders or ourselves conduct a public offering
for the acquisition of all our outstanding shares, subject to the conditions below:
➤
the price offered for the shares in the public offering must be the fair value of those shares, as
established in the Brazilian corporations law;
➤
shareholders holding more than one third of our outstanding shares shall have expressly agreed to our
decision to become a private company or accepted the offer, provided that for such purposes,
outstanding shares shall mean only those shares the holders thereof expressly agreed to our decision to
become a private company or accepted the offer.
According to the Novo Mercado regulations and our bylaws, the minimum price for the shares in the
public offering for the acquisition of the outstanding shares in connection with a decision to become a
private company is the economic value of those shares, as determined in a valuation report prepared by
an independent and specialized institution of recognized experience, which will be chosen at a
shareholders’ meeting from a list of three institutions presented by our board of directors. The selection
of the institution requires the affirmative vote of a majority of our outstanding shares without counting
blank votes.
According to the Brazilian corporations law, we may become a private company only if our controlling
shareholders or ourselves conduct a public offering for the acquisition of all our outstanding shares in the
market, for a fair value, at least equal to our value, as determined based on the following valuation
methods, individually or combined: book value, book value at market price, discounted cash flow,
multiple comparison, trading price of our shares in the exchange market or any other valuation method
accepted by the CVM. Shareholders holding at least 10% of our outstanding shares may require our
management to review the price offered for the shares, and in this event our management shall call a
special shareholders’ meeting to resolve upon the carrying out of another valuation using the same or a
different valuation method. Such request must be made within 15 days following the disclosure of the
price to be paid for the shares in the public offering, and shall be duly justified. The shareholders who
make such request as well as those who vote in its favor, shall reimburse us for any costs involved with
the new valuation, in case the valuation price is lower than or equal to the original valuation price. If the
new valuation price is higher than the original valuation price, the public offering shall be made at the
new valuation price.
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DELISTING FROM THE NOVO MERCADO
We may, at any time, delist our shares from the Novo Mercado, provided that the action is approved by
shareholders representing the majority of our voting capital stock at a shareholders’ meeting and that
BOVESPA is notified in writing at least 30 days in advance.
If we delist from the Novo Mercado, and in order for our shares to be traded outside of the Novo
Mercado, our controlling shareholder shall conduct a public offering for the acquisition of shares within
90 days as of the delisting from the Novo Mercado, at a price per share equivalent to the economic value
of those shares as determined in a valuation report prepared by an independent and specialized
institution of recognized experience, which will be chosen at a shareholders’ meeting from a list of three
institutions presented by our board of directors. The selection of the institution requires the affirmative
vote of a majority of our outstanding shares without counting blank votes.
If our delisting from the Novo Mercado occurs as a result of our decision to go private, our controlling
shareholders shall follow the procedure applicable for going private.
Delisting of shares from the Novo Mercado does not require delisting from BOVESPA.
In the event that we delist from the Novo Mercado as a result of a corporate reorganization, in which the
surviving company is not listed in the Novo Mercado, our controlling shareholders shall, within 120 days
following the date of the shareholders’ meeting which approved the corporate reorganization, conduct a
public offering for the acquisition of the outstanding shares, at the economic value of such shares.
In the event of a transfer of our shareholding control within 12 months following our delisting from the
Novo Mercado, the selling controlling shareholders and the new controlling shareholders shall offer to
acquire the remaining shareholders’ shares for the same price and terms offered to the selling controlling
shareholders in the transfer of control, adjusted by the inflation in the period.
If our securities are delisted from the Novo Mercado, we will not be permitted to have securities listed
with the Novo Mercado for a period of two years after the delisting date, unless there is a change in
control after the delisting.
PURCHASES BY US OF SHARES OF OUR OWN CAPITAL STOCK
Our bylaws entitle our board of directors to approve the acquisition of our own shares. The decision to
acquire our shares or maintain the acquired shares in treasury or to cancel them may not, among other
things:
➤
result in the reduction of our capital stock;
➤
require the use of resources greater than our accumulated profits and the profit reserves that may be
distributed to our shareholders;
➤
create, directly or indirectly, any artificial demand, supply or share price condition or use any unfair
practice as a result of any action or omission; or
➤
be used for the acquisition of shares held by our controlling shareholders.
We may not keep in treasury more than 10% of our common shares, including the shares held by
subsidiaries and affiliates.
Any acquisition by us of our shares must be made on a stock exchange, except where the shares are
registered for negotiation only in the over-the-counter market and cannot be made in a private
133
transaction unless prior approval is received from the CVM. We may also purchase our own shares for
the purpose of going private. Moreover, we may acquire or issue put or call options related to our shares.
In addition, on April 26, 2004, we implemented a trading policy for shares of our own issuance. See
“Trading policy for shares of our own issuance.”
DISCLOSURE REQUIREMENTS
As soon as we become a publicly held corporation, we will be subject to the reporting requirements
established by the Brazilian corporation law and the CVM. Further, because we will be listed with the
Novo Mercado, we must also follow the disclosure requirements provided for in the Novo Mercado. See
“Trading, settlement and clearance—Novo Mercado.”
Disclosure of information
Brazilian securities regulations require that a publicly held corporation provide the CVM and the
relevant stock exchanges with periodic information that includes annual information statements,
quarterly financial statements, quarterly management reports and reports of the independent auditors.
Brazilian securities regulations also require public companies to file with the CVM shareholders’
agreements and notices and minutes of shareholders’ meetings.
In addition to the disclosure requirements imposed by the Brazilian corporations laws and the CVM, we
must also observe the following:
➤
no later than six months following the listing of our shares in the Novo Mercado, we must disclose
consolidated financial statements at the end of each quarter (except for the last quarter of each year)
and at the end of each year, including a statement of our cash flow, which must indicate, at least, the
changes in our cash and cash equivalents, divided into operational, finance and investment cash flow;
➤
after the release of our financial statements relating to the second fiscal year after the listing of our
shares in the Novo Mercado, we must, no later than four months after the end of the fiscal year, (1)
release financial statements and consolidated financial statements in accordance with the U.S. GAAP
or International Financial Reporting Standards, or IFRS, GAAP, in reais or U.S. dollars, which must be
disclosed in its entirety, in the English language, together with the management’s report, the
explanatory notes which shall include the net revenues and shareholders’ equity calculated at the end
of such fiscal year, prepared in accordance with the Brazilian GAAP, as well as the net revenue
destination proposal and the independent auditors’ report; or (2) disclose, in the English language, the
full financial statements, management report and explanatory notes, prepared in accordance with the
Brazilian corporations law, accompanied by an additional explanatory note regarding the conciliation
of the year-end results and shareholders’ equity calculated in accordance with the Brazilian GAAP and
the international standards U.S. GAAP or IFRS GAAP, as the case may be, which shall include the
main differences between the accounting principles used and by the independent auditors’ report;
➤
within no longer than 15 days following the term established by the Brazilian law for disclosure of our
quarterly information, we must: (i) disclose our quarterly information translated into the English
language; or (ii) disclose our financial statements and consolidated financial statements in accordance
with the U.S. GAAP or IFRS GAAP, accompanied by the independent auditors’ report.
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Quarterly information
In addition to the information required pursuant to applicable legislation, a company with shares listed
in the Novo Mercado must disclose the following information after obtaining a listing of its shares in the
Novo Mercado:
➤
a consolidated balance sheet, a consolidated statement of results and the accompanying letter to
shareholders, if the company is obligated to disclose consolidated financial statements at year-ends;
➤
any direct or indirect ownership interest exceeding five percent of our capital stock, looking through to
the ultimate individual beneficial owners;
➤
the number and characteristics of our securities held directly or indirectly by insiders;
➤
changes in the number of securities held by the controlling shareholders and members of the board of
directors, board of executive officers and fiscal council within the immediately preceding 12 months;
➤
include, in the explanatory notes, a cash flow statement; and
➤
the number of free float shares and their respective percentage in relation to the total of shares issued.
Information relating to the number and characteristics of the company’s shares directly or indirectly held
by the controlling shareholders and members of the board of directors, board of executive officers and
fiscal council, changes in the number of securities held by the insiders within the immediately preceding
12 months, as well as the number of free float shares and their respective percentage in relation to the
total of shares issued must also be included in the company’s annual report in the section “Additional
information deemed relevant by the company.”
Disclosure of trading by controlling shareholders, directors, executive officers or
members of the fiscal council
Our controlling shareholders, management and members of our fiscal council and any other technical or
consultant body must disclose to us, so that we can disclose to the CVM and BOVESPA, the number and
type of securities issued by us, our subsidiaries and our controlling companies, including derivatives, that
are held by them or by persons closely related to them and any changes in their respective monthly
ownership positions. The information regarding transfers of such securities (such as the amount, price
and date of acquisition) must be provided to the CVM and BOVESPA within 10 days of the end of the
month in which those transfers occurred.
Such information must include:
➤
name and qualification of the person providing the information;
➤
amount, price, type, class and other characteristics of the shares or securities transferred; and
➤
form of transfer (private transaction, stock exchange transaction or otherwise);
According to CVM Instruction No. 358, of January 3, 2002, if any shareholder or any person or entity,
individually or under a group of persons or entities sharing the same interests, increases participation in
our capital stock by more than 5%, such person or entity must disclose to us, to CVM and to BOVESPA,
the following information:
➤
name and qualification of the person providing the information;
➤
amount, price, type and class and other characteristics of the shares or securities traded;
135
➤
acquisition method (private transaction, stock exchange transaction or otherwise);
➤
reasons and purposes sought with the transaction;
➤
information regarding any agreement regarding the exercise of voting rights or the purchase and sale
of our securities;
➤
average price in BOVESPA for the securities acquired during the 90-day period preceding the
transaction.
Disclosure of material developments
Under Brazilian securities regulations, we must disclose any material development related to our business
to the CVM and BOVESPA. We are also required to publish a notice of that material development. A
development is deemed material if it has an impact on the price of our securities, the decision of investors
to trade in our securities or the decision of investors to exercise any rights as holders of any of our
securities.
Under special circumstances, we may submit to the CVM a request for confidential treatment for certain
material developments.
Trading in Stock Exchange Markets
Our common shares will trade on BOVESPA, which is a not-for-profit entity owned by its member
brokerage firms. Trading on such exchanges is carried out by member brokerage firms.
The CVM and BOVESPA have discretionary authority to suspend trading in shares of a particular issuer
under certain circumstances.
Trading in securities listed on BOVESPA, including the Novo Mercado and Levels 1 and 2 of
Differentiated Corporate Governance, may be effected off the exchanges in the unorganized over-thecounter market in certain circumstances.
Settlement of transactions on BOVESPA occurs three business days after the trade date. Delivery of and
payment for shares is made through the facilities of an independent clearinghouse. The clearinghouse for
BOVESPA is the CBLC. The CBLC is the central counterparty for transactions effected on BOVESPA,
carrying out multi-party settlement for financial obligations and transfers of securities. Under the
regulations of the CBLC, financial settlement is carried out through the Sistema de Transferência de
Reservas (Reserve Transfer System) of the Central Bank. The settlement of trades of shares is carried out
in the custodial system of the CBLC. All deliveries against final payment are irrevocable.
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Plan of distribution
Under an underwriting agreement dated May 24, 2004, Banco UBS S.A., Banco Itaú BBA S.A. and Banco
Pactual S.A., for whom Banco UBS S.A. is acting as representative, have severally agreed to place the
numbers of the common shares set forth opposite their names below:
Name
Banco UBS S.A................................................................................................................
Banco Pactual S.A...........................................................................................................
Banco Itaú BBA S.A. .......................................................................................................
Total........................................................................................................................
Number of shares
8,520,239
7,674,720
2,387,897
18,582,856
Banco UBS S.A. will act as sole global coordinator, and UBS Securities LLC, Itaú Securities Inc. and
Pactual Capital Corporation will act as agents on behalf of Banco UBS S.A., Banco Itaú BBA S.A. and
Banco Pactual S.A., respectively, for common shares sold to investors outside Brazil. BB Banco de
Investimento S.A., Banco Merrill Lynch de Investimentos S.A. and Unibanco—União de Bancos
Brasileiros S.A. will act as subcontracted managers (instituições subcontratadas) in connection with the
placement of the common shares in this offering.
The underwriting agreement provides that the obligation of the underwriters to place the common shares
is subject to, among other conditions, the delivery of certain legal opinions by our and their legal counsel
and comfort letters from our auditors. The underwriting agreement also provides that, if any of the
common shares are not placed, the underwriters are obligated to purchase them on a firm commitment
basis on the settlement date, subject to certain conditions and exceptions. The common shares will
initially be offered by the underwriters and the agents at the price indicated on the cover page of this
offering memorandum. After the initial offering of the common shares, the offering price and other
selling terms may from time to time be varied by the underwriters. The selling shareholders, other than
BNDESPAR, have also entered into a placement facilitation and agency agreement among our company,
the selling shareholders, other than BNDESPAR, the underwriters and the agents relating to the offering
of our common shares outside Brazil.
The selling shareholders, other than BNDESPAR have granted to the underwriters an option exercisable
within 30 days after the date of the final offering memorandum relating to this offering to place up to an
aggregate of 2,461,545 additional common shares to cover over-allotments. The option, if exercised, will
be at the price per common share indicated on the cover page of this offering memorandum, to be paid
less the underwriting discount.
Pursuant to the underwriting agreement and the placement facilitation and agency agreement, we and the
selling shareholders, other than BNDESPAR will indemnify the underwriters and the agents against
certain liabilities, including liabilities under the Securities Act, and will contribute to payments the
underwriters and the agents may be required to make in respect thereof.
We and the selling shareholders have also been advised by the underwriters that they propose to place
the common shares initially to persons in the United States whom the agents reasonably believe to be
“qualified institutional buyers” in resale transactions meeting the requirements of Rule 144A under the
Securities Act and to non-U.S. persons in transactions meeting the requirements of Regulation S under
the Securities Act. The 2,172,550 shares being sold by BNDESPAR will be offered only in Brazil to
Brazilian persons.
The common shares have not been registered under the Securities Act and will be subject to significant
resale restrictions. See “Notice to investors.” Until 40 days after the commencement of this offering, an
offer or sale of common shares within the United States by a broker-dealer, whether or not it is
participating in this offering, may violate the registration requirements of the Securities Act if such offer
or sale is made otherwise than pursuant to Rule 144A.
137
The following table shows the per share offering price, underwriting discount to be paid by the selling
shareholders to the underwriters and proceeds, before expenses, to the selling shareholders. This
information is presented assuming either no exercise or exercise in full of the over-allotment option.
(in reais)
Per share
Without overallotment option
With overallotment option
Offering price ...................................................... R$ 36.50 R$ 678,274,244.00 R$768,120,636.50
Underwriting discount .........................................
1.14
21,128,581.84
23,927,341.89
Proceeds, before expenses, to the selling
shareholders.....................................................
35.36
657,145,662.16
744,193,294.61
The expenses for the selling shareholders for this offering, exclusive of the underwriting discount, are
estimated at approximately R$0.2 million. We have agreed with the selling shareholders to pay expenses
for this offering estimated at approximately R$5.1 million.
Our common shares have been approved for listing and trading on the Novo Mercado segment of
BOVESPA under the symbol “NATU3.”
The underwriters have informed the selling shareholders and us that the price at which the common
shares will be offered was based primarily on the demand they have encountered at various price levels in
the course of the bookbuilding process, taking into consideration the underwriters’ valuation of our
company based on discounted cash flows and comparative multiples.
The underwriting agreement requires the underwriters to offer priority to investors in this offering that
are non-institutional investors as defined in the underwriting agreement for a period of 11 days that
began on May 10, 2004 and ended on May 21, 2004. During this period, non-institutional investors
were permitted submit reserve requests to purchase up to 20% in the aggregate of the common shares
offered in this offering. Non-institutional investors who are members of management of our company
and their relatives and certain other non-institutional investors were required to submit any such reserve
requests on or before May 14, 2004.
In connection with this offering, Banco UBS S.A., acting through UBS Corretora de Câmbio e Valores
Mobiliários S.A., on behalf of the underwriters, may engage in transactions that stabilize, maintain or
otherwise affect the price of the common shares, and the underwriters have agreed to engage in
stabilization activity for a period of up to 30 days after May 25, 2004, the date of announcement in
Brazil of the commencement of this offering. Specifically, the underwriters’ representative may over-allot
in connection with the offering, creating a syndicate short position. In addition, the underwriters’
representative may bid for, and purchase, common shares in the open market to cover syndicate short
positions or stabilize the price of the common shares. Any of these activities may stabilize or maintain the
market price of the common shares above independent market levels or may retard a decline in the
market price of the common shares. The underwriters are not required to engage in these activities and
may end any of these activities at any time. Reports on stabilization activity are required to be furnished
to the CVM. Such stabilizing shall be in compliance with all laws, regulations and rules.
The underwriters, the agents and their affiliates have from time to time in the past provided, and
may in the future provide, investment banking, financial advisory and other services to us, the selling
shareholders, and our or their affiliates, for which they have received or expect to receive customary fees.
In particular, we have outstanding financings from Banco Itaú BBA S.A., including the loan described in
“Management’s discussion and analysis of financial condition and results of operations – Liquidity and
capital resources – Debt – Itaú BBA/IFC Financing.” We also maintain financial investments with Banco
Pactual S.A. and Banco Itaú BBA S.A., and Banco Itaú BBA S.A. provides certain payroll services to us.
The selling shareholders who are natural persons also maintain bank accounts and/or financial
investments with Banco Itaú BBA S.A. BNDESPAR has commercial and financial relationships with the
underwriters in the ordinary course of their business.
138
The common shares will not be offered or sold to persons in the United Kingdom, except to persons
whose ordinary activities involve them acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995. This offering memorandum may only be communicated in
connection with the issue or sale of the common shares in circumstances in which section 21(1) of the
Financial Services and Markets Act 2000 does not apply to us.
The common shares may be offered outside of Brazil only to investors registered with the CVM and
acting through custody accounts managed by local agents pursuant to CVM Instruction No. 325, dated
January 27, 2000 and Resolution No. 2,689 of the Brazilian National Monetary Council.
Other than with respect to the public offering of the common shares on the Novo Mercado, no action
has been or will be taken in any country or jurisdiction by us or the underwriters that would permit a
public offering of the common shares, or possession or distribution of any offering material in relation
thereto, in any country or jurisdiction where action for that purpose is required. Persons into whose
hands this offering memorandum comes are required by us, the selling shareholders, the underwriters
and the agents to comply with all applicable laws and regulations in each country or jurisdiction in or
from which they purchase, offer, sell or deliver common shares or have in their possession or distribute
such offering material, in all cases at their own expense.
Shares eligible for future sale
We, the selling shareholders other than BNDESPAR, other shareholders controlled by the selling
shareholders, other than BNDESPAR, and each of our other directors and executive officers have agreed
with the underwriters’ representative, on behalf of the underwriters and the agents, for a period of 180
days following the date of the final offering memorandum, not to issue, offer, sell, contract to sell,
pledge, loan, grant any option to purchase, make any short sale or otherwise dispose of, or grant any
rights or, in the case of our company, file a registration statement under the Securities Act or Brazilian
laws, in all cases with respect to, any common shares or any options or warrants to purchase any
common shares, or any securities convertible into, or exchangeable for, or that represent the right to
receive common shares (except that we are permitted to issue common shares in connection with the
exercise of outstanding stock options). We call such actions, other than issuance, “transfer.”
Under this agreement, transfers of these securities could be made under the following circumstances:
➤ with the prior consent of the representative on behalf of the underwriters and the agents, such consent
not to be unreasonably withheld;
➤ pursuant to any merger, tender offer or other change of control transaction involving us on terms
available to our shareholders generally;
if the shareholder is a natural person, to members of the shareholder’s immediate family or in
connection with a bona fide gift or gifts; or
➤ if the shareholder is a corporation, to any controlled subsidiary of the shareholder.
➤
In either of the last two cases, it will be a condition of the transfer that the transferee agrees that it is
receiving and holding the transferred securities subject to the provisions of the lock-up agreement and
that the transferee will not transfer the securities except in accordance with the lock-up agreement for the
remainder of its term. It will also be a condition that any such transfer of securities will not involve a
disposition for value.
BNDESPAR has agreed, subject to certain exceptions, not to transfer, until 90 days after the date of this
offering memorandum, any common shares of our company, or any securities convertible into, or
exchangeable for, or that represent the right to receive, common shares of our company.
139
Under Novo Mercado regulations, the selling shareholders, other than BNDESPAR, and our directors
and executive officers may not sell or offer to sell common shares of our company, or derivatives linked
to those shares, during the first six months after the common shares begin trading on the Novo Mercado.
After this initial period of six months, the selling shareholders, other than BNDESPAR, and our directors
and executive officers may not sell or offer to sell more than 40% of the shares that they hold, or
derivatives linked to those shares, for an additional six months.
We cannot assure you that the underwriters and the agents or the Novo Mercado will not waive these
lock-up obligations, in which case these common shares would become eligible for sale earlier.
We cannot predict the effect, if any, that future sales of the common shares, or the availability of such
common shares for future sale, will have on the market price of the common shares prevailing from time
to time or on our ability to raise capital in the future. Sales of substantial amounts of common shares in
the public market, or the perception that such sales could occur, could adversely affect the prevailing
market price of the common shares and our ability to sell shares in the future at a time and at a price that
we deem appropriate.
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Trading, settlement and clearance
GENERAL
Our common shares have been approved for listing and trading on BOVESPA under the symbol
“NATU3”. We expect our common shares to begin trading on BOVESPA on May 26, 2004. BOVESPA
will be our only trading market.
On April 26, 2004, we agreed to comply with heightened corporate governance and disclosure
requirements established by BOVESPA in order to qualify for a differentiated listing qualification as a
company admitted to the Novo Mercado.
To become a company within Novo Mercado, we agreed, among other things, to:
➤
issue voting shares only;
➤
ensure that shares representing 25% of our total capital are effectively available for trading;
➤
adopt offering procedures that favor widespread ownership of shares whenever making a public
offering;
➤
comply with minimum quarterly disclosure standards and improvements in quarterly financial
statements, including quarterly consolidated financial statements and limited audit revision;
➤
follow stricter disclosure policies with respect to transactions made by controlling shareholders,
directors and officers involving securities issued by us;
➤
disclose any existing shareholders’ agreements and stock option plans;
➤
make a schedule of corporate events available to the shareholders;
➤
disclose and periodically update a listing of any related party transactions;
➤
ensure that the same conditions provided to controlling shareholders in the transfer of our company’s
control are extended to all shareholders (i.e., tag-along rights);
➤
establish a one-year term of office for the entire board of directors;
➤
make our annual balance sheet available according to U.S. GAAP or IFRS GAAP;
➤
accept the BOVESPA arbitration panel for conflict resolution between investors, management and
Novo Mercado companies; and
➤
if we ever decide to delist from Novo Mercado, conduct a tender offer based on economic valuation
criteria.
TRADING ON THE BRAZILIAN STOCK EXCHANGES
The common shares will trade on BOVESPA, which is a not-for-profit entity owned by its member
brokerage firms. Trading on such exchanges is limited to member brokerage firms and a limited number
of authorized non-members.
The CVM and BOVESPA have discretionary authority to suspend trading in shares of a particular issuer
under certain circumstances. Trading in securities listed on BOVESPA, including the Novo Mercado and
Levels 1 and 2 of Differentiated Corporate Governance, may be effected off the exchanges in the
unorganized over-the-counter market in certain circumstances.
141
The shares of all companies listed on BOVESPA, including Novo Mercado and Level 1 and Level 2
companies, are traded together.
Settlement of transactions occurs three business days after the trade date. Delivery of and payment for
shares is made through the facilities of separate clearing houses for each exchange, which maintain
accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the
clearing house on the third business day following the trade date. The clearing house for BOVESPA is the
CBLC.
In order to reduce volatility, BOVESPA has adopted a “circuit breaker” system pursuant to which
trading sessions may be suspended for a period of 30 minutes or one hour whenever specified indices of
BOVESPA fall below the limits of 10% and 15%, respectively, in relation to the index levels for the
previous trading session.
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is
smaller and less liquid than the major U.S. and European securities markets. Moreover, BOVESPA is less
liquid than the New York Stock Exchange and other major exchanges in the world. BOVESPA had a
market capitalization of US$210 billion as of April 30, 2004 and an average monthly trading volume of
approximately US$6.4 billion from January 2003 to April 2004. In comparison, the New York Stock
Exchange had a market capitalization of US$12.3 trillion as of April 30, 2004 and an average monthly
trading volume of approximately US$855.7 billion from January 2003 to April 2004. Although any of
the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer
than half of the listed shares are actually available for trading by the public, the remainder being held by
small groups of controlling persons, governmental entities or one principal shareholder.
Trading on Brazilian stock exchanges by non-residents of Brazil is subject to registration procedures. See
“—Investment in our common shares by non-residents of Brazil.”
REGULATION OF BRAZILIAN SECURITIES MARKETS
The Brazilian securities markets are principally governed by Law No. 6,385, dated December 7, 1976,
and the Brazilian corporation law, each as amended and supplemented, and by regulations issued by the
CVM, which has authority over stock exchanges and the securities markets generally; the National
Monetary Council; and the Central Bank, which has, among other powers, licensing authority over
brokerage firms and regulates foreign investment and foreign exchange transactions.
These laws and regulations, among others, provide for licensing and oversight of brokerage firms,
governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded
securities, restrictions on price manipulation and protection of minority shareholders. They also provide
for restrictions on insider trading. However, the Brazilian securities markets are not as highly regulated
and supervised as the U.S. securities markets or securities markets in some other jurisdictions.
Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling
shareholders or any of the officers and directors of our controlling shareholders must comply with the
regulations issued by the CVM, in particular Instruction No. 358. See “Description of capital stock—
Disclosure requirements.”
Under the Brazilian corporation law, a corporation is either public (companhia aberta), such as we will
be upon approval of our registration statement by the CVM, or closely held (companhia fechada). All
public companies are registered with the CVM and are subject to reporting requirements. Our common
shares will be listed with the Novo Mercado of the BOVESPA, the rules of which impose stricter
disclosure requirements than the standard BOVESPA listing. See “—General.”
142
We have the option to ask that trading in securities on BOVESPA be suspended in anticipation of a
material announcement. Trading may also be suspended on the initiative of BOVESPA or the CVM,
based on or due to, among other reasons, a belief that a company has provided inadequate information
regarding a material event or has provided inadequate responses to inquiries by the CVM or BOVESPA.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial
institution registered with the CVM serves as intermediary. No special application, other than
registration with the CVM, is necessary for securities of a public company to be traded in this market.
The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter
market by the respective intermediaries.
INVESTMENT IN OUR COMMON SHARES BY NON-RESIDENTS OF BRAZIL
Investors residing outside Brazil, including institutional investors, are authorized to purchase equity
instruments, including our common shares, on BOVESPA provided that they comply with the
registration requirements set forth in Resolution No. 2,689 of the National Monetary Council, which we
refer to as Resolution 2,689, and CVM Instruction No. 325.
With certain limited exceptions, Resolution 2,689 investors are permitted to carry out any type of
transaction in the Brazilian financial capital market involving a security traded on a stock, future or
organized over-the-counter market. Investments and remittances outside Brazil of gains, dividends,
profits or other payments under our common shares are made through the commercial rate exchange
market.
In order to become a Resolution 2,689 investor, an investor residing outside Brazil must:
➤
appoint a representative in Brazil with powers to take actions relating to the investment;
➤
appoint an authorized custodian in Brazil for the investments, which must be a financial institution
duly authorized by the Central Bank and CVM; and
➤
through its representative, register itself as a foreign investor with the CVM and the investment with
the Central Bank.
Securities and other financial assets held by foreign investors pursuant to Resolution 2,689 must be
registered or maintained in deposit accounts or under the custody of an entity duly licensed by the
Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to
transactions involving securities listed on the Brazilian stock exchanges or traded in organized over-thecounter markets licensed by the CVM.
CPMF Tax
The offering of our common shares constitutes a “non-organized over-the-counter transaction” under
Brazilian law. Each investor who is not a resident of Brazil should note that because our common shares
will be acquired in a “non-organized over-the-counter transaction,” CPMF tax in the amount of 0.38%
of the purchase price may be withheld by the custodian or other party closing the foreign exchange
transaction from the amounts deposited by such investor when such amounts are transferred to the
CBLC. Any amounts withheld would have the effect of reducing the amount of common shares
purchased by the investor. Therefore, each such investor should consult its own legal and financial
advisors with respect to the applicability of CPMF tax to its purchase as well as other tax consequences
of such investment.
Please refer to “Taxation” in this offering memorandum for a more detailed description of the tax
consequences to an investor residing outside Brazil of investing in our common shares in Brazil.
143
Notice to investors
Because of the following restrictions, investors are advised to consult legal counsel prior to making any
offer, resale, pledge or other transfer of our common shares.
Our common shares have not been registered under the Securities Act. They may not be offered or sold
within the United States except:
➤
in compliance with the registration requirements of the Securities Act and all applicable securities laws
of the states of the United States; or
➤
pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the
Securities Act and any applicable securities laws of the states of the United States.
Accordingly, our common shares are being offered and sold only:
➤
inside the United States to qualified institutional buyers in compliance with the exemption from the
registration requirements of the Securities Act provided by Rule 144A; and
➤
outside the United States in offshore transactions in accordance with Rule 903 of Regulation S.
In addition, purchasers of common shares may not be able to exercise the preemptive rights relating to
the common shares unless an exemption from the registration requirements of the Securities Act is
available or a registration statement under the Securities Act is effective with respect to those rights. We
are not obligated to file a registration statement with respect to the shares relating to these preemptive
rights, and we may not file such a registration statement.
Each purchaser of our common shares in the United States will be deemed to have agreed not to deposit
such common shares into an unrestricted American depositary receipt facility for as long as those shares
are “restricted securities” within the meaning of Rule 144 under the Securities Act and to have
represented and agreed as follows:
➤
The purchaser is either (1) a qualified institutional buyer and is aware that the sale of our common
shares to it is being made in reliance on Rule 144A and such acquisition will be for its own account or
for the account of a qualified institutional buyer or (2) a person who, at the time the buy order for the
common shares was originated, was outside the United States and was not a U.S. person (and was not
purchasing for the account or benefit of a U.S. person) within the meaning of Regulation S under the
Securities Act;
➤
In making its decision to purchase the common shares, the purchaser:
Š has made its own investment decision regarding the common shares based on its own knowledge;
Š has had access to such information as it deems necessary or appropriate in connection with its
purchase of the common shares; and
Š has sufficient knowledge and experience in financial and business matters and expertise in assessing
credit, market and all other relevant risk and is capable of evaluating, and has evaluated
independently, the merits, risks and suitability of purchasing the common shares; and
➤
Our common shares have not been, nor will they be, registered under the Securities Act and may not
be re-offered, resold, pledged or otherwise transferred except (1) (A) to a person who the purchaser
reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule
144A, (B) in an offshore transaction complying with Rule 903 or Rule 904 of Regulation S or (C)
pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder
(if available) and (2) in accordance with all applicable securities laws of the states of the United States.
144
Notice to investors
We make no representation as to the availability of the exemption provided by Rule
144 for resales of our common shares.
We acknowledge that for so long as any of our common shares are “restricted securities” within the
meaning of Rule 144(a)(3) under the Securities Act, holders of such restricted securities, and prospective
purchasers (as designated by such holders) of such restricted securities, will have the right to obtain upon
request any information required to be provided by Rule 144A(d)(4) under the Securities Act during any
period in which we are not subject to and in compliance with Section 13 or 15(d) of the Exchange Act,
or we are not exempt from such reporting requirements pursuant to and in compliance with Rule
12g3-2(b) under the Exchange Act.
Terms used in this section that are defined in Rule 144A or Regulation S are used as defined in those
regulations.
Pursuant to Brazilian Resolution No. 2,689, transfers of common shares, including by or between
residents of jurisdictions outside Brazil, may be effected only in Brazil. Please see “Trading, settlement
and clearance—Investment in our common shares by non-residents of Brazil.”
OFFERS AND SALES IN CANADA
This offering memorandum is not, and under no circumstances is to be construed as, an advertisement or
a public offering of the common shares in Canada or any province or territory thereof. Any offer or sale
of common shares in Canada will be made only under an exemption from the requirements to file a
prospectus with the relevant Canadian securities regulators and only by a dealer properly registered
under applicable provincial securities laws or, alternatively, pursuant to an exemption from the dealer
registration requirement in the relevant province or territory of Canada in which such offer or sale is
made.
145
Taxation
BRAZIL
The following discussion summarizes the principal Brazilian tax consequences of the acquisition,
ownership and disposition of common shares by a holder that is not domiciled in Brazil and that has
registered the investment as a U.S. dollar investment with the Central Bank (a “non-resident holder”). It
is based on Brazilian law as currently in effect. Any change in that law may change the consequences
described below.
The following discussion summarizes the principal tax consequences applicable under Brazilian law to a
non-resident holder of common shares in general and, therefore, does not specifically address all of the
Brazilian tax considerations applicable to any particular non-resident holder. Each non-resident holder
should consult its own tax adviser concerning the Brazilian tax consequences of an investment in
common shares. The tax consequences described below do not take into account tax treaties entered into
by Brazil and other countries. Nevertheless, please note that Brazil has not entered into any tax treaty
with the United States.
Income tax
Dividends
Dividends paid by a Brazilian corporation, such as our company, including stock dividends and other
dividends paid to a non-resident holder of common shares, are currently not subject to withholding
income tax in Brazil, as far as such amounts are related to profits generated as of January 1, 1996.
Interest on capital
Law No. 9,249, dated December 26, 1995, as amended, permits a Brazilian corporation, such as our
company, to make distributions to shareholders of interest on capital. These distributions may be paid in
cash. This interest is limited to the daily pro rata variation of the TJLP, as determined by the Central
Bank from time to time, and may not exceed the greater of:
➤
50% of net income (after social contribution on profits and before corporate income tax, and taking
into consideration the deduction of the own interest amount attributable to shareholders) related to
the period in respect of which the payment is made; and
➤
50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in
respect of which the payment is made.
Payment of interest to a non-resident holder is subject to withholding income tax at the rate of 15%, or
25% if the non-resident holder is domiciled in a tax haven—that is, a country or location that does not
impose income tax or where the income tax rate is lower than 20% or where the local legislation
imposes restrictions on disclosing the shareholding composition or the ownership of the investment (“tax
haven jurisdiction”). These payments may be included, at their net value, as part of any mandatory
dividend. To the extent payment of interest on capital is so included, the corporation is required to
distribute to shareholders an additional amount to ensure that the net amount received by them, after
payment of the applicable withholding income tax, plus the amount of declared dividends, is at least
equal to the mandatory dividend.
146
Taxation
Gains
According to the Law No. 10,833, dated December 29, 2003, gains earned abroad derived from the
disposition of assets located in Brazil by non-residents to other non-residents may become subject to
taxation in Brazil. In this sense, considering the general and unclear scope of Law No. 10,833 and the
absence of judicial court rulings in respect thereof, it is not possible to predict whether such
understanding is applicable to the common shares or will ultimately prevail in the courts of Brazil
(however, under Resolution No. 2,689, transfers of common shares outside Brazil are currently not
allowed and remain subject to prior approval, except in cases involving corporate restructurings or
hereditary succession).
For purposes of taxation of gains earned in Brazil, two categories of non-resident holders should be
considered: (a) non-resident holders that are not resident or domiciled in a tax haven jurisdiction, and, in
the case of non-resident holders of common shares, are registered before the Central Bank and the CVM
to invest in Brazil in accordance with Resolution No. 2,689; and (b) other non-resident holders which
include any and all non-residents who invest in common shares of Brazilian companies through any other
means and all types of investors that are located in tax haven jurisdictions. The investors mentioned in
item (a) above are subject to a favorable tax regime in Brazil as described below.
As a general rule, non-resident holders registered under Resolution No. 2,689 are subject to income tax
at a rate of 15% on gains realized on sales of common shares outside a Brazilian stock exchange, or 25%
in the case of non-resident holders located in tax haven jurisdictions. With reference to proceeds of
redemption of common shares or capital reduction by a Brazilian corporation, such as us, the positive
difference between the amount effectively received by the non-resident and the amount paid for the
shares is treated as a capital gain not carried out on a Brazilian stock exchange market, being therefore
subject to income tax at the rate of 15%, or 25% in the case of non-resident holders domiciled in tax
haven jurisdictions.
Gains realized arising from transactions on a Brazilian stock exchange by a non-resident holder
registered under Resolution No. 2,689 that is not located in a tax haven jurisdiction are exempt from
Brazilian income tax. As of January 1, 2000, the favorable tax treatment under Resolution No. 2,689 is
no longer applicable if the non-resident holder of the common shares is resident in a tax haven
jurisdiction in accordance with Law No. 9,959 of January 27, 2000. Consequently, gains realized on
transactions performed by such holders on the Brazilian stock exchange are subject to income tax at the
rate of 20%.
Therefore, non-resident holders are subject to income tax at the rate of 20% on gains realized on sales of
common shares that occur on a Brazilian stock exchange, unless such sale is made in accordance with
Resolution No. 2,689 by a non-resident holder that is not resident in a tax haven jurisdiction. In such a
case the transaction will be exempt.
Tax on foreign exchange and financial transactions (“IOF Tax”)
Foreign exchange transactions
Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/Exchange Tax, on the
conversion of reais into foreign currency and on the conversion of foreign currency into reais. Although
the current applicable rate for almost all foreign currency exchange transactions is zero, the Ministry of
Finance is permitted to increase the rate at any time up to 25%. However, any increase in rates may only
apply to future transactions.
147
Taxation
Tax on transactions involving bonds and securities
Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or IOF/Bonds Tax, due on
transactions involving bonds and securities, including those carried out on a Brazilian stock exchange.
The rate of IOF applicable to transactions involving stocks is currently zero, although the Minister of
Finance is permitted to increase such rate at any time up to 1.5% per day, but only in respect of future
transactions.
Temporary contribution on financial transactions (“CPMF Tax”)
Any transaction carried out by a holder of securities in Brazil that results in the transfer of reais from an
account maintained by such holder (or its custodian) with a Brazilian financial institution is subject to
the CPMF Tax at the rate of 0.38%. The CPMF Tax will be in effect until December 31, 2007.
Currently, the funds transferred for the acquisition of shares on BOVESPA are exempted from the CPMF
Tax. On the other hand, when a non-resident remits abroad the proceeds earned from the disposition of
stocks in Brazil by means of a currency exchange transaction, the CPMF Tax is imposed on the amount
in reais to be remitted abroad.
Nevertheless, CPMF Tax might be levied on transactions performed on non-organized over-the-counter
markets, such as this offering of common shares. See “Trading, settlement and clearance—Investment in
our common shares by non-residents of Brazil—CPMF Tax.”
When applicable, the CPMF Tax must be withheld from the amounts transferred from such account and
must be collected in favor of the Brazilian government by the financial institution that carries out the
relevant financial transaction.
Other Brazilian taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or
disposition of stocks, except for gift and inheritance taxes imposed by some Brazilian states on gifts or
bequests by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled
or residing within such states. There are no Brazilian stamp, issue, registration, or similar taxes or duties
payable by holders of shares.
UNITED STATES
The following summary describes certain United States federal income tax consequences of the
ownership of our common shares as of the date hereof. Except where noted, this discussion deals only
with United States Holders (as defined below) that hold our common shares as capital assets for United
States federal income tax purposes (generally, property held for investment). This summary does not
represent a detailed description of the United States federal income tax consequences applicable to you if
you are subject to special treatment under the United States federal income tax laws, including if you are:
➤
a bank;
➤
dealer in securities or currencies;
➤
a financial institution;
➤
a regulated investment company;
➤
a real estate investment trust;
148
Taxation
➤
an insurance company;
➤
a tax-exempt organization;
➤
a person holding our common shares as part of a hedging, integrated or conversion transaction, a
constructive sale or a straddle;
➤
a trader in securities that has elected the mark-to-market method of accounting for your securities;
➤
a person liable for alternative minimum tax;
➤
a person who owns more than 10% of our voting stock;
➤
a partnership or other pass-through entity for United States federal income tax purposes; or
➤
a person whose “functional currency” is not the United States dollar.
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be replaced, revoked or modified so as to result in United States federal income tax
consequences different from those discussed below. If you are considering the purchase, ownership or
disposition of our common shares, you should consult your own tax advisors concerning the United
States federal income tax consequences to you in light of your particular situation as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, “United States Holder” means a holder of our common shares that is for United States
federal income tax purposes:
➤
an individual citizen or resident of the United States;
➤
a corporation (or other entity treated as a corporation for United States federal income tax purposes)
created or organized in or under the laws of the United States, any state thereof or the District of
Columbia;
➤
an estate the income of which is subject to United States federal income taxation regardless of its
source; or
➤
a trust which either (1) is subject to the primary supervision of a court within the United States and
one or more United States persons have the authority to control all substantial decisions of the trust or
(2) has a valid election in effect under applicable United States Treasury regulations to be treated as a
United States person.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes)
holds our common shares, the tax treatment of a partner will generally depend on the status of the
partner and the activities of the partnership. If you are a partner of a partnership holding our common
shares, you should consult your tax advisors.
Taxation of dividends
Distributions on our common shares (including amounts withheld to reflect Brazilian withholding taxes
and distributions of interest on capital, as described above under “—Brazil”) will be taxable as dividends
to the extent paid out of our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Such income (including withheld taxes) will be includable in your
gross income as ordinary income on the day actually or constructively received by you. Such dividends
will not be eligible for the dividends received deduction allowed to corporations. Under current law,
149
Taxation
dividends received before January 1, 2009 by non-corporate United States holders on shares of certain
foreign corporations will be subject to United States federal income tax at lower rates than other types of
ordinary income if certain conditions are met. However, because our common shares are not readily
tradable on an established securities market in the United States and there is no income tax treaty
between Brazil and the United States, we currently do not expect that those conditions will be met. Thus,
we do not expect that dividends we pay will be entitled to such reduced rates.
The amount of any dividend paid in reais will equal the United States dollar value of the reais received
calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively
received by you, regardless of whether the reais are converted into United States dollars. If the reais
received as a dividend are not converted into United States dollars on the date of receipt, you will have a
tax basis in the reais equal to their United States dollar value on the date of receipt. Any gain or loss
realized on a subsequent conversion or other disposition of the reais will be treated as United States
source ordinary income or loss.
Subject to certain conditions and limitations, Brazilian withholding taxes on dividends may be treated as
foreign taxes eligible for credit against your United States federal income tax liability. For purposes of
calculating the foreign tax credit, dividends paid on our common shares will be treated as income from
sources outside the United States and will generally constitute “passive income” or, in the case of certain
United States Holders, “financial services income.” Special rules apply to certain individuals whose
foreign source income during the taxable year consists entirely of “qualified passive income” and whose
creditable foreign taxes paid or accrued during the taxable year do not exceed US$300 (US$600 in the
case of a joint return). Further, in certain circumstances, if you:
➤
have held our common shares for less than a specified minimum period during which you are not
protected from risk of loss, or
➤
are obligated to make payments related to the dividends,
you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our common
shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax
advisors regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings and
profits for a taxable year, as determined under United States federal income tax principles, the
distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of
our common shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by you on a subsequent disposition of our common shares), and the balance in excess of
adjusted basis will be taxed as capital gain recognized on a sale or exchange (as discussed below under
“—Taxation of capital gains”). Such distributions in excess of our current and accumulated earnings and
profits would generally not give rise to foreign source income and you would generally not be able to use
the foreign tax credit arising from any Brazilian withholding tax imposed on such distributions unless
such credit can be applied (subject to applicable limitations) against United States federal income tax due
on other foreign source income in the appropriate category for foreign tax credit purposes.
Passive foreign investment company
We do not believe that we are, for United States federal income tax purposes, a passive foreign
investment company, (a “PFIC”), and we expect to operate in such a manner so as not to become a PFIC
in the future. If, however, we are or become a PFIC, you could be subject to additional United States
150
Taxation
federal income taxes on gain recognized with respect to our common shares and on certain distributions
on our common shares, plus an interest charge on certain taxes treated as having been deferred under the
PFIC rules.
Taxation of capital gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale,
exchange or redemption of our common shares in an amount equal to the difference between the amount
realized for the common shares and your tax basis in the common shares. Such gain or loss will generally
be capital gain or loss. Capital gains of non-corporate shareholders derived with respect to capital assets
held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is
subject to limitations. Any gain or loss recognized by you will generally be treated as United States source
gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any Brazilian
tax imposed on the disposition of our common shares unless such credit can be applied (subject to
applicable limitations) against tax due on other income treated as derived from foreign sources.
Other Brazilian taxes
You should note that any Brazilian IOF/Exchange Tax, IOF/Bonds Tax or CPMF Tax (as discussed
above under “—Brazil”) may not be treated as a creditable foreign tax for United States federal income
tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under
the Code. You should consult your tax advisors regarding the United States federal income tax
consequences of these taxes.
Information reporting and backup withholding
In general, information reporting will apply to dividends (including distributions of interest on capital) in
respect of our common shares and the proceeds from the sale, exchange or redemption of our common
shares that are paid to you within the United States (and in certain cases, outside the United States),
unless you are an exempt recipient such as a corporation. A backup withholding tax may apply to such
payments if you fail to provide a taxpayer identification number or certification of other exempt status
or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against
your United States federal income tax liability provided the required information is timely furnished to
the Internal Revenue Service.
151
Certain ERISA Considerations
Section 406 of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and
Section 4975 of the Code prohibit employee benefit plans and certain other retirement plans, accounts
and arrangements that are subject to Title I of ERISA or Section 4975 of the Code (“ERISA Plans”) from
engaging in specified transactions involving plan assets with persons or entities who are “parties in
interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of
the Code, unless an exemption is available. A party in interest or disqualified person who engaged in a
non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities
under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engaged in such a nonexempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.
Because of the nature of our business and the fact that we have no U.S. affiliates or U.S. operations, it is
not likely that we would be considered a party in interest or a disqualified person with respect to any
ERISA Plans or that our assets would be considered to be plan assets of any such plan. A prohibited
transaction within the meaning of ERISA and the Code may result if any common shares are acquired by
an ERISA Plan to which an underwriter is a party in interest and such acquisition is not entitled to an
applicable exemption, of which there are many. Any ERISA Plan or other entity subject to such
provisions of ERISA or the Code proposing to acquire the common shares should consult with its legal
counsel.
152
Legal matters
Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, our Brazilian counsel and Brazilian counsel
to the selling shareholders, other than BNDESPAR, will pass on the validity of our common shares.
Simpson Thacher & Bartlett LLP, our U.S. counsel and U.S. counsel to the selling shareholders, other
than BNDESPAR, will pass on certain legal matters for us. Shearman & Sterling LLP, U.S. counsel to the
underwriters, and Machado, Meyer, Sendacz e Opice Advogados, Brazilian counsel to the underwriters,
will pass on certain legal matters for the underwriters.
153
Independent accountants
Our consolidated financial statements as of December 31, 2003 and 2002 and for the three years in the
period ended December 31, 2003 and the financial statements of Natura Empreendimentos as of and for
the years ended December 31, 2003 and 2002 and as of and for the years ended December 31, 2002 and
2001 presented in this offering memorandum have been audited by Deloitte Touche Tohmatsu Auditores
Independentes.
With respect to our unaudited interim financial information for the three months ended March 31, 2003
and 2004 that is included in this offering memorandum, Deloitte Touche Tohmatsu Auditores
Independentes have conducted a review in accordance with specific standards established by the Instituto
dos Auditores Independentes do Brasil (Brazilian Institute of Independent Auditors, or IBRACON),
together with the Conselho Federal de Contabilidade (Federal Accounting Council). However, they did
not audit and they do not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in light of the limited nature
of the review procedures applied.
154
Index to financial statements
Consolidated Financial Statements of Natura Cosméticos S.A. as of December 31, 2003 and 2002
and for the Three Years in the Period Ended December 31, 2003 and Independent Auditors’
Report
Independent Auditors’ Report .........................................................................................................
F-3
Consolidated Balance Sheets............................................................................................................
F-5
Consolidated Statements of Income .................................................................................................
F-7
Consolidated Statements of Changes in Shareholders’ Equity ..........................................................
F-8
Consolidated Statements of Changes in Financial Position...............................................................
F-9
Consolidated Statements of Cash Flows .......................................................................................... F-10
Notes to the Consolidated Financial Statements .............................................................................. F-11
Financial Statements of Natura Empreendimentos S.A. as of and for the Years Ended December
31, 2003 and 2002 and Independent Auditors’ Report
Balance Sheets .................................................................................................................................
Statements of Income.......................................................................................................................
Statements of Changes in Shareholders’ Equity................................................................................
Statements of Changes in Financial Position ....................................................................................
Statements of Cash Flows ................................................................................................................
Statements of Value Added..............................................................................................................
Notes to the Financial Statements....................................................................................................
F-35
F-36
F-38
F-39
F-40
F-41
F-42
F-43
Financial Statements of Natura Empreendimentos S.A. as of and for the Years Ended December
31, 2002 and 2001 and Independent Auditors’ Report
Balance Sheets .................................................................................................................................
Statements of Income.......................................................................................................................
Statements of Changes in Shareholders’ Equity................................................................................
Statements of Changes in Financial Position ....................................................................................
Statements of Cash Flows ................................................................................................................
Statements of Value Added..............................................................................................................
Notes to the Financial Statements....................................................................................................
F-57
F-58
F-60
F-61
F-62
F-63
F-64
F-65
Unaudited Interim Financial Statements of Natura Cosméticos S.A. as of March 31, 2004 and for
the Three-Month Periods Ended March 31, 2004 and 2003 and Independent Accountants’
Review Report
Independent Accountants’ Review Report ....................................................................................... F-79
Interim Consolidated Balance Sheets ............................................................................................... F-80
Interim Consolidated Statements of Income..................................................................................... F-82
Interim Consolidated Statements of Changes in Shareholders’ Equity .............................................. F-83
Notes to the Interim Financial Statements ....................................................................................... F-84
F-1
F-2
Independent auditors’ report
To the Shareholders of
São Paulo—SP
1.
We have audited the accompanying consolidated balance sheets of Natura Cosméticos S.A. and
subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related statements of
income, changes in shareholders’ equity and changes in financial position for each of the three years
in the period ended December 31, 2003, all expressed in Brazilian reais. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
2.
Our audits were conducted in accordance with auditing standards generally accepted in Brazil and
the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
3.
As discussed in Note 14 to the Company’s financial statements, based on CVM Resolution No.
409/01 and Law No. 10,305/01, the Company elected to defer net foreign exchange losses incurred
as a result of the adjustment of assets and liabilities denominated in foreign currency for the year
ended December 31, 2001. In our opinion, accounting practices adopted in Brazil do not permit the
deferral of net foreign exchange losses incurred as a result of the adjustment of assets and liabilities
denominated in foreign currency. Accordingly, for the year ended December 31, 2002, net income
was understated by R$7,602,000 and for the year ended December 31, 2001, net income, assets and
shareholders’ equity were overstated by R$11,397,000.
4.
In our opinion, except for the effects on the financial statements for the years ended December 31,
2002 and 2001 of deferring the net foreign exchange losses as discussed in the preceding paragraph,
the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2003 and 2002, and the results
of its operations, and changes in shareholders’ equity and its financial position for each of the three
years in the period ended December 31, 2003 in conformity with accounting practices adopted in
Brazil.
5.
Accounting practices adopted in Brazil vary in certain respects from accounting principles generally
accepted in the United States of America. Application of accounting principles generally accepted in
the United States of America would have affected shareholders’ equity as of December 31, 2003 and
2002 and results of operations for the years then ended, to the extent summarized in Note 23 of the
consolidated financial statements.
F-3
6.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The consolidated statements of cash flows for each of the three years in the period
ended December 31, 2003 are presented for purposes of additional analysis and are not a required
part of the basic consolidated financial statements prepared in accordance with accounting practices
adopted in Brazil. Such information has been subjected to the same auditing procedures applied in
the audit of the basic financial statements described above and, in our opinion, is presented fairly in
all material respects in relation to the basic financial statements taken as a whole.
/s/
DELOITTE TOUCHE TOHMATSU
São Paulo, February 11, 2004, except for Notes 22 a) and b) as to which the dates are March 2 and 5,
2004, respectively, and Notes 23 and 24 as to which the date is April 16, 2004.
F-4
NATURA COSMÉTICOS S.A.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
(In thousands of Brazilian reais—R$)
2003
2002
ASSETS
Current assets
Cash and banks..................................................................................................
34,072
44,201
Cash equivalents ................................................................................................ 102,039
13,202
Trade accounts receivable .................................................................................. 180,118 159,804
Inventories .........................................................................................................
79,254
74,435
Recoverable taxes ..............................................................................................
8,525
6,040
Advances to employees.......................................................................................
4,938
2,984
Related parties ...................................................................................................
1,275
1,113
Deferred income and social contribution taxes ...................................................
22,096
10,876
Other receivables ...............................................................................................
5,214
5,412
Derivative contracts ...........................................................................................
—
27,569
Total current assets .....................................................................................
437,531 345,636
Noncurrent assets
Related parties ...................................................................................................
Advance for future capital increase ....................................................................
Deferred income and social contribution taxes ...................................................
Judicial deposits .................................................................................................
Other receivables ...............................................................................................
Others................................................................................................................
3,382
—
9,447
14,595
1,715
641
7,386
—
17,139
3,299
264
1,202
Total noncurrent assets ...............................................................................
29,780
29,290
Permanent assets
Goodwill............................................................................................................
2,809
5,925
Property, plant and equipment ........................................................................... 253,739 262,001
Deferred exchange variation...............................................................................
—
3,795
Total permanent assets................................................................................
Total assets ...............................................................................................................
256,548 271,721
723,859 646,647
F-5
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
2003
2002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Loans and financing ...........................................................................................
75,102 104,271
Domestic suppliers .............................................................................................
55,384
52,064
Foreign suppliers ................................................................................................
2,139
1,873
Suppliers—related parties...................................................................................
5,304
4,202
Payroll and related charges.................................................................................
41,563
31,111
Taxes payable ....................................................................................................
64,297
53,471
Remuneration on debentures.............................................................................. 102,170
4,080
Related parties ...................................................................................................
964
32,401
Dividends...........................................................................................................
20,000
5,435
Interest on capital ..............................................................................................
8,541
3,292
Other payables...................................................................................................
24,243
15,070
Derivative contracts ...........................................................................................
9,012
—
Total current liabilities................................................................................
408,719 307,270
Long-term liabilities
Loans and financing ...........................................................................................
Debentures.........................................................................................................
Provision for contingencies.................................................................................
Other payables...................................................................................................
32,986
99,850
130,656 130,656
28,381
15,533
1,809
2,109
Total long-term liabilities............................................................................
193,832 248,148
Minority interest .......................................................................................................
(30)
58
Shareholders’ equity
Capital ...............................................................................................................
Capital reserves ..................................................................................................
Profit reserves ....................................................................................................
56,387
9,998
54,953
56,387
9,998
24,786
Total shareholders’ equity...........................................................................
121,338
91,171
Total liabilities and shareholders’ equity ...................................................................
723,859 646,647
The accompanying notes are an integral part of these financial statements.
F-6
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003 , 2002 AND 2001
2003
2002
2001
Gross sales to domestic market ........................................................ 1,860,287 1,375,186 1,140,275
Gross sales to foreign market ...........................................................
47,876
34,972
27,740
Other sales.......................................................................................
1,957
1,022
—
Gross operating revenues ................................................................. 1,910,120 1,411,180 1,168,015
Taxes on sales, returns and rebates ..................................................
(581,210) (418,041) (292,478)
Net operating revenues ....................................................................
Cost of sales.....................................................................................
1,328,910
(458,405)
993,139
(345,346)
875,537
(376,962)
Gross profit .....................................................................................
870,505
647,793
498,575
Operating expenses
Selling ..............................................................................................
General and administrative ..............................................................
Employee profit sharing ...................................................................
Management compensation .............................................................
(403,018)
(182,890)
(20,466)
(3,589)
(321,859)
(146,135)
(11,498)
(2,850)
(274,963)
(105,092)
(8,714)
(1,988)
Income from operations before financial (expenses) income.............
Financial expenses ...........................................................................
Financial income..............................................................................
260,542
(64,439)
34,339
165,451
(134,004)
89,660
107,818
(65,282)
29,820
Income from operations ...................................................................
Nonoperating income ......................................................................
230,442
1,455
121,107
5,518
72,356
971
Income before debenture participation and taxes .............................
Debenture participation ...................................................................
231,897
(127,709)
126,625
(75,817)
73,327
(42,252)
Income before taxes .........................................................................
Income and social contribution taxes ...............................................
104,188
(40,364)
50,808
(29,116)
31,075
(21,851)
Net income before minority interest.................................................
Minority interest..............................................................................
63,824
60
21,692
49
9,224
261
Net income ......................................................................................
63,884
21,741
9,485
F-7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Company
Capital
Capital
reserves
Investment
grants
Profit reserves
Legal
Retention
Retained
earnings
(losses)
(12,104)
—
9,485
(474)
12,104
(3,000)
58,639
954
9,485
—
12,104
(3,000)
78,182
556
21,741
—
—
(3,873)
(5,435)
Balances as of December 31, 2000............. 56,387
Income tax incentives.................................
—
Net income ................................................
—
Reserve for retention of profits ..................
—
Interest on capital ......................................
—
Proposed dividends ....................................
—
8,488
954
—
—
—
—
5,868
—
—
474
—
—
Income tax incentives.................................
—
Net income ................................................
—
Legal reserve..............................................
—
Reserve for retention of profits ..................
—
—
—
9,442
556
—
—
—
—
—
6,342
—
—
1,087
—
—
—
—
—
—
—
17,357
—
—
6,011
—
21,741
(1,087)
(17,357)
(3,873)
(5,435)
Net income ................................................
—
Legal reserve..............................................
—
Reserve for profit retention........................
—
—
Additional dividends paid out of profit
reserves ..................................................
—
—
9,998
—
—
—
—
7,429
—
3,258
—
—
17,357
—
—
30,577
—
—
91,171
63,884
63,884
(3,258)
—
(30,577)
—
(10,049) (10,049)
—
—
—
—
Balances as of December 31, 2003.............
9,998
56,387
10,687
—
—
—
—
—
—
Total
(3,668)
—
(3,668)
—
(20,000) (20,000)
44,266
F-8
—
121,338
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
2003
Sources of funds
From operations:
Net income ........................................................................................
Items not affecting working capital:
Depreciation and amortization ...................................................
Monetary and exchange variations on long-term items, net ........
Provision for contingencies .........................................................
Other provisions.........................................................................
Deferred income and social contribution taxes ...........................
Net book value of property, plant and equipment sold ...............
Minority interest ........................................................................
2002
63,884
21,741
9,485
33,673
(10,136)
16,551
906
5,017
1,596
(60)
28,263
64,214
10,223
533
2,283
1,694
(49)
11,533
(7,947)
245
—
(3,448)
6,694
(261)
111,431 128,902
Interest on capital imputed in dividends .....................................
From third parties:
Subscription of debentures..........................................................
Income tax incentives .................................................................
Transfer from noncurrent to current assets .................................
Increase in long-term liabilities ...................................................
Total sources ............................................................................................
Uses of funds
Additions to property, plant and equipment .............................................
Increase in noncurrent assets.....................................................................
Decrease in long-term liabilities ................................................................
Transfer from long-term to current liabilities ............................................
Dividends proposed and paid....................................................................
Interest on capital .....................................................................................
Total uses .................................................................................................
(Decrease) increase in working capital ......................................................
Represented by
Increase in current assets...........................................................................
Increase in current liabilities .....................................................................
(Decrease) increase in working capital ......................................................
Net working capital incorporated by acquisition of investment
( Note nº 4) ...........................................................................................
2001
—
—
—
1,222
17,025
(28)
—
16,301
12,104
—
1,858
556
954
17,483
6,019
—
314,570
343
33
129,650 147,284 351,839
23,891
5,910
—
75,686
23,668
10,049
25,230
7,104
3,081 186,553
979
—
96,776
68,378
5,435
3,000
3,873
139,204 135,374 265,035
(9,554)
11,910
86,804
75,803
63,893
(12,642)
(99,446)
(9,554)
11,910
86,804
—
(9,554)
—
11,910
(56,950)
29,854
91,895
101,449
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
2003
2002
63,884
21,741
9,485
33,673
(14,076)
36,581
16,551
3,350
1,278
(3,528)
(1,025)
102,170
(60)
28,263
93,004
(52,629)
10,223
5,375
—
3,925
(1,871)
60,654
(49)
11,533
(7,948)
25,775
245
2,150
—
(5,484)
4,842
33,802
(261)
238,798
168,636
74,139
(Increase) decrease in assets:
Accounts receivable ...................................................................................................................
Inventories.................................................................................................................................
Other receivables.......................................................................................................................
Escrow deposits.........................................................................................................................
Other receivables.......................................................................................................................
(23,042)
(6,684)
1,304
(11,296)
3,934
(35,127) (15,504)
(24,851)
9,263
(29,721) 44,238
(2,814)
—
22,654
(2,387)
(69,859)
Operating activities
Net income .......................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................................................................
Monetary and exchange variations, net.....................................................................................
(Gain) loss on swap contracts....................................................................................................
Provision for contingencies........................................................................................................
Other provisions........................................................................................................................
Subsidiaries' unrealized profit....................................................................................................
Deferred income and social contribution taxes..........................................................................
(Gain) loss on sale of fixed assets ..............................................................................................
Debenture participation.............................................................................................................
Minority interest .......................................................................................................................
2001
Subtotal .....................................................................................................................................
(35,784)
Increase (decrease) in liabilities:
Suppliers....................................................................................................................................
Payroll and related charges........................................................................................................
Taxes payable............................................................................................................................
Other payables ..........................................................................................................................
Taxes payable............................................................................................................................
Other payables ..........................................................................................................................
Subtotal .....................................................................................................................................
35,610
4,417
8,498
6,183
(21,769)
—
(1,432)
(4,103)
Net cash provided by operating activities .........................................................................................
198,911
137,750
74,772
Investing activities
Additions to property, plant and equipment.....................................................................................
Proceeds from sales of fixed assets....................................................................................................
(23,891)
2,621
(25,230)
3,565
(7,104)
1,852
Net cash used in investing activities ..................................................................................................
(21,270)
(21,665)
(5,252)
Financing activities
Decrease in current and long-term loans...........................................................................................
Payment of dividends........................................................................................................................
Payment of interest on capital...........................................................................................................
Payment of debenture participation..................................................................................................
(82,458) (116,772) (12,936)
(9,103)
—
—
(3,292)
—
—
(4,080)
—
(6,623)
Net cash used in financing activities .................................................................................................
(98,933) (116,772) (19,559)
14,886 (31,033)
3,206
1,773
17,373
(7,465)
10,598
(5,275)
(6,697)
6,687
(393)
336
38,973 (34,977)
Net increase (decrease) in cash and cash equivalents ........................................................................
78,708
Balance at beginning of year .............................................................................................................
57,403
58,090
8,129
Balance at end of year.......................................................................................................................
136,111
57,403
58,090
Additional information on cash flow
Payment of income and social contribution taxes .............................................................................
Payment of interest on loans and financing ......................................................................................
Payment of swap agreements ............................................................................................................
13,468
9,657
8,134
15,400
11,960
444
14,877
15,672
—
F-10
(687)
49,961
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(Amounts in thousands of Brazilian reais—R$, except as indicated)
1. Operations
The Company and its subsidiaries are engaged in the production and sale of cosmetics, fragrances in
general, and hygiene and health products, and hold equity interests in other companies in Brazil and
abroad.
2. Presentation of financial statements
–
The Corporate Law Method
The consolidated financial statements are prepared in accordance with accounting practices generally
adopted in Brazil. These accounting practices are established by the Brazilian corporate law and rules
and accounting procedures established by the Brazilian Securities Commission (CVM—Comissão de
Valores Mobiliários) (“Brazilian corporate law”).
Brazilian corporate law provided a simplified methodology for accounting for the effects of inflation
until December 31, 1995. It consisted of restating permanent assets (property, plant and equipment,
investments and deferred charges) and shareholders’ equity accounts using indices mandated by the
Federal Government. The net effect of this restatement process was credited or charged to the statement
of income in a single caption, usually entitled “Monetary Correction Adjustments” or “Inflation
Adjustments.”
For local reporting purposes, the Company also prepares its consolidated financial statements in
accordance with Brazilian corporate law.
The accompanying financial statements are a translation and adaptation from those originally issued in
Brazil, based on accounting practices generally adopted in Brazil. Certain reclassifications, modifications,
and changes in terminology have been made, in order to conform more closely to reporting practices
prevailing pursuant to accounting principles generally accepted in the United States of America.
3. Significant accounting practices
a)
Cash equivalents
Cash equivalents represent highly liquid temporary investments with maturities of less than three
months, to be held to maturity, stated at cost plus income earned to the dates of the balance sheets.
b)
Allowance for doubtful accounts
The allowance for doubtful accounts is recognized based on an analysis of risks of realization of
receivables, in an amount considered sufficient to cover possible losses.
c)
Inventories
Inventories are stated at the lower of average cost of acquisition or production and net realizable value.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
d)
Property, plant and equipment
Property, plant and equipment are recorded at acquisition cost, monetarily restated to December 31,
1995. Financial charges arising from financing linked to construction-in-progress are capitalized as part
of property, plant and equipment until the asset is placed in service. Depreciation is calculated under the
straight-line method, based on the estimated economic useful lives of the assets, using the rates shown in
Note 12.
e)
Goodwill
The Company records the purchase of an equity interest of another company at book value. The
difference between the company’s proportional interest in the book value of net assets acquired and the
purchase price is recorded as goodwill. Goodwill is generally amortized over 10 years on a straight-line
basis, based on the estimated future profitability of the acquired company.
f)
Deferral of exchange variations
The exchange variation for 2001 was deferred based on CVM Resolution No. 409/01 and Law No.
10,305/01. The deferred asset relating to the exchange variation is being amortized over the terms of the
related assets and liabilities that are subject to the exchange variation (Note 13).
g)
Current and long-term liabilities
Current and long-term liabilities are stated at amounts payable plus, if applicable, interest and monetary
and exchange variations incurred to the balance sheet dates.
h)
The provision for income tax was recorded at the rate of 25%. Social contribution tax was calculated at
the rate of 9% of taxable income. The deferred taxes attributable to temporary differences, tax loss and
social contribution tax loss carry forwards are recorded when their realization is considered to be more
likely than not.
i)
Loans and financing
Loans and financing are adjusted based on exchange variations and interest incurred to the balance sheet
dates based on contractual terms as described in Note 14.
j)
Reserve for contingencies
A reserve for contingencies is recorded based on the amount of probable losses outstanding at each
balance sheet. The nature of the contingencies is described in Note 16.
k)
Swap transactions
Unrealized gains or losses on swap transactions are recorded using the accrual basis of accounting based
on the settlement amount of each contract at year-end, as described in Note 20.
F-12
l)
Financial income and expenses
Financial income and expenses represent interest and monetary and exchange variations on temporary
cash investments, loans and financing.
m)
Interest on capital
Interest on capital is accounted for as financial expenses, as required by tax legislation. However, for
financial statement purposes, interest on capital is presented as a distribution of profits in the statement
of changes in shareholders’ equity.
o)
Use of estimates
The preparation of financial statements requires management to use 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 for the years ended December 31, 2003 and 2002 have been
prepared in accordance with the consolidation principles established by Brazilian corporate law, and
include the financial statements of the Company and its direct and indirect subsidiaries, as follows:
Ownership
interest-%
2003
2002
Direct:
Indústria e Comércio de Cosméticos Natura Ltda. (i).............................................
99.76
99.99
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. ..............................................................................
99.43
99.43
Indirect:
Natura Logística e Serviços Ltda. ...........................................................................
99.99
99.99
Flora Medicinal J. Monteiro da Silva Ltda. ............................................................ 100.00 100.00
(i) On November 30, 2001, the Company’s parent company, Natura Empreendimentos S.A.
contributed its shareholdings in Indústria e Comércio de Cosméticos Natura Ltda. (“Indústria”) to
the Company in settlement of a receivable amounting to R$194,138. The contribution was recorded
at book value. Indústria has been consolidated by the Company as from November 30, 2001. The
F-13
net assets of Indústria e Comércio de Cosméticos Natura Ltda. on November 30, 2001 comprised
the following:
Assets:
Current assets.............................................
Noncurrent assets.......................................
Permanent assets ........................................
135,580
20,612
250,075
Liabilities and shareholders’ equity:
Current liabilities ...................................
Long-term liabilities ...............................
Shareholders’ equity ...............................
192,530
19,599
194,138
Total assets........................................................
406,267
Total liabilities and shareholders’ equity .......
406,267
The following unaudited summarized consolidated financial information of the Company assumes that
Indústria had been consolidated by the Company as from January 1, 2001. This pro forma financial
information is presented for informational purposes only and is not necessarily indicative of the results of
future operations that would have been achieved had Indústria been consolidated at the beginning of
2001.
Year ended
December 31, 2001
(unaudited)
Gross operating revenues ..............................................................................................
1,172,730
Net operating revenues..................................................................................................
813,176
Operating income..........................................................................................................
37,035
Net loss .........................................................................................................................
(13,864)
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 eliminated to the extent of the parent company’s interest in shareholders’ equity and net income of
the respective subsidiaries. Intercompany balances and transactions and unrealized profit 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.
The operations of the direct and indirect subsidiaries are as follows:
Š 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.
Š Foreign operations (Natura Cosméticos S.A.—Argentina, Natura Cosméticos S.A.—Chile and Natura
Cosméticos S.A.—Peru)—These operations are an extension of the operations of the parent company
Natura Cosméticos S.A.—Brazil.
Š Nova Flora Participações Ltda. (“Nova Flora”)—This subsidiary’s activity is limited to holding an
equity interest in the subsidiary Flora Medicinal J. Monteiro da Silva Ltda.
Š Natura Logística e Serviços Ltda.—Engaged in providing administrative and logistics services to other
Group companies.
Š Flora Medicinal J. Monteiro da Silva Ltda.—Engaged in the production and sale of phytotherapic
products under its own brand.
F-14
5. Cash equivalents
2003
Bank certificates of deposit..........................................................................................
Investment funds .........................................................................................................
57,527
44,512
2002
8,645
4,557
102,039 13,202
As of December 31, 2003, bank certificates of deposit bear interest at rates ranging from 100% to
101.5% of the CDI (interbank deposit rate) (100% to 104% in 2002). As of December 31, 2003,
investment funds bear interest at rates ranging from 100% to 106% of the CDI (100% to 101% in
2002).
6. Trade accounts receivable
2003
2002
Trade accounts receivable.......................................................................................... 197,845 170,922
Allowance for doubtful accounts............................................................................... (17,383) (10,883)
Allowance for return of goods...................................................................................
(344)
(235)
180,118 159,804
7. Inventories
2003
2002
Finished products .......................................................................................................... 35,163 38,369
Raw materials and packaging........................................................................................ 42,486 33,757
Work in process ............................................................................................................
5,931
6,585
Promotional material ....................................................................................................
2,239
2,467
Imports in transit ..........................................................................................................
824
58
Reserve for losses .......................................................................................................... (7,389) (6,801)
79,254 74,435
8. Recoverable taxes
2003
2002
Social contribution tax ......................................................................................................
583
490
IRPJ (Corporate income tax) ............................................................................................. 2,688 1,556
IPI (Tax on Industrialized Products, a federal value added tax) ......................................... 1,063
400
ICMS (Tax on the Circulization of Goods and Services, a state value added tax) .............. 1,827 1,902
Other ................................................................................................................................ 2,364 1,692
8,525 6,040
F-15
9. Income and social contribution taxes
a)
Deferred
Deferred income and social contribution taxes recorded in the consolidated financial statements result
from temporary differences and tax loss carry forwards. These credits are recorded in current and
noncurrent assets, in view of their expected realization based on projections of taxable income, under the
limit imposed by applicable legislation of offsetting a maximum of 30% of annual taxable income offset
with tax loss carry forwards. The amounts are as follows:
2003
Current:
Tax loss carry forwards .........................................................................................
Temporary differences:
Reserve for inventory losses ............................................................................
Allowance for doubtful accounts ....................................................................
Reserve for losses on swap contracts ...............................................................
Other ..............................................................................................................
Deferred income and social contribution tax credits........................................
Noncurrent:
Tax loss carry forwards .........................................................................................
Reserve for contingencies ................................................................................
Other ..............................................................................................................
Deferred income and social contribution taxes................................................
b)
2002
6,468
—
2,512
5,169
3,064
4,883
2,312
3,608
—
4,956
22,096 10,876
—
12,673
8,562
885
4,466
—
9,447 17,139
Current expense
Reconciliation of income and social contribution taxes:
2003
2002
2001
Income before taxes.................................................................................... 104,188 50,808 31,075
Income and social contribution taxes at nominal rate (34%) ...................... (35,424) (17,275) (10,566)
Valuation allowance...................................................................................
(6,769) (8,289) (10,450)
Deferral of exchange variation ...................................................................
(1,290) (2,585)
3,875
Translation effect of foreign subsidiaries ....................................................
(227)
1,605
(409)
Interest on capital.......................................................................................
3,417
1,316
—
Non-deductible donations ..........................................................................
(700)
(933)
(539)
Other .........................................................................................................
629
(2,955) (3,762)
Income and social contribution taxes..........................................................
(40,364) (29,116) (21,851)
Current income and social contribution taxes.............................................
Deferred income and social contribution taxes ...........................................
(43,893) (25,190) (26,862)
3,529
(3,926)
5,011
(40,364) (29,116) (21,851)
F-16
10. Related parties
Receivables from and payables to related parties are as follows:
2003
Current assets:
Accounts receivable:
Natura Inovação e Tecnologia de Produtos Ltda...............................................
Natura Participações S.A. .................................................................................
Natura Empreendimentos S.A...........................................................................
2002
1,234
14
27
749
—
364
1,275
1,113
Noncurrent assets:
Loan agreement:
Natura Participações S.A. ................................................................................. 3,382
7,386
Current liabilities:
Suppliers:
Natura Inovação e Tecnologia de Produtos Ltda............................................... 5,304
4,202
Loan agreement:
Natura Empreendimentos S.A...........................................................................
816 32,049
Accounts payable:
Natura Participações S.A. .................................................................................
148
352
Transactions with related parties are summarized below:
Product purchases
2003 2002 2001
Natura Inovação e Tecnologia de Produtos Ltda. .........................................................
390
346
105
F-17
2003
Commissions paid for guarantees of loans and
financings:
Natura Empreendimentos S.A. ...........................
Rendering of administrative services:
Natura Inovação e Tecnologia de Produtos
Ltda................................................................
Natura Logística e Serviços Ltda. .......................
Service revenues
2002
2001
1,904
3,345
—
—
—
—
Service purchases
2003
2002
2001
—
29,074
—
8,549 7,280 3,802
—
—
—
Product research and development: (f)
Ltda................................................................ 52,247 52,212 25,647
—
Lease agreements:
Natura Empreendimentos S.A. ...........................
—
—
323
Natura Participações S.A....................................
—
—
169
Ltda................................................................
—
—
1,301
Natura Logística e Serviços Ltda. .......................
—
—
—
—
—
—
—
—
—
—
850
—
603
335
The above transactions were completed with terms generally similar to those prevailing with unrelated
parties.
11. Goodwill
Goodwill is represented by:
Consolidated
2003
2002
Goodwill on acquisition of Nova Flora........................................................................... 8,015 8,015
Amortization of goodwill................................................................................................ (5,206) (2,404)
Other..............................................................................................................................
—
314
2,809
5,925
Goodwill is being amortized over ten years based on an appraisal report issued by independent
appraisers, based on projections that were reviewed by management. As of December 31, 2003, in light
of new projections of future results and a report issued by independent appraisers, an impairment of
R$2,001 was recognized as additional amortization expense during the year ended December 31, 2003.
F-18
12. Property, plant and equipment
Annual
depreciation -%
Buildings .........................................................................................
Infrastructure and fixtures...............................................................
Machinery and equipment...............................................................
Vehicles...........................................................................................
Molds .............................................................................................
Furniture and fixtures .....................................................................
Information technology equipment .................................................
Leasehold improvements .................................................................
Software licenses .............................................................................
Land ...............................................................................................
Advances to suppliers......................................................................
Other ..............................................................................................
Accumulated depreciation ...............................................................
4
10
10
20
33
10
20
12
20
—
—
2003
2002
126,925 126,832
62,809
58,617
66,137
62,056
14,859
9,939
21,084
17,761
11,114
9,945
25,765
24,835
571
211
8,981
6,043
15,910
15,910
1,534
1,617
5,147
6,722
360,836 340,488
(107,097) (78,487)
253,739 262,001
13. Deferred exchange variation
Based on CVM Resolution No. 409/01 and Law No. 10,305/01, the Company and its subsidiary
Indústria e Comércio de Cosméticos Natura Ltda. elected to defer net foreign exchange losses incurred as
a result of the adjustment of assets and liabilities denominated in foreign currency for the year ended
December 31, 2001. The balance of the deferred amount at December 31, 2003 and 2002 is as follows:
2003
2002
Deferred exchange variation ....................................................................................... 18,491 18,491
Accumulated amortization .......................................................................................... (18,491) (14,696)
—
3,795
F-19
14. Loans and financing
Type
2003
2002
Import financing ..............................
—
6,452
BNDES (Brazilian Bank for..............
Economic and Social
Development)
BNDES.............................................
1,269
16,468
42,294
25,892
2,786
2,426
BNDES-FINAME (Government .......
Agency for Machinery and
Equipment Financing)
BNDES-Poc *...................................
ACE (Advances on Export ...............
Contract)
Bank overdrafts................................
Floating rate notes............................
2,009
741
6,038
1,915
—
58,989
371
144,559
Total ................................................
108,088
204,121
Current ............................................
75,102
104,271
Long term ........................................
32,986
99,850
*
Interest rates
Interest of 7.2% per year +
exchange variation
Interest of 3.5% per year + TJLP
(long-term interest rate)
71% (40% in 2002) Interest of
4% per year + TJLP
29% (60% in 2002) Interest of
4% per year + UMBNDES **
exchange variation
Interest of 105% of CDI
Interest of 7.6% (8.3% in 2002)
+ exchange variation
Guarantees and collateral
Natura Empreendimentos S.A.
Chattel mortgage and Natura
Empreendimentos S.A.
Mortgage and bank guarantee
Promissory notes and Natura
Poc – Proposta de operação de crédito (“Operating line of credit”)
** UMBNDES – Unidade Monetária do Bando Nacional de Desenvolvimento Econômico e Social
(“Brazilian National Development Bank – BNDES monetary unit”)
Maturities of long-term debt are as follows:
2003
2004 ............................................................................................................................................
—
2005 ............................................................................................................................................ 12,352
2006 ............................................................................................................................................ 11,572
2007 ............................................................................................................................................
9,018
2008 ............................................................................................................................................
44
32,986
Financing in local currency from BNDES is secured by the Itapecerica da Serra and Cajamar units.
Loans related to Floating Rate Notes, in the amount of R$58,989 (R$144,559 in 2002), are represented
by short-term credit lines substantially for maintenance of working capital. These operations provide for
the maintenance of financial ratios, such as the following:
Š Net debt/EBITDA of the last 12 months.
Š Net debt/Shareholders’ equity + net debt.
F-20
Š Adjusted EBITDA of 12 months/Net financial expense.
These financial ratios do not consider the balances of debentures and debenture participation in the
balance payable.
15. Taxes payable
Taxes payable are represented by:
2003
2002
ICMS (State VAT).................................................................................................. 34,008 26,663
Cofins (Contribution for the Financing of Social Security, a federal tax on gross
operating revenues) ............................................................................................
6,159
4,974
PIS (Program for Social Integration, a federal tax on gross operating revenues)......
1,386
1,223
Income tax .............................................................................................................
876
4,104
Social contribution tax ...........................................................................................
327
1,421
Withholding income tax......................................................................................... 20,319 14,194
Other .....................................................................................................................
1,222
892
64,297 53,471
A significant portion of the balances recorded under “Withholding income tax” refers to income tax
withheld on the debenture participation in 2003 and 2002.
16. Provision for contingencies
The Company and its subsidiaries are parties to labor, tax and civil lawsuits involving contingent
liabilities. These proceedings include administrative and judicial proceedings.
Provisions for contingencies are recognized by management based on the opinion of external legal
counsel, at amounts representing estimates of probable losses.
Accrued amounts are classified as follows, according to the nature of the respective lawsuits:
2003
Labor ............................................................................................................................
Civil ..............................................................................................................................
Tax ...............................................................................................................................
2002
2,935
889
1,580
618
23,866 14,026
28,381 15,533
The Company and its subsidiaries are parties to other labor, civil and tax lawsuits, for which the
probability of loss is considered possible but not probable by management and its legal counsel. The
amounts involved in these lawsuits as of December 31, 2003 are as follows: tax—R$10,950, civil—
F-21
R$3,270, and labor—R$6,889 (R$7,741, R$4,008 and R$5,055, respectively, as of December 31, 2002).
The Company has not recorded a provision for these lawsuits.
a)
Labor/civil lawsuits
The Company and its subsidiaries are parties to 168 labor lawsuits filed by former employees and third
parties (99 in 2002) claiming the payment of severance amounts, salary premiums and overtime, as well
as 263 civil lawsuits (103 in 2002), mostly related to indemnity claims.
b)
Tax lawsuits
Refer mainly to tax assessment notices related to IPI (Federal VAT) ICMS (State VAT) in the State of
Minas Gerais, as well as requests for injunctions contesting the deductibility of social contribution taxes
from the calculation basis of the social contribution tax itself and of income tax, and the federal import
tax rate.
c)
Judicial deposits
The Company and its subsidiaries maintain judicial deposits principally relating to tax lawsuits
amounting to R$14,595 as of December 31, 2003 (R$3,299 in 2002). Substantially amount of these
judicial deposits relate to tax lawsuits.
17. Employee profit sharing
The Company and its subsidiaries make profit sharing payments to their employees, based on the
achievement of operating targets and specific goals established and approved at the beginning of each
year. As of December 31, 2003, the amount payable as profit sharing was R$20,466 (R$11,498 in 2002
and R$8,714 in 2001), recorded as operating expenses under “Payroll and related charges” in the
consolidated balance sheet.
18. Debentures
Consolidated
2003
2002
Debenture participation .....................................................................................
102,170
Long-term liabilities:
Debentures payable ............................................................................................
130,656 130,656
4,080
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 to the Company’s indirect shareholders. From 1998 to 2002, 130,656,000
debentures were subscribed, totaling R$130,656.
Until December 31, 2002, the debenture participation was computed based on a percentage of up to
70% of net income before provision for income taxes, calculated on a quarterly basis. Commencing
F-22
January 1, 2002, the debenture participation is computed by applying the ratio of the debentures
outstanding at year end to the sum of the prior year’s shareholders’ equity and the debentures
outstanding, to net income before provision for income taxes, calculated on a semiannual basis.
19. Shareholders’ equity
a)
Capital
Capital as of December 31, 2003 and 2002 is R$56,387. Subscribed and paid-up capital is represented
by 35,955 common shares without par value.
b)
Interest on capital
The Company’s management proposed, at the Board of Directors’ meeting, the payment of interest on
capital under the terms of the bylaws, CVM Resolution No. 207/86 and Law No. 9,249/95, subject to
approval of the Annual Shareholders’ Meeting to be held on March 4, 2004. As of December 31, 2003,
the gross amount of interest on capital is R$10,049 (R$3,873 as of December 31, 2002), which was
calculated as provided by law, including the mandatory minimum dividend of 25%, under the terms of
Article 203 of Law No. 6,404/76 and the bylaws.
The withholding income tax was withheld and settled by the Company.
c)
Dividend distribution policy
The dividend distribution policy provided for in Brazilian corporate law ensures a minimum dividend
equivalent to 25% of net income for the year. Proposed dividends for 2003 in the amount of R$20,000,
which will be submitted by the Company’s management for the approval of shareholders at the annual
meeting, meet the statutorily guaranteed rights.
Dividends were calculated as shown below:
2003
Company
2002
2001
Net income ....................................................................................................... 65,162 21,741 9,485
Legal reserve..................................................................................................... (3,258) (1,087) (474)
Calculation basis for minimum dividends .........................................................
61,904 20,654 9,011
Mandatory minimum dividends (25%) .............................................................
Supplementary dividends ..................................................................................
Proposed dividends ...........................................................................................
Interest on capital .............................................................................................
Dividends per share ..........................................................................................
Interest on capital per share ..............................................................................
Amount exceeding mandatory minimum dividend ............................................
15,476
3,668
20,000
10,049
0.658
0.279
18,241
5,163 2,253
—
—
5,435 3,000
3,873
—
0.151 0.083
0.108
—
4,145
747
F-23
d)
Reserve for profit retention
As of December 31, 2003 and 2002, this reserve was recorded in accordance with Article 196 of Law
No. 6,404/76 and is intended for use in future investments.
20. 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 financing needs, and to reduce exposure to market, currency,
and interest rate risks. These risks and the respective financial instruments are managed through the
establishment of risk management strategies, establishment of control systems, and determination of
exchange exposure limits.
Cash equivalents are mainly made at negotiated return rates, since the companies intend to hold these
investments to redemption. These investments reflect the 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 transactions to protect against exchange variation on its liabilities
resulting from financing agreements. The Company’s policy is to enter into swap contracts for all new
debt that exposes the Company to exchange rate variation risks. These operations are swaps between
two variable rates: foreign currency and CDI (Interbank Deposit Certificate).
As of December 31, 2003 and 2002, the Company had swap transactions with financial institutions with
notional amounts of R$65,558 (US$22,691,000) and R$180,218 (US$51,006,000), respectively. These
transactions generated losses and gains of R$9,012 and R$27,569, respectively, which were recorded in
current liabilities and current assets, respectively. The exchange risk is primarily to the U.S. dollar and
the Euro.
The Company does not enter into derivative instruments for speculation purposes.
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 BNDES.
d) Fair values
As of December 31, 2003 and 2002, the fair values of cash and banks, temporary cash investments, trade
accounts receivable, and suppliers approximated carrying value because of the short-term nature of these
instruments. The fair value of loans and financing approximates carrying value because substantially all
of these instruments have variable interest rates. The fair value of the debentures is equal to carrying
value because the Company has the option to pay down the debentures for book value at any time.
F-24
Following are the book and fair values of the Company’s derivative contracts as of December 31, 2003
and 2002.
2003
Book
value
(Payables) / Receivables—Derivative contracts.....................................
e)
Fair
value
2002
Book
Fair
value
value
(9,012) (6,783) 27,569 6,825
Credit risk
The Company’s sales are made to a large number of independent sales representatives. The Company
manages the credit risk through a strict credit granting process.
21. Insurance
The Company and its subsidiaries contract insurance based 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, 2003, the insurance coverage was as follows:
Item
Coverage
Industrial complex/inventories..........................
Any material damages to buildings,
infrastructure, fixtures and machinery and
equipment
Vehicles ............................................................
Fire, theft and collision for 805 vehicles
Loss of profits ..................................................
Nonrealization of profits arising from
material damages to production installation,
buildings and machinery and equipment
Insured
amount
365,033
14,928
428,398
22. Subsequent events
a)
Capitalization of debentures
At the Extraordinary Shareholders’ Meeting held on March 2, 2004, after the debenture holders’
approval at the General Debenture holders’ Meeting held on February 27, 2004, it was decided that the
130,656,000 debentures issued by the Company, corresponding to R$238,569 (R$130,656 related to the
principal amount of the debentures and R$107,913 related to accrued debenture participation, as of
January 31, 2004, net of withholding income tax (IRRF), will be transferred to shareholders’ equity as a
capital contribution of R$138,569 and as an increase in of the capital reserve of R$100,000. The
debentures were transferred and capitalized on March 2, 2004.
b)
Merger of Group companies
At the Extraordinary Shareholders’ Meeting held on March 5, 2004, the shareholders approved the
merger of the net assets of Natura Empreendimentos S.A. and Natura Participações S.A. into the
Company. The merger was completed based on the accounting valuation supported by a valuation report
F-25
issued by independent accountants. The amounts of the net assets merged into the Company were
R$104,951 related to Natura Empreendimentos S.A. and R$75,716 related to Natura Participações S.A.
based on the book values of these companies.
23. Summary of the differences between accounting practices in accordance with
Brazilian corporate law and U.S. GAAP
The Company’s accounting policies comply with Brazilian corporate law. Accounting policies that differ
from accounting principles generally accepted in the United States of America (U.S. GAAP) are described
below:
a.
Capitalization of interest cost
Under Brazilian corporate law, interest charges and monetary and foreign exchange variation from
financing linked to construction in progress are capitalized in the balance of the assets and credited to
interest expense and monetary and foreign exchange variation.
Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 34, “Capitalization of Interest Costs,” interest incurred on borrowings is capitalized as part
of the cost of certain assets to the extent that borrowings do not exceed construction in progress. The
credit is recorded as a reduction of interest expense. The amount of interest capitalized excludes foreign
exchange gains and losses on foreign currency borrowings.
For the years ended December 31, 2003 and 2002, the Company did not have any construction in
progress. Consequently, the U.S. GAAP adjustment refers to the difference between amortization of
capitalized interest under Brazilian corporate law and U.S. GAAP.
b.
Monetary correction of 1996 and 1997
As mentioned in Note 2, under Brazilian corporate law, the Company discontinued accounting for the
effects of inflation as of December 31, 1995. As of January 1, 1996, the carrying value of all nonmonetary assets and liabilities became their historical cost basis. Under U.S. GAAP, Brazil was still
considered to be a highly inflationary economy until July 1, 1997, and consequently, the Company
continued to record the effects of inflation using the General Price Index – Market (Índice Geral de
Preços – Mercado, or “IGP-M) up to 1997.
The U.S. GAAP adjustment represents the amortization of the restatement of fixed assets, which resulted
from the inflation accounting applied during 1996 and 1997.
c.
Items posted directly to shareholders’ equity accounts
Brazilian GAAP requires that the effect of certain items relating to entities other than the Company’s
shareholders be credited directly to shareholders’ equity. Under U.S. GAAP, these items are recorded as a
credit to the Company’s results for the year.
F-26
d.
Reversal of proposed dividends
Under Brazilian corporate law, proposed dividends are accrued for in the consolidated financial
statements in anticipation of their approval at the Shareholders’ General Meeting. Under U.S. GAAP,
dividends are not accrued until they are formally approved by the Shareholders’ General Meeting.
e.
Interest income (expense)
Brazilian corporate law requires interest to be included as part of operating income. Under U.S. GAAP,
interest income (expense) is included as non-operating income.
f.
Stock option plan
On August 25, 1998, the Company’s holding company’s shareholders approved a stock option plan
granting directors and certain managers of the Company the option to acquire shares in the Company’s
holding company. The options are granted on a yearly basis; the exercise price is determined based on an
estimate of the fair value of the Company’s shares, calculated based on a fixed formula in the related
stock option plan agreement. The exercise price per share is updated for inflation based on the IGP-M
(1999 plan options) and IPC-A – Expanded Consumer Price Index (Índice Nacional de Preços ao
Consumidor Amplo)—(2000 to 2003 plan options).
The 1999, 2000 and 2001 plan options vest on a pro-rata basis over a three-year period. The 2002 and
2003 plans vest over a four-year period (50% in the 3rd year and 50% in the 4th year). The options are
settled by the Company in cash.
Under Brazilian corporate law, the Company has not accounted for the impact of the stock option plan
in its financial statements. Under U.S. GAAP, the Company accounts for the impacts of the plan by
accruing a liability for the amount payable under the plan at each period end in accordance with SFAS
123—Accounting for Stock-Based Compensation.
Summarized information for the plan is as follows:
Number of purchase options (in shares)—
Outstanding options as of January 1, 2002...........................................................................
Options granted in 2002.......................................................................................................
Options exercised in 2002 ....................................................................................................
Options cancelled in 2002 ....................................................................................................
8,500
3,624
(1,807)
(75)
Outstanding options as of December 31, 2002 .....................................................................
10,242
Options granted in 2003.......................................................................................................
Options cancelled in 2003 ....................................................................................................
4,013
(1,400)
Outstanding options as of December 31, 2003 .....................................................................
12,855
Weighted average exercise price of the outstanding options at December 31, 2003 (per shares,
expressed in Reais) ...................................................................................................................
2,684
F-27
g.
Goodwill
Under Brazilian corporate law, the goodwill related to Nova Flora, defined as the excess of the
acquisition cost over the book value of the net assets acquired, is amortized using the straight-line
method over a period of ten years. As described in Note 12, the Company recorded an impairment in
2003 related to this goodwill.
Under U.S. GAAP, prior to January 1, 2002, the goodwill was amortized over the same period as
Brazilian corporate law. On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill, and
Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board Opinion 17, “Intangible
Assets.” Pursuant to SFAS No. 142, goodwill is no longer amortized and is subject to a yearly
impairment test. In connection with adoption of SFAS No. 142 on January 1, 2002, the Company
recorded an impairment loss amounting to R$1,177, net of income taxes, relating to the goodwill
recorded in connection with the purchase of Nova Flora. The impairment loss was a result of continuing
decrease in sales of Nova Flora, which has resulted in lower operating results and cash flows.
For purposes of SFAS No. 142, Nova Flora is considered a separate reporting unit. The Company
performed annual impairment tests on December 31, 2002 and 2003 and recorded additional
impairment charges under U.S. GAAP.
h.
Accounting for derivative instruments
As mentioned in Note 21, the Company uses derivative financial instruments to mitigate its exposure to
foreign currency fluctuations related to a portion of its foreign currency denominated debt. The
Company primarily uses foreign currency swap agreements to manage these risks.
Under Brazilian corporate law, foreign currency swap contracts are recorded at the settlement amount at
the balance sheet date. The premium accrued at that date is recorded as an expense with a corresponding
liability.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133” and
SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS
No. 133 established accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. Changes in a derivative’s fair value are recognized
currently in earnings unless specific hedge accounting criteria are met.
For U.S. GAAP purposes, the Company’s derivatives do not qualify for hedge accounting using the
criteria of SFAS No. 133, and consequently, the changes in fair value are recorded in earnings.
Accordingly, an adjustment has been included in the reconciliation of U.S. GAAP for the difference
between the carrying value recorded under Brazilian corporate law and the fair market value of the
Company’s derivative contracts.
F-28
Contracts outstanding at December 31, 2003 and 2002 are summarized as follows (all amounts in
thousands of Brazilian reais):
Type
USD x CDI............
Type
USD x CDI............
i.
Date of contracts
Expiration dates
September 26, 2001
April 1, 2004
to December 3, 2001 to October 1, 2004
Date of contracts
Expiration dates
September 24, 2001 September 1, 2003
to December 3, 2001 to October 1, 2004
Number
of
contracts
05
Aggregate
notional
amount
49,348
Accounting balance
(liability) as of
December 31, 2003
(9,012)
Number
of
contracts
Aggregate
notional
amount
Accounting balance
asset as of
December 31, 2002
10
123,362
27,569
Reversal of local deferred exchange variation
As mentioned in Note 14, the Company and its subsidiary Indústria e Comércio de Cosméticos Natura
Ltda. elected to defer net exchange losses incurred as a result of the adjustment of assets and liabilities
denominated in foreign currency for the year ended December 31, 2001. For U.S. GAAP purposes, net
exchange losses are recorded against earnings when incurred.
j.
Translation of financial statements of foreign subsidiaries
Under Brazilian corporate law, the Company records the effects of translating the financial statements of
its foreign subsidiaries into Brazilian Reais in results of operations for the year. For U.S. GAAP purposes,
the functional currencies of the Company’s foreign subsidiaries are considered to be the respective local
currencies. Under SFAS No. 52, Foreign Currency Translation,” the adjustments resulting from the
process of translating a foreign entity’s financial statements from the functional currency to the reporting
currency are not recorded in results of operations but are accumulated in a separate component of
consolidated equity (foreign currency translation adjustments).
k.
Comprehensive income (loss)
Brazilian corporate law does not recognize the concept of comprehensive income (loss).
Under U.S. GAAP, SFAS No. 130, “Reporting Comprehensive Income,” effective for years beginning
after December 15, 1997, requires the disclosure of comprehensive income. Comprehensive income is
comprised of net income and “other comprehensive income” which include charges or credits directly to
equity that are not the result of transactions with shareholders. The Company’s comprehensive income
(loss) for the years presented below relates to cumulative translation adjustments recorded under SFAS
No. 52, Foreign Currency Translation.
F-29
l.
Reconciliation of the differences between Brazilian corporate law and U.S. GAAP
Net income reconciliation:
2003
2002
Income (loss) under Brazilian corporate law................................................................. 63,884 21,741
Adjustments to reconcile Brazilian corporate law to U.S. GAAP:
Monetary restatement of 1996 and 1997 ..............................................................
(26)
(26)
Amortization of capitalized interest ......................................................................
(361)
(361)
Reversal of goodwill amortization and impairment recorded under Brazilian
corporate law ....................................................................................................
2,802
801
Impairment recorded under U.S. GAAP ................................................................ (1.735)
(481)
Reversal of local deferred exchange variation........................................................
3,795
7,602
Accounting for derivative instruments................................................................... 22,973 (24,447)
Stock option plan.................................................................................................. (3,465)
1,445
Items posted directly to shareholders’ equity accounts ..........................................
—
556
Translation of financial statements of foreign subsidiaries ....................................
667
(4,722)
Deferred tax effect of the above adjustments......................................................... (8,154)
5,258
Net income under U.S. GAAP, before adoption of SFAS No. 142 ................................
Effect of SFAS 142 adoption, net of tax effects (see item g) ..........................................
80,380
—
Net income under U.S. GAAP ...................................................................................... 80,380
Foreign currency translation adjustments .....................................................................
(667)
Comprehensive income under U.S. GAAP ....................................................................
Shareholders’ equity reconciliation:
79,713
2003
7,366
(1,177)
6,189
4,722
10,911
2002
Total shareholders’ equity under Brazilian corporate law........................................... 121,338 91,171
Adjustments to reconcile Brazilian corporate law to U.S. GAAP:
Monetary restatement of 1996 and 1997 ............................................................
1.687
1,714
Capitalized interest .............................................................................................
6,318
6,679
Reversal of proposed dividends...........................................................................
20,000
5,435
Goodwill.............................................................................................................
(397) (1,464)
Reversal of local deferred exchange variation......................................................
—
(3,795)
Accounting for derivative instruments.................................................................
2,229 (20,744)
Stock option plan................................................................................................
(3,465)
—
Deferred tax effects of the above adjustments .....................................................
(2,166)
5.987
U.S. GAAP shareholders’ equity .................................................................................
145,544
84,983
The deferred tax effects of the U.S. GAAP adjustments above are classified as non-current under U.S.
GAAP, with the exception of the adjustment relating to derivative instruments.
F-30
m.
Statements of changes in shareholders’ equity under U.S. GAAP
Total
Balances as of December 31, 2001.............................................................................................
Income under U.S. GAAP ...................................................................................................
Foreign currency translation adjustments............................................................................
Interest on capital ...............................................................................................................
Income under U.S. GAAP ...................................................................................................
Foreign currency translation adjustments............................................................................
Dividends of 2002 approved in 2003..................................................................................
Additional payment of 2002 dividends ...............................................................................
Interest on capital ...............................................................................................................
77,945
6,189
4,722
(3,873)
84,983
80,380
(667)
(5,435)
(3,668)
(10,049)
145,544
24. Additional disclosures required by U.S. GAAP
a.
Concentrations of risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These
financial instruments consist primarily of cash investments. The Company places its cash investments
with high credit quality financial institutions and has a policy of limiting the amount and percentage of
credit exposure to any financial institution.
Some of the Company’s employees are affiliated with state and/or municipal labor unions (Union of
Workers in the Chemical, Pharmaceutical, Plastics, Explosives, Abrasives, Fertilizers and Refinement of
Mineral Oils Industries of Osasco, Cotia and the Surrounding Region (Sindicato dos Trabalhadores nas
Indústrias Químicas, Farmacêuticas, Plásticas, Explosivas, Abrasivas, Fertilizantes e Refino de Óleos
Minerais de Osasco, Cotia e Região); Union of Employees of Autonomous Commercial Agents, of
Companies that Perform Advisory, Expert, Information and Research Services and of Accounting
Services Companies in the State of São Paulo (Sindicato dos Empregados de Agentes Autônomos do
Comércio e em Empresas de Assessoramento, Perícias, Informações e pesquisas e de Empresas de Serviços
Contábeis no Estado de São Paulo); and Union of Commercial Employees of Cotia and the Surrounding
Region (Sindicato dos Empregados no Comércio de Cotia e Região), with which labor agreements are
negotiated that influence the wages the Company pays to its employees generally. In recent years, the
Company has not experienced a work stoppage that has had a material effect on its operations. The
Company’s collective agreements have a one-year term. These collective agreements and its related terms
are revised yearly.
Other than described above, the Company has no other concentrations of risk that could result in a
materially adverse impact on the Company’s operations.
F-31
b.
Intangible assets
The following is a summary of the Company’s intangible assets subject to amortization under U.S.
GAAP:
2003
Software
Licenses
Patents
Gross ..............................................................................................
Accumulated amortization ..............................................................
2002
Software
Licenses Patents
8,981
3,995
6,043
(2,881) (3,425) (1,349)
1,071
(758)
Net .................................................................................................
6,100
570
4,694
313
Amortization expense .....................................................................
1,532
368
540
238
Amortization period (years) ............................................................
5
4-10
5
4-10
The estimated aggregate amortization expense for the following years is as follows:
Amount
2004 ............................................................................................................................................
2005 ............................................................................................................................................
2006 ............................................................................................................................................
2007 ............................................................................................................................................
2008 ............................................................................................................................................
2,067
1,867
1,333
1,066
337
Total ...........................................................................................................................................
6,670
c.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” or SFAS 143, which is
effective for years beginning after June 15, 2002. SFAS 143 addresses legal obligations associated with
the retirement of tangible long-lived assets that result from the acquisition, construction, development or
normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair
value can be made. The fair value of the liability is added to the carrying amount of the related asset and
depreciated over the life of the asset. The liability is accrued each period through charges to operating
expenses. If the obligation is settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The adoption of SFAS 143 did not have a material impact on the
Company’s results of operations or financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” or SFAS 144. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS
No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No.
30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business,
F-32
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 also
amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to eliminate the
exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS 144
requires that one accounting model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS 144 also broadens the presentation of discontinued
operations to include more disposal transactions. The adoption of SFAS 144 on January 1, 2002, did not
have any impact on the Company’s financial position, cash flows or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation-Transition and Disclosure,” or SFAS 148. SFAS 148 amends Statement of
Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123,
and provides alternative methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements
of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects
of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are
effective for financial statements issued for fiscal years ending after December 15, 2002. Adoption of
SFAS 148 did not have any impact the Company’s financial position, cash flows, or results of operations.
In November 2002, the FASB issued Interpretation Number 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45. This
interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods
after December 15, 2002. The initial recognition and initial measurement requirements of FIN 45 are
effective prospectively for guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 for the year ended December 31, 2003, did not have any impact on the
Company’s financial position, cash flows or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities—an interpretation of ARB No. 51,” or FIN 46. FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 explains how to identify variable interests entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that entity. It requires existing
unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. It also requires certain disclosures by the primary
beneficiary of a variable interest entity and by an enterprise that holds significant variable interests in a
variable interest entity where the enterprise is not the primary beneficiary. FIN 46 is effective
immediately to variable interest entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date, and effective for the first fiscal year or interim
period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 requires an entity to disclose certain
information regarding a variable interest entity, if when the Interpretation becomes effective, it is
F-33
reasonably possible that an enterprise will consolidate or have to disclose information about that variable
interest entity, regardless of the date on which the variable entity interest was created. Adoption of this
rule did not have any material impact on the Company’s financial statements.
In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,” or SFAS 150. SFAS 150 modifies the accounting for
certain financial instruments that, under previous guidance, issuers could account for as equity. The
Statement requires that those instruments be classified as liabilities in statements of financial position.
SFAS 150 affects an issuer’s accounting for three types of financial instruments, namely:
Š mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for
cash or other assets.
Š instruments, other than outstanding shares, that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. These instruments include put options and forward
purchase contracts.
Š obligations that can be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the value of the issuers’
shares.
SFAS 150 does not apply to features embedded in financial instruments that are not derivatives in their
entirety. In addition to its requirements for the classification and measurement of financial instruments
within its scope, SFAS 150 also requires disclosures about alternative ways of settling those instruments
and the capital structure of entities, all of whose shares are mandatorily redeemable. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for financial instruments created
before the issuance date of the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company is currently evaluating the impact of SFAS 150 on
its financial position, results of operations and cash flows.
F-34
(Convenience Translation into English from the Original Previously Issued in Portuguese)
São Paulo—SP
1.
We have audited the accompanying individual (Company) and consolidated balance sheets of
Natura Empreendimentos S.A. and subsidiaries as of December 31, 2003 and 2002, 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.
As described in Note 14, based on CVM (Brazilian Securities Commission) Resolution No. 409/01
and Law No. 10,305, of November 7, 2001, the Company elected to defer the exchange variation.
Brazilian accounting practices require that the effects of exchange variations be recognized in income
for the period in which they were incurred. Accordingly, for the year ended December 31, 2002, net
income is understated by R$7,602,000.
4.
In our opinion, except for the effect of the matter mentioned in paragraph 3, the financial statements
referred to in paragraph 1 present fairly, in all material respects, the individual and consolidated
financial positions of Natura Empreendimentos S.A. and subsidiaries as of December 31, 2003 and
2002, 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.
5.
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 permitting additional analyses
and is not a required part of the basic financial statements. This supplementary information was
audited by us in accordance with the auditing procedures mentioned in paragraph 2 and, in our
opinion, is fairly presented, in all material respects, in relation to the basic financial statements taken
as a whole.
6.
The accompanying financial statements have been translated into English for the convenience of
readers outside Brazil.
São Paulo, February 11, 2004, except for Note 23 as to
which the date is March 5, 2004
/s/ DELOITTE TOUCHE TOHMATSU
Auditores Independentes
/s/ EDIMAR FACCO
Edimar Facco
Engagement Partner
F-35
NATURA EMPREENDIMENTOS S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
Company
ASSETS
2003
2002
Consolidated
2003
2002
Current Assets
Cash and banks.................................................................
Temporary cash investments .............................................
Trade accounts receivable .................................................
Inventories ........................................................................
Recoverable taxes..............................................................
Advances to employees......................................................
Related parties ..................................................................
Deferred income and social contribution taxes ..................
Receivables from swap contracts .......................................
Other receivables...............................................................
—
24,512
—
—
638
—
31,186
1,191
—
136
40
34,101
45,733
2,457 156,172
38,643
—
180,401 159,804
—
79,294
74,578
546
12,256
8,001
—
5,212
3,124
46,629
—
—
887
23,447
12,118
—
—
27,569
1,086
5,081
5,804
Total current assets ....................................................
57,663
51,645 495,964 375,374
Noncurrent Assets
Related parties ..................................................................
Tax incentives ...................................................................
Escrow deposits.................................................................
Receivables from sale of shares .........................................
10,364
—
—
—
—
—
4,152
—
—
—
997
—
13,746
676
9,620
15,134
—
1,715
8,036
1,538
17,164
3,282
997
264
Total noncurrent assets ..............................................
10,364
5,149
40,891
31,281
Permanent Assets
Investments ....................................................................... 128,302
Property, plant and equipment ..........................................
—
Deferred exchange variation..............................................
—
96,859
—
—
Total permanent assets...............................................
Total Assets .............................................................................
128,302
2,809
5,925
257,823 265,811
—
3,795
96,859 260,632 275,531
196,329 153,653 797,487 682,186
The accompanying notes and Attachments are an integral part of these financial statements.
F-36
Company
2003
Consolidated
2002
2003
2002
Current Liabilities
Loans and financing ..........................................................
Domestic suppliers ............................................................
Foreign suppliers ...............................................................
Payroll and related charges................................................
Taxes payable ...................................................................
Debenture participation ....................................................
Dividends ..........................................................................
Interest on capital..............................................................
Reserve for losses on swap contracts .................................
Other payables ..................................................................
17,231
173
—
—
508
—
60,893
322
—
3,513
265
4
—
—
46
—
16,000
3,292
—
—
Total current liabilities ...............................................
82,640
19,607 465,539 288,613
Long-Term Liabilities
Debentures ........................................................................
Reserve for contingencies ..................................................
Related parties ..................................................................
Other payables ..................................................................
16,951
—
—
—
—
32,208
75,234 148,879
—
130,656 130,656
—
28,806
15,609
5,102
—
—
—
1,809
1,624
Total long-term liabilities ...........................................
16,951
37,310 236,505 296,768
Minority Interest ......................................................................
—
—
93,076 104,681
55,827
52,744
2,145
2,015
48,220
35,644
65,533
54,372
102,170
4,080
60,893
16,000
322
3,292
9,012
—
28,341
15,785
(17)
69
Shareholders’ Equity
Capital ..............................................................................
Capital reserves .................................................................
Profit reserves ...................................................................
86,950
5,348
4,440
86,950
562
9,224
86,950
5,348
3,162
86,950
562
9,224
Total shareholders’ equity ..........................................
96,738
96,736
95,460
96,736
Total Liabilities and Shareholders’ Equity ................................
196,329 153,653 797,487 682,186
F-37
STATEMENTS OF INCOME
(In thousands of Brazilian reais—R$, except for earnings per share)
Company
2003
2002
Consolidated
2003
2002
Gross sales to domestic market...............................................
Gross sales to foreign market .................................................
Other sales .............................................................................
—
—
1,904
—
—
3,345
Gross operating revenues........................................................
1,904
3,345 1,901,181 1,403,554
Taxes on sales, returns and rebates.........................................
Net operating revenues...........................................................
—
1,904
—
(584,239)
3,345 1,316,942
Cost of sales ...........................................................................
—
—
(458,064)
(345,021)
Gross profit............................................................................
1,904
3,345
858,878
638,398
(403,018)
(164,096)
(24,110)
(3,589)
—
(321,859)
(121,553)
(14,329)
(2,850)
—
Operating (expenses) income
Selling ....................................................................................
—
—
General and administrative.....................................................
(662)
(88)
Employee profit sharing .........................................................
—
—
Management compensation....................................................
—
—
Equity in subsidiaries.............................................................. 67,084 29,698
1,851,348 1,367,560
47,876
34,972
1,957
1,022
(420,135)
983,419
Income from operations before financial effects......................
Financial expenses ..................................................................
Financial income ....................................................................
68,326 32,955
(9,538) (5,250)
2,735
836
264,065
(75,807)
41,663
177,807
(140,627)
96,187
Income from operations .........................................................
61,523 28,541
229,921
133,367
Nonoperating income (expenses) ............................................
—
—
(869)
4,210
Income before debenture participation ................................... 61,523 28,541
Debenture participation..........................................................
—
—
229,052
(127,709)
137,577
(75,817)
Income before taxes on income .............................................. 61,523 28,541
Income and social contribution taxes...................................... (1,749)
393
101,343
(42,901)
61,760
(32,872)
Net income before minority interest ....................................... 59,774 28,934
Minority interest ....................................................................
—
—
58,442
54
28,888
46
Net income.............................................................................
58,496
28,934
Earnings per share—R$..........................................................
59,774 28,934
2.91
1.41
F-38
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002—COMPANY
Capital reserves
Company
Capital
Balances as of December 31,
2001 .................................. 29,319
Income tax incentives—
subsidiaries ........................
—
Capital increase:
Profits and reserves................
9,731
Subscription .......................... 47,900
Net income............................
—
Legal reserve .........................
—
Reserve for profit retention ...
—
Interest on capital..................
—
Dividends ..............................
—
Gain
on sale
of treasury
shares
488
—
(482)
—
—
—
—
—
—
Profit reserves
Investment
grants
Legal
2,708
5,864
—
840
—
—
—
(5,860)
—
—
1,447
—
—
—
—
—
—
—
7,773
—
—
556
1,451
7,773
556
(2,708)
—
—
—
—
—
—
Retention
2002 .................................. 86,950
Addition to dividends paid in
2002:
Dividends paid ......................
—
Dividends payable .................
—
Gain on sale of shares............
—
Net income............................
—
Legal reserve .........................
—
Dividends ..............................
—
—
—
4,786
—
—
—
—
—
—
—
—
—
—
—
—
—
2,989
—
(3,665)
(4,108)
—
—
—
—
2003 ..................................
4,792
556
4,440
—
86,950
6
Retained
earnings
Total
39,219
556
(681)
—
—
47,900
28,934 28,934
(1,447)
—
(7,773)
—
(3,873) (3,873)
(16,000) (16,000)
—
96,736
—
(3,665)
—
(4,108)
—
4,786
59,774 59,774
(2,989)
—
(56,785) (56,785)
—
96,738
F-39
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Company
2003
2002
Sources of funds
From operations:
Net income ......................................................................... 59,774 28,934
Depreciation and amortization ....................................
—
—
Monetary and exchange variations on long-term
items, net .................................................................
1,496
(281)
Provision for contingencies ..........................................
—
—
Other provisions..........................................................
—
—
Deferred income and social contribution taxes ............
—
—
Equity in subsidiaries................................................... (67,084) (29,698)
Net book value of property, plant and equipment
written off/sold ........................................................
—
—
Minority interest..........................................................
—
—
Consolidated
2003
2002
58,496
28,934
34,303
28,777
(7,455)
16,900
1,202
5,017
—
63,696
10,299
279
2,283
—
1,816
(54)
1,901
(46)
(5,814)
(1,045) 110,225 136,123
Interest on capital received.........................................................
Dividends received .....................................................................
From shareholders:
Capital contribution ...........................................................
From third parties:
Income tax incentives..........................................................
Transfer from noncurrent to current assets .........................
Increase in long-term liabilities ...........................................
Minority interest.................................................................
10,672
24,969
3,873
15,734
—
—
—
47,900
—
—
—
—
—
—
—
2,320
—
Total sources .............................................................................
29,827
68,782 136,464 206,746
Uses of funds
Additions to property, plant and equipment...............................
Increase in noncurrent assets......................................................
Decrease in long-term liabilities .................................................
Transfer from long-term to current liabilities .............................
Dividends proposed and paid.....................................................
Interest on capital ......................................................................
—
442
4,891
16,951
64,558
—
—
2,855
—
19,592
16,000
3,873
Total uses ..................................................................................
86,842
42,320 192,800 146,273
(Decrease) increase in working capital .......................................
(57,015)
Represented by
Increase in current assets............................................................
Increase in current liabilities.......................................................
6,018
63,033
(Decrease) increase in working capital .......................................
(57,015)
26,462
—
1,076
25,023
140
25,014
10,045
—
93,183
64,558
—
(56,336)
47,900
556
6,414
15,410
343
26,371
8,241
—
91,788
16,000
3,873
60,473
45,900 120,590
19,438 176,926
98,864
38,391
26,462
60,473
(56,336)
F-40
—
—
Attachment I
STATEMENTS OF CASH FLOWS
Operating activities
Net income .............................................................................................................
Depreciation and amortization ........................................................................
Monetary and exchange variations, net............................................................
(Gain) loss on swap contracts ..........................................................................
Provision for contingencies ..............................................................................
Other provisions ..............................................................................................
Subsidiaries’ unrealized profit ..........................................................................
Deferred income and social contribution taxes.................................................
Net book value of property, plant and equipment written off/sold...................
Debenture participation ...................................................................................
Minority interest..............................................................................................
Consolidated
2003
2002
58,496
28,934
34,303
(3,166)
36,581
16,900
3,648
1,278
(3,785)
1,816
102,170
(54)
28,777
96,806
(52,629)
10,299
6,113
—
3,521
1,901
60,654
(46)
248,187
184,330
(22,034)
(6,583)
(13,340)
(35,652)
(24,994)
(8,489)
2,947
10,488
6,307
7,947
14,339
3,845
8,748
8,803
Net cash provided by operating activities ................................................................
233,919
150,930
Investing activities
Additions to property, plant and equipment............................................................
(25,014)
(26,371)
Net cash used in investing activities ........................................................................
(25,014)
(26,371)
Financing activities
Decrease in current and long-term loans .................................................................
Payment of dividends ..............................................................................................
Payment of interest on capital .................................................................................
Debenture participation ..........................................................................................
(79,958) (103,801)
(16,000)
—
(2,970)
—
(4,080)
—
Net cash used in financing activities........................................................................
(103,008) (103,801)
Increase in assets:
Accounts receivable .........................................................................................
Inventories.......................................................................................................
Other receivables .............................................................................................
Increase in liabilities:
Suppliers..........................................................................................................
Payroll and related charges ..............................................................................
Taxes payable ..................................................................................................
Other payables ................................................................................................
Net increase in cash and cash equivalents ...............................................................
105,897
20,758
Balance at beginning of year ...................................................................................
Balance at end of year .............................................................................................
84,376
190,273
63,618
84,376
Change in cash and cash equivalents.......................................................................
105,897
20,758
*****
F-41
Attachment II
STATEMENTS OF VALUE ADDED
Consolidated
Revenues ..........................................................................................
2003
2002
1,868,699
1,381,953
Sales of goods, products and services................................................ 1,895,897
Allowance for doubtful accounts—recognition.................................
(26,329)
Nonoperating...................................................................................
(869)
Inputs purchased from third parties..................................................
(904,984)
1,399,007
(21,264)
4,210
(637,555)
Cost of sales and services .................................................................
Materials, energy, outside services and other....................................
(555,415)
(349,569)
(389,758)
(247,797)
Gross value added ............................................................................
Retentions ........................................................................................
963,715
(34,303)
744,398
(28,777)
Depreciation and amortization .........................................................
(34,303)
(28,777)
Value added generated by the company............................................
Value added received in transfer.......................................................
929,412
41,663
715,621
96,187
Financial income ..............................................................................
41,663
96,187
Total value added to be distributed ..................................................
971,075
811,808
Distribution of value added ..............................................................
Payroll and related charges...............................................................
Taxes and contributions ...................................................................
Financial expenses and rents.............................................................
Net income.......................................................................................
Minority interest ..............................................................................
(971,075) 100% (811,808) 100%
(195,645) 20% (171,255) 21%
(511,100) 53% (388,915) 48%
(78,179)
8% (146,933) 18%
(127,709) 13% (75,817)
9%
(58,496)
6% (28,934)
4%
54 —
46 —
Additional information on the statements of value added:
Of the amounts recorded under “Taxes and contributions” in 2003 and 2002, the amounts of
R$224,160 and R$159,561, respectively, refer to ICMS (State VAT) under the taxpayers’ substitution
regime levied on the estimated profit margin defined by the State Finance Secretariats obtained from sales
made by Natura beauty Consultants to final consumers.
In order to analyze this tax impact on the statement of value added, these amounts should be deducted
from the amounts recorded under “Sales of goods, products and services” and “Taxes and
contributions”, since sales revenue does not include the estimated profit attributable to Natura beauty
Consultants upon the sale of products.
*****
F-42
NOTES TO THE FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian reais—R$, unless otherwise indicated)
1. Operations
The Company holds equity interest in other companies. The subsidiaries are engaged in the production,
sale, import and export of cosmetics, perfumery in general and hygiene and health products, and hold
equity interests in other companies in Brazil and abroad.
The accompanying financial statements have been prepared in accordance with Brazilian accounting
practices and standards established by the Brazilian Securities Commission (CVM). Certain balances in
the financial statements for the year ended December 31, 2002, presented for comparative purposes,
have been reclassified for comparability with the financial statements for the year ended December 31,
2003.
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, to be held to
maturity, stated at cost plus income earned to the balance sheet dates.
c)
Recognized based on an analysis of risks on realization of receivables, in an amount considered sufficient
to cover possible losses.
d)
Inventories
Stated at average cost of acquisition or production, adjusted to market value, when applicable.
e)
Investments
Investments in subsidiaries are accounted for under the equity method, plus goodwill on acquisition of
investments, as shown in Note 12.
f)
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 13.
F-43
NOTES TO THE FINANCIAL STATEMENTS — (CONTINUED)
g)
10,305/01. Deferred amounts are stated in Note 14.
h)
Stated at amounts payable plus, if applicable, interest, monetary and exchange variations incurred to the
balance sheet dates.
i)
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 noncurrent 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 estimated realizable values, as detailed in Note 10.
j)
Loans and financing
Adjusted based on exchange variations and interest incurred to the balance sheet dates, as provided for
by contract and mentioned in Note 15.
k)
Adjusted to the balance sheet dates based on the probable loss amount, according to the nature of each
contingency. The fundamentals and the nature of reserves are described in Note 17.
l)
Swap transactions
The nominal values of swap 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 21.
m)
Represented by interest and monetary and exchange variations on temporary cash investments, loans and
financing.
n)
Interest on capital
financial statement purposes, interest on capital is presented as a distribution of profits in the statements
F-44
o)
Earnings per share
Calculated based on the number of shares at the balance sheet date.
p)
Supplementary information
In order to permit additional analyses, the Company is presenting, as supplementary information,
consolidated statements of cash flows and value added.
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—%
2003
2002
Direct:
Natura Cosméticos S.A. .........................................................................................
99.99
99.99
Natura Inovação e Tecnologia de Produtos Ltda....................................................
99.99
99.99
Indirect:
Indústria e Comércio de Cosméticos Natura Ltda. .................................................
99.99
99.99
99.99
99.99
Natura Cosméticos S.A.—Chile .............................................................................
99.97
99.97
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. ..............................................................................
99.43
99.43
were proportionately eliminated against shareholders’ equity and net income of the respective
subsidiaries. Intercompany balances and transactions and unrealized profit 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.
The Company’s shareholders’ equity and net income as of December 31, 2003 differ by R$1,278 from
those amounts stated in the consolidated financial statements, due to the elimination of subsidiaries’
unrealized profit.
F-45
5. Temporary cash investments
Company
2003
2002
Bank CDs......................................................................................... 13,885 2,457
Investment funds .............................................................................. 10,627
—
Consolidated
2003
2002
87,922 23,641
68,250 15,002
24,512 2,457 156,172 38,643
As of December 31, 2003, bank CDs are remunerated at rates ranging from 100% to 101.5% of the CDI
(interbank deposit rate) (100% to 104% in 2002). Investment funds are remunerated at rates ranging
from 100% to 106% of the CDI (100% to 101% in 2002).
Consolidated
2003
2002
Allowance for return of goods...................................................................................
(344)
(220)
180,401 159,804
7. Inventories
Consolidated
2003
2002
Finished products ......................................................................................................
Raw materials and packaging....................................................................................
Work in process ........................................................................................................
Promotional material ................................................................................................
Imports in transit ......................................................................................................
Reserve for losses ......................................................................................................
35,163
42,486
5,931
2,239
864
(7,389)
38,369
33,757
6,585
2,467
200
(6,800)
79,294
74,578
Social contribution tax .............................................................
IRPJ (corporate income tax) .....................................................
IPI (Federal VAT) .....................................................................
ICMS (State VAT) ....................................................................
Other .......................................................................................
F-46
Company
2003
2002
Consolidated
2003
2002
—
638
—
—
—
—
524
—
—
22
1,056
5,917
1,063
1,827
2,393
578
3,407
400
1,903
1,713
638
546
12,256
8,001
9. Tax incentives
Consolidated
2003
2002
Tax incentives ...........................................................................................................
Reserve for losses ......................................................................................................
3,280
(2,604)
676
4,928
(3,390)
1,538
a)
Deferred
Deferred income and social contribution taxes recorded in the financial statements result from temporary
differences and tax loss carryforwards (Company and consolidated). These credits are recorded in
current and noncurrent assets, in view of their expected realization based on projections of future taxable
income, considering the limit of 30% for annual taxable income offset by tax loss carryforwards,
pursuant to the applicable legislation. The amounts are as follows:
Company
2003
2002
Consolidated
2003
2002
Current:
Tax loss carryforwards......................................................
Reserve for inventory losses .......................................
Allowance for doubtful accounts................................
Reserve for losses on swap contracts ..........................
Other .........................................................................
—
887
6,469
887
—
—
—
1,191
—
—
—
—
2,512
5,169
3,064
6,233
2,312
3,608
—
5,311
Deferred income and social contribution tax credits ..........
1,191
887
23,447
12,118
—
—
—
12,673
—
—
—
—
8,706
914
4,491
—
—
—
9,620
17,164
Noncurrent:
Tax loss carryforwards......................................................
Reserve for contingencies ...........................................
Other .........................................................................
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 noncurrent assets will be realized as follows:
2005 ..............................................................................................................................................
2006 ..............................................................................................................................................
2007 ..............................................................................................................................................
2008 ..............................................................................................................................................
5,270
1,362
1,156
1,832
9,620
F-47
b)
Current expense
Company
2003
2002
Consolidated
2003
2002
Income before taxes on income ................................................
Income and social contribution taxes at the rate of 34% ..........
Equity in subsidiaries................................................................
Loss generated by subsidiaries ..................................................
Deferral of exchange variation .................................................
Interest on capital.....................................................................
Other .......................................................................................
61,523
(20,918)
22,809
—
—
(3,629)
(11)
28,541 101,343 61,760
(9,704) (34,457) (20,998)
10,097
—
—
—
(7,005) (6,670)
—
(1,290) (2,585)
—
—
—
—
(149) (2,619)
Income and social contribution taxes in income .......................
(1,749)
393
(42,901) (32,872)
Current income and social contribution taxes...........................
Deferred income and social contribution taxes .........................
(2,053)
304
—
393
(46,686) (29,351)
3,785
(3,521)
(1,749)
393
(42,901) (32,872)
11. Related parties
Receivables from and payables to subsidiaries and affiliates are as follows:
Company
2003
2002
Current assets:
Natura Cosméticos S.A. .....................................................
815 31,213
Dividends receivable:
Natura Cosméticos S.A. ..................................................... 20,000
5,435
Natura Inovação e Tecnologia de Produtos Ltda................
1,300
6,689
Interest on capital receivable:
530
—
Natura Cosméticos S.A. .....................................................
8,541
3,292
31,186 46,629
Noncurrent assets:
Loan agreements:
Natura Participações S.A. ..................................................
Consolidated
2003
2002
—
—
—
—
—
—
—
—
—
—
—
—
10,364
4,152 13,746
8,036
10,364
4,152 13,746
8,036
Dividends payable:
Natura Participações S.A. .................................................. 60,893 16,000 60,893 16,000
Interest on capital payable:
Natura Participações S.A. ..................................................
322
3,292
322
3,292
61,215 19,292 61,215 19,292
F-48
Loan agreements:
Natura Logística e Serviços Ltda. .......................................
Company
2003
2002
Consolidated
2003
2002
—
—
1,600
3,502
—
—
—
—
—
5,102
—
—
Product sales
2003
2002
Product purchases
2003
2002
Natura Cosméticos S.A. ...........................................................
—
—
765,789 555,228
Indústria e Comércio de Cosméticos Natura Ltda. ................... 783,541 565,580
—
—
Natura Inovação e Tecnologia de Produtos Ltda. .....................
—
—
390
346
Flora Medicinal JMS Ltda. .......................................................
—
—
368
774
Natura Cosméticos S.A.—Chile................................................
—
—
2,803
1,874
Natura Cosméticos S.A.—Peru.................................................
—
—
4,899
2,587
Natura Cosméticos S.A.—Argentina.........................................
—
—
9,292
4,771
783,541 565,580 783,541 565,580
Service sales
2003
2002
Natura Empreendimentos S.A. .................................................
Indústria e Comércio de Cosméticos Natura Ltda. ...................
Natura Logística e Serviços Ltda. .............................................
1,904
—
—
—
87,043
52,247
Service purchases
2003
2002
3,345
—
—
—
114,732 106,805
—
17,872
15,748
—
30
—
74,283
10
6
52,212
8,550
7,281
141,194 129,840 141,194 129,840
Related-party transactions are carried out under usual market prices and conditions. These transactions
refer mainly to commercial operations, services, and intercompany loans.
F-49
12. Investments
Investments are represented by:
Company
2003
2002
Consolidated
2003
2002
Investments in subsidiaries ............................................................... 128,302 96,859
Goodwill on acquisition of investment.............................................
—
—
Amortization of goodwill.................................................................
—
—
Other investments............................................................................
—
—
128,302 96,859
—
—
8,015 8,015
(5,206) (2,404)
—
314
2,809
5,925
The goodwill on the acquisition made by the indirect subsidiary Nova Flora Participações Ltda. is
supported by an appraisal report issued by independent appraisers, based on expectation of future
profitability which, as of December 31, 2003, was reviewed by management based on new projections of
future results, also supported by an appraisal report issued by independent appraisers, and is being
amortized over ten years. Due to this review of projections of future results, the Company recorded an
additional R$2,001 to supplement the amount of R$801 amortized in 2003.
Investments in direct subsidiaries are as follows:
Natura
Cosméticos
S.A.
Shares of subsidiaries ..........................................................................
Number of shares held ........................................................................
Ownership interest ..............................................................................
Shareholders’ equity of subsidiaries .....................................................
Share in shareholders’ equity ...............................................................
Net income of subsidiaries...................................................................
35,955
35,951
99.99%
122,616
122,604
65,162
Natura
Inovação e
Tecnologia
de Produtos
Ltda.
Total
5,008
—
5,007
—
99.99%
—
5,699
128,315
5,698
128,302
1,924
67,086
Book value of Company investment:
Balances as of December 31, 2002 ......................................................
Equity in subsidiaries ..........................................................................
Additional dividends paid....................................................................
Dividends payable ...............................................................................
Interest on capital payable...................................................................
91,162
65,160
(3,669)
(20,000)
(10,049)
5,697
1,924
—
(1,300)
(623)
96,859
67,084
(3,669)
(21,300)
(10,672)
122,604
5,698
128,302
F-50
Composed as follows:
Annual
depreciation
rate—%
Buildings..............................................................................................
Installations .........................................................................................
Machinery and equipment ...................................................................
Vehicles ...............................................................................................
Molds ..................................................................................................
Furniture and fixtures ..........................................................................
IT equipment .......................................................................................
Leasehold improvements......................................................................
Software licenses..................................................................................
Land ....................................................................................................
Advances to suppliers ..........................................................................
Other...................................................................................................
Accumulated depreciation/amortization...............................................
4
10
10
20
20
10
20
12
20
—
—
—
Consolidated
2003
2002
126,925 126,832
62,809
58,940
68,663
63,618
15,747
10,682
21,084
17,761
12,396
11,528
26,354
25,397
571
211
9,021
6,284
15,910
15,910
1,534
1,617
5,147
6,722
366,161 345,502
(108,338) (79,691)
257,823 265,811
Based on CVM Resolution No. 409/01 and Law No. 10,305/01, the Company elected to defer net
exchange losses incurred as a result of the adjustment of assets and liabilities denominated in foreign
currency for the year ended December 31, 2001, as follows:
Consolidated
2003
2002
Deferred exchange variation ....................................................................................... 18,491 18,491
Accumulated amortization .......................................................................................... (18,491) (14,696)
—
3,795
F-51
Type
Import financing ...........................
Company
2003
2002
—
—
BNDES (Brazilian Bank for...........
—
—
Economic and Social
Development)
BNDES.......................................... 34,182 32,473
Consolidated
2003
2002
—
1,269
76,476
BNDES-FINAME (Government ....
BNDES-Poc...................................
—
—
2,852
—
—
2,009
ACE (Advances on Export ............
Contracts)
—
—
742
FINEP (Agency for the Financing..
of Studies and Projects)
Secured account ............................
—
—
25,973
—
—
Bank loans and financing ..............
—
—
—
Charges
6,452 Interest of 7.2% per year +
exchange variation
TJLP (long-term interest
rate)
58,364 Interest of 4% per year +
TJLP
TJLP
TJLP
exchange variation
16,881 Interest of 3% per year +
TJLP
397 Interest of 105% of CDI
58,989 144,561 Interest of 7.6% per year +
exchange variation
Guarantee
S.A.
Chattel mortgage and
S.A.
bank guarantee
S.A.
S.A.
Promissory notes and
S.A.
S.A.
S.A.
Promissory notes and
S.A.
Total ............................................. 34,182 32,473 168,310 253,560
Current ......................................... 17,231
265
93,076 104,681
Long term ..................................... 16,951 32,208
75,234 148,879
Consolidated
2003
2002
2004 ...........................................................................................................................
—
2005 ........................................................................................................................... 26,190
2006 ........................................................................................................................... 35,022
2007 and thereafter ..................................................................................................... 14,022
87,134
34,310
27,435
—
75,234 148,879
Financing in local currency from BNDES is guaranteed mainly by the Itapecerica da Serra and Cajamar
units.
The subsidiary Natura Inovação e Tecnologia de Produtos Ltda. signed a loan agreement with the
Agency for Financing of Studies and Projects (FINEP) on December 3, 2001, in the amount of R$39,153,
with a grace period of 36 months for the payment of principal. Amounts released in 2002 and 2003 were
R$16,309 and R$7,978, respectively. The funds are being used in the development of new products in
the biodiversity field.
F-52
Other bank loans and financing in the amount of R$58,989 (R$144,561 in 2002) refer to short-term
credit lines, substantially for maintenance of the subsidiaries’ working capital.
Certain loans and financing agreements provide for the maintenance of financial ratios.
16. Taxes payable
Company
2003 2002
ICMS (State VAT) .....................................................................................
COFINS (tax on revenue)..........................................................................
PIS (tax on revenue) ..................................................................................
IRPJ and CSLL ..........................................................................................
IRRF (withholding income tax) .................................................................
Other ........................................................................................................
Consolidated
2003
2002
—
344
164
—
—
—
—
29
17
—
—
—
34,009 27,513
6,677
5,153
1,614
1,318
1,014
5,887
20,890 14,437
1,329
64
508
46
65,533 54,372
A significant portion of the balances recorded under “Withholding income tax” refers to income tax
withheld on debenture participation in 2003 and 2002.
17. Reserve for contingencies
The subsidiaries are parties to labor, tax and civil lawsuits involving contingent liabilities. These lawsuits
are at administrative or judicial levels.
Reserves for contingencies are recognized by management based on the opinion of legal counsel, at
amounts restated according to estimates of probable losses.
Consolidated
2003
2002
Labor ............................................................................................................................
Civil ..............................................................................................................................
Tax ...............................................................................................................................
2,822
1,173
2,465
671
23,519 13,765
28,806 15,609
The Company and its subsidiaries are parties to other labor, civil and tax lawsuits, for which the chance
of loss is considered possible but not probable by management and legal counsel. The amounts involved
in these lawsuits as of December 31, 2003 are as follows: tax—R$10,950, civil—R$3,270, and labor—
R$6,889 (R$7,741, R$4,008 and R$5,055, respectively, as of December 31, 2002).
F-53
a)
Labor/civil lawsuits
The subsidiaries are parties to 168 labor lawsuits filed by former employees and third parties (107 in
2002) claiming the payment of severance amounts, salary premiums and overtime, as well as 157 civil
lawsuits (108 in 2002), mostly related to indemnity claims.
b)
Tax lawsuits
Refer mainly to tax assessment notices and judicial claims contesting certain federal and state taxes.
Escrow deposits for tax lawsuits amounted to R$14,265 as of December 31, 2003 (R$2,852 in 2002).
The subsidiaries pay profit sharing to their employees, based on the achievement of operating targets and
specific goals established and approved at the beginning of each year. As of December 31, 2003, the
amount payable as profit sharing was R$24,110 (R$14,329 in 2002), recorded under “Payroll and
related charges” in the consolidated balance sheet.
19. Debentures
Consolidated
2003
2002
102,170
130,656 130,656
4,080
The Extraordinary Shareholders’ Meeting on April 14, 1998 authorized the issuance of 140,000,000
predetermined maturity date. From 1998 to 2002, 130,656,000 debentures were subscribed, totaling
R$130,656.
The debentures entitle their holders to a participation corresponding to the proportion of debentures
issued of up to 70% of income before provision for income tax as of March 31, June 30, September 30
and December 31 of each year.
Starting in 2002, the method of calculating debenture participation is represented by the share of
debentures in the issuer’s income before provision for income tax as of June 30 and December 31 of each
year.
a)
Capital
On December 30, 2002, the shareholder Natura Participações S.A. made a capital contribution with
receivables from the subsidiary Natura Cosméticos S.A. in the amount of R$47,900.
F-54
Capital as of December 31, 2003 is R$86,950. Subscribed and paid-up capital is represented by
20,550,000 common shares without par value.
b)
Distribution of dividends
The bylaws provide for a minimum dividend equivalent to 25% of net income for the year. Proposed
dividends for 2003, which will be submitted by the Board of Directors for the approval of shareholders
at the annual meeting, in the amount of R$60,893, meet the statutorily guaranteed rights.
Dividends were calculated as shown below:
Company
2003
2002
Net income....................................................................................................................
Legal reserve .................................................................................................................
59,774 28,934
(2,989) (1,447)
Calculation basis for minimum dividends......................................................................
56,785 27,487
Mandatory minimum dividends (25%) ......................................................................... 14,196
6,872
Additional dividends .....................................................................................................
4,108
—
Dividends for the year ................................................................................................... 56,785 16,000
Proposed dividends ....................................................................................................... 60,893 16,000
Dividends per share.......................................................................................................
2.96
0.78
Amount exceeding mandatory minimum dividend......................................................... 46,697
9,128
c)
Premium on sale of treasury shares
As of December 31, 2003, the Company’s management, together with the parent company Natura
Participações S.A., approved the settlement of part of the balance related to the sale of the Company’s
shares to the parent company in the amount of R$5,353, which as of that date was recorded under
“Related parties” in noncurrent assets. With the settlement made by the parent company of the
aforementioned amount, in February 2004, the amount of R$4,786, corresponding to the premium on
sale of shares, was recorded in shareholders’ equity under “Capital reserves.”
d)
As of December 31, 2002, this reserve was recorded in accordance with article 196 of Law No. 6,404/76.
2003
Consolidated
Book
Market
value
value
Cash and banks.........................................................................................................
34,101
34,101
Temporary cash investments ..................................................................................... 156,172 156,172
Payables—swap transactions .....................................................................................
9,012
7,045
Loans and financing .................................................................................................. 168,310 168,310
Debentures ................................................................................................................ 130,656 130,656
Debenture participation ............................................................................................ 102,170 102,170
F-55
a)
General conditions
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 return rates, since the companies intend to
hold these investments to redemption. These investments reflect the market conditions at the balance
sheet dates.
b)
Exchange risk
The subsidiaries entered into swap transactions to hedge against exchange variation on their liabilities
resulting from financing agreements.
As of December 31, 2003 and 2002, the subsidiaries had swap transactions with financial institutions in
the amounts of R$65,558 (US$22,691,000) and R$180,218 (US$51,006,000), respectively. These
transactions generated losses and gains of R$9,012 and R$27,569, which were recorded in current
liabilities and current assets, respectively. The exchange risk is substantially indexed to the U.S. dollar.
The Company and its subsidiaries do not have derivative financial instruments.
c)
Interest rate risk
the financing agreements entered into with BNDES and FINEP.
d)
Fair values
As of December 31, 2002, the estimated fair values of financial instruments for assets and liabilities
approximate the amounts recorded in the financial statements.
22. Insurance
The Company has insurance coverage in amounts considered by management sufficient to cover possible
risks on its assets and/or responsibilities.
23.
Subsequent events
The Extraordinary Shareholders’ Meeting held on March 5, 2004 approved the merger of the Company’s
net assets into Natura Cosméticos S.A., based on the accounting valuation supported by a valuation
report issued by independent experts.
F-56
INDEPENDENT AUDITORS’ REPORT
São Paulo—SP
1.
We have audited the accompanying individual (Company) and consolidated balance sheets of
Natura Empreendimentos S.A. and subsidiaries as of December 31, 2002, and the related statements
of income, changes in shareholders’ equity, and changes in financial position for the year 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 audit was 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.
As described in Note 16, based on CVM (Brazilian Securities Commission) Resolution No. 409/01
and Law No. 10,305, of November 7, 2001, the Company elected to defer the exchange variation.
Brazilian accounting practices require that the effects of exchange variations be recognized in income
for the period in which they were incurred. Accordingly, income for the year ended December 31,
2002 is understated by R$7,602,000.
4.
In our opinion, except for the effect of the matter mentioned in paragraph 3, the financial statements
referred to in paragraph 1 present fairly, in all material respects, the individual and consolidated
financial positions of Natura Empreendimentos S.A. and subsidiaries as of December 31, 2002, and
the results of their operations, the changes in shareholders’ equity, and the changes in their financial
positions for the year then ended in conformity with Brazilian accounting practices.
5.
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 permitting additional analyses
and is not a required part of the basic financial statements. This supplementary information was
audited by us in accordance with the auditing procedures mentioned in paragraph 2 and, in our
opinion, is fairly presented, in all material respects, in relation to the basic financial statements taken
as a whole.
6.
The financial statements for the year ended December 31, 2001, presented for comparative
purposes, were audited by other independent auditors whose report thereon, dated February 22,
2002, contained a qualification as to the deferral of exchange loss as permitted by CVM Resolution
No. 409/01 and Law No. 10,305/01. As of December 31, 2001, assets and shareholders’ equity were
overstated by R$11,397,000, and net loss was understated by the same amount.
7.
The accompanying financial statements have been translated into English for the convenience of
readers outside Brazil.
São Paulo, February 11, 2004
/s/ DELOITTE TOUCHE TOHMATSU
/s/ EDIMAR FACCO
Edimar Facco
Engagement Partner
F-57
Company
2002
2001
Consolidated
2002
2001
ASSETS
Current assets
Cash and banks...................................................................
Temporary cash investments ...............................................
Trade accounts receivable ...................................................
Inventories ..........................................................................
Recoverable taxes................................................................
Advances to employees........................................................
Related parties ....................................................................
Deferred income and social contribution taxes ....................
Receivables from shareholders ............................................
Receivables from swap contracts .........................................
Other receivables.................................................................
40
2,457
—
—
546
—
46,629
887
—
—
1,086
1
45,733
28,738
—
38,643
34,880
—
159,804 128,160
—
74,578
54,552
946
8,001
5,953
—
3,124
3,009
—
—
—
494
12,118
11,514
3,910
—
4,222
—
27,569
—
394
5,804
5,482
Total current assets ......................................................
51,645
5,745 375,374 276,510
Noncurrent assets
Related parties ....................................................................
Tax incentives .....................................................................
Deferred income and social contribution taxes ....................
Escrow deposits...................................................................
Receivables from sale of shares ...........................................
Other receivables.................................................................
4,152
—
—
—
997
—
1,256
—
—
—
772
—
8,036
1,538
17,164
3,282
997
264
5,814
1,371
21,289
485
772
324
Total noncurrent assets ................................................
5,149
2,028
31,281
30,055
Permanent assets
Investments .........................................................................
Property, plant and equipment ............................................
Deferred exchange variation................................................
96,859 86,212
—
—
—
—
5,925
6,883
265,811 269,010
3,795
11,397
Total permanent assets.................................................
96,859 86,212 275,531 287,290
Total assets ................................................................................
153,653 93,985 682,186 593,855
F-58
Company
2002
2001
Consolidated
2002
2001
Current liabilities
Loans and financing ............................................................
Domestic suppliers ..............................................................
Foreign suppliers .................................................................
Payroll and related charges..................................................
Taxes payable .....................................................................
Debenture participation ......................................................
Dividends ............................................................................
Related parties ....................................................................
Other payables ....................................................................
265
4
—
—
46
—
16,000
3,292
—
115 104,681 103,226
2
52,744
37,648
—
2,015
3,208
—
35,644
31,566
27
54,372
34,680
—
4,080
—
—
16,000
—
—
3,292
—
25
15,785
34,884
Total current liabilities.................................................
19,607
169 288,613 245,212
Loans and financing ............................................................
Debentures ..........................................................................
Reserve for contingencies ....................................................
Related parties ....................................................................
Taxes payable .....................................................................
Other payables ....................................................................
32,208 31,056 148,879 165,269
—
— 130,659 130,659
—
—
15,609
5,011
5,102 23,541
—
—
—
—
—
6,697
—
—
1,621
2,016
Total long-term liabilities .............................................
37,310 54,597 296,768 309,652
—
—
69
(228)
Capital ................................................................................
Capital reserves ...................................................................
Profit reserves .....................................................................
Retained earnings................................................................
86,950 29,319
562
3,196
9,224
5,864
—
840
86,950
562
9,224
—
29,319
3,196
5,864
840
Total shareholders’ equity ............................................
96,736 39,219
96,736
39,219
Total liabilities and shareholders’ equity ....................................
153,653 93,985 682,186 593,855
F-59
(In thousands of Brazilian reais—R$, except for per share data)
Company
2002
2001
Consolidated
2002
2001
Gross sales to domestic market .............................................
Gross sales to foreign market ................................................
Other sales ............................................................................
—
—
3,345
—
—
—
1,367,560 1,143,653
34,972
28,710
1,022
261
Gross operating revenues ......................................................
3,345
—
1,403,554 1,172,624
Taxes on sales, returns and rebates .......................................
Net operating revenues..........................................................
—
3,345
—
—
(420,135)
983,419
(359,519)
813,105
Cost of sales..........................................................................
—
—
(345,021)
(293,046)
Gross profit...........................................................................
3,345
—
638,398
520,059
(321,859)
(121,553)
(14,329)
(2,850)
—
(274,966)
(120,375)
(14,098)
(2,156)
—
177,807
108,464
(140,627)
96,187
(121,203)
48,736
133,367
35,997
4,210
1,127
Selling ...................................................................................
—
—
General and administrative ...................................................
(88)
(237)
Employee profit sharing ........................................................
—
—
Management compensation...................................................
—
—
Equity in subsidiaries ............................................................ 29,698 (14,025)
Income (loss) from operations before financial effects ...........
32,955 (14,262)
Financial expenses.................................................................
Financial income ...................................................................
(5,250)
836
Income (loss) from operations ...............................................
28,541 (15,104)
Nonoperating income............................................................
—
(3,145)
2,303
—
Income (loss) before debenture participation ......................... 28,541 (15,104)
Debenture participation ........................................................
—
—
137,577
(75,817)
37,124
(42,252)
Income (loss) before taxes on income .................................... 28,541 (15,104)
Income and social contribution taxes ....................................
393
367
61,760
(32,872)
(5,128)
(9,871)
Income (loss) before minority interest ................................... 28,934 (14,737)
Minority interest ...................................................................
—
—
28,888
46
(14,999)
262
Net income (loss) ..................................................................
28,934
(14,737)
Earnings (loss) per share—R$ ...............................................
28,934 (14,737)
1.41
(1.34)
F-60
Company
Capital
2000 ....................................... 29,319
subsidiaries..............................
—
Receivables from shareholders ....
—
Net loss ......................................
—
2001 ....................................... 29,319
subsidiaries..............................
—
Capital increase:
Profits and reserves..............
9,731
Subscription......................... 47,900
Net income .................................
—
Legal reserve ...............................
—
Reserve for profit retention.........
—
Interest on capital .......................
—
Dividends payable.......................
—
2002 .......................................
86,950
Capital reserves
Gain on
sale of
treasury Investment
shares
grants
7,198
—
(6,710)
—
488
—
(482)
—
—
—
—
—
—
6
1,726
982
—
—
2,708
556
(2,708)
—
—
—
—
—
—
556
Profit reserves
Legal
Retention
Retained
earnings
Total
15,577
59,684
5,864
—
—
—
—
—
—
—
5,864
—
840
—
—
—
(5,860)
—
—
1,447
—
—
—
—
—
—
—
7,773
—
—
1,451
7,773
—
982
—
(6,710)
(14,737) (14,737)
39,219
556
(681)
—
—
47,900
28,934 28,934
(1,447)
—
(7,773)
—
(3,873) (3,873)
(16,000) (16,000)
—
96,736
F-61
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Company
2002
2001
Sources of funds
From operations:
Net income (loss) ................................................................ 28,934 (14,737)
Depreciation and amortization ....................................
—
—
Monetary and exchange variations on long-term
items, net .................................................................
(281)
878
Provision for contingencies ..........................................
—
—
Other provisions..........................................................
—
—
Deferred income and social contribution taxes ............
—
—
Equity in subsidiaries................................................... (29,698) 14,025
Net book value of property, plant and equipment
written off/sold ........................................................
—
—
Minority interest..........................................................
—
—
(1,045)
Consolidated
2002
2001
28,934
(14,737)
28,777
25,111
63,696
10,299
279
2,283
—
(7,763)
—
550
(15,026)
—
1,901
(46)
166 136,123
—
—
3,109
(262)
(9,018)
Interest on capital received ..........................................
Dividends received from subsidiary..............................
From shareholders:
Capital contribution ...........................................................
From third parties:
Subscription of debentures..................................................
Income tax incentives..........................................................
Transfer from noncurrent to current assets .........................
Increase in long-term liabilities ...........................................
Minority interest.................................................................
3,873
15,734
—
3,000
47,900
—
47,900
—
—
—
2,320
—
—
—
—
778
—
—
1,858
556
982
6,414
3,730
15,410 143,230
343
28
Total sources .............................................................................
68,782
Uses of funds
Increase in investments...............................................................
Additions to property, plant and equipment...............................
Increase in noncurrent assets......................................................
Transfer from long-term to current liabilities .............................
Dividends payable......................................................................
Interest on capital ......................................................................
—
—
2,855
19,592
16,000
3,873
18,617
—
1,231
—
—
—
Total uses ..................................................................................
42,320
19,848 146,273 114,362
Increase (decrease) in working capital ........................................
26,462 (15,904)
60,473
26,448
Represented by
Increase (decrease) in current assets ...........................................
Increase (decrease) in current liabilities ......................................
45,900 (16,737)
19,438
(833)
98,864
38,391
20,363
(6,085)
Increase (decrease) in working capital ........................................
26,462 (15,904)
60,473
26,448
—
3,944 206,746 140,810
—
26,371
8,241
91,788
16,000
3,873
F-62
—
—
—
38,755
2,219
73,388
—
—
Attachment I
STATEMENTS OF CASH FLOWS
Consolidated
2002
2001
Operating Activities
Net income (loss) .....................................................................................................
Depreciation and amortization..........................................................................
Monetary and exchange variations, net.............................................................
(Gain) loss on swap contracts ...........................................................................
Provision for contingencies ...............................................................................
Other provisions ...............................................................................................
Deferred income and social contribution taxes..................................................
Net book value of property, plant and equipment written off/sold ....................
Debenture participation ....................................................................................
Minority interest ...............................................................................................
28,934
28,777
25,111
96,806
(7,763)
(52,629) 25,873
10,299
245
6,113
2,403
3,521 (18,136)
1,901
3,109
60,654
33,802
(46)
(262)
184,330
(Increase) decrease in assets:
Accounts receivable...........................................................................................
Inventories ........................................................................................................
Other receivables ..............................................................................................
Increase (decrease) in liabilities:
Suppliers ...........................................................................................................
Payroll and related charges ...............................................................................
Taxes payable ...................................................................................................
Other payables..................................................................................................
(14,737)
49,645
(35,652) (15,793)
(24,994) 21,888
(8,489)
4,655
14,339
3,845
8,748
8,803
1,182
11,259
25,026
2,267
Net Cash Provided by Operating Activities ..............................................................
150,930 100,129
Investing Activities
Additions to property, plant and equipment.............................................................
(26,371) (38,755)
Net Cash Used in Investing Activities.......................................................................
(26,371) (38,755)
Financing Activities
(Decrease) increase in current and long-term loans................................................... (103,801) 18,811
Debenture participation ...........................................................................................
—
(29,994)
Net Cash Used in Financing Activities......................................................................
(103,801) (11,183)
Net Increase in Cash and Cash Equivalents ..............................................................
20,758
50,191
Balance at beginning of year.....................................................................................
Balance at end of year ..............................................................................................
63,618
84,376
13,427
63,618
Change in Cash and Cash Equivalents .....................................................................
20,758
50,191
*****
F-63
Attachment II
STATEMENTS OF VALUE ADDED
Consolidated
Revenues ..........................................................................................
2002
2001
1,381,953
1,148,337
Sales of goods, products and services................................................ 1,399,007
Allowance for doubtful accounts—recognition.................................
(21,264)
Nonoperating...................................................................................
4,210
Inputs purchased from third parties..................................................
(637,555)
1,168,755
(21,545)
1,127
(547,692)
Cost of sales and services .................................................................
Materials, energy, outside services and other....................................
(389,758)
(247,797)
(310,600)
(237,092)
Gross value added ............................................................................
Retentions ........................................................................................
744,398
(28,777)
600,645
(25,111)
Depreciation and amortization .........................................................
(28,777)
(25,111)
Value added generated by the company............................................
Value added received in transfer.......................................................
715,621
96,187
575,534
48,736
Financial income ..............................................................................
96,187
48,736
Total value added to be distributed ..................................................
811,808
624,270
Distribution of value added ..............................................................
Payroll and related charges...............................................................
Taxes and contributions ...................................................................
Financial expenses and rents.............................................................
Net (income) loss .............................................................................
Minority interest ..............................................................................
*****
F-64
(836,616) 100% (624,270) 100%
(171,255) 20% (166,293) 27%
(388,915) 46% (305,565) 49%
(146,933) 18% (125,159) 20%
(75,817)
9% (42,252)
7%
(28,934)
3% 14,737
-2%
46 —
262 —
1. Operations
The Company holds equity interests in other companies. The subsidiaries are engaged in the production,
sale, import and export of cosmetics, perfumery in general and hygiene and health products.
practices and standards established by the Brazilian Securities Commission (CVM). Certain balances in
the financial statements for the year ended December 31, 2001, presented for comparative purposes,
have been reclassified for comparability with the financial statements for the year ended December 31,
2002.
a)
b)
maturity, which are stated at cost plus income earned to the balance sheet dates.
c)
d)
Inventories
e)
Investments
Investments in subsidiaries are accounted for under the equity method.
f)
g)
10,305/01. Deferred amounts are stated in Note 16.
F-65
h)
Stated at amounts payable plus, if applicable, interest, monetary and exchange variations incurred to the
balance sheet dates.
i)
Determined based on the criteria established by the tax legislation in effect. Deferred taxes attributable to
temporary differences and tax loss carryforwards are recorded under assets or liabilities based on their
future realization.
j)
Loans
by contract.
k)
l)
financing.
m)
Interest on capital
financial statement purposes, interest on capital is presented as a distribution of profits in the statements
F-66
prepared in accordance with the consolidation principles established by Brazilian corporate law and
regulatory instructions established by the CVM, and include the financial statements of the Company
and its direct and jointly-owned subsidiaries, as follows:
Ownership interest—%
2002
2001
Direct:
Natura Cosméticos S.A............................................................................
Natura Inovação e Tecnologia de Produtos Ltda......................................
Jointly-owned:
Indústria e Comércio de Cosméticos Natura Ltda. ...................................
Natura Logística e Serviços Ltda..............................................................
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......................................................
Nova Flora Participações Ltda. ................................................................
99.99
99.99
99.99
99.99
99.99
99.99
99.97
99.85
99.99
99.99
100.00
99.43
99.99
99.99
99.97
99.85
99.99
99.99
100.00
97.67
The consolidated financial statements have been prepared based on financial statements as of the same
date and consistent with the accounting practices described in Note 3. Investments in subsidiaries were
proportionately eliminated against shareholders’ equity and net income of the respective subsidiaries.
Intercompany balances and transactions and unrealized profit 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. In the case of the investment in Argentina, the devaluation of the peso against the U.S. dollar
was taken into consideration before the translation into Brazilian reais, as stated in Note 14.
In 2001, there were the following changes in the capital structure:
Š Change of the corporate name of Natura Financiadora S.A.—Crédito, Financiamento e Investimento
to Natura Inovação e Tecnologia de Produtos Ltda., and of Natura Informática Ltda. to Natura
Logística e Serviços Ltda.
Š On November 30, 2001 the Company assigned all its sharequotas in Indústria e Comércio de
Cosméticos Natura Ltda. to Natura Cosméticos S.A. The transaction was carried out based on the
company’s book value on said date.
F-67
Company
2002
2001
Consolidated
2002
2001
Bank CDs—floating rates ....................................................................... 2,457
Investment funds.....................................................................................
—
—
—
23,641
8,172
15,002 26,708
2,457
—
38,643 34,880
Consolidated
2002
2001
Provision for return of goods.....................................................................................
(220)
(200)
159,804 128,160
7. Inventories
Consolidated
2002
2001
Finished products .......................................................................................................... 38,369 22,856
Raw materials and packaging........................................................................................ 33,757 25,118
Work in process ............................................................................................................
6,585
5,396
Promotional material ....................................................................................................
2,467
2,218
Imports in transit ..........................................................................................................
200
797
Reserve for losses .......................................................................................................... (6,800) (1,833)
74,578 54,552
Company
2002 2001
Social contribution tax ..................................................................................
IRPJ (corporate income tax) ..........................................................................
Income tax on temporary cash investments ...................................................
ICMS (State VAT) .........................................................................................
IPI (Federal VAT) and other ..........................................................................
Consolidated
2002
2001
—
390
134
—
22
—
—
795
—
151
578
820
804 1,749
705
795
1,903
885
4,011 1,704
546
946
8,001 5,953
9. Tax incentives
Consolidated
2002
2001
Tax incentives................................................................................................................. 4,928 4,372
Reserve for losses............................................................................................................ (3,390) (3,001)
1,538
F-68
1,371
a)
Deferred
differences and tax loss carryforwards, as shown below:
Company
2002 2001
Current:
Deferred income and social contribution taxes on temporary
differences ......................................................................................
Noncurrent:
Income tax on tax loss carryforwards.................................................
Deferred income and social contribution taxes on temporary
differences ......................................................................................
Consolidated
2002
2001
887
494
12,118 11,514
887
494
12,118 11,514
—
—
12,673 15,169
—
—
—
—
17,164 21,289
887
494
29,282 32,803
4,491
6,120
Management estimates that the recorded tax credits will be realized within five years.
b)
Current expense
Reconciliation of income and social contribution taxes
Company
2002
2001
Consolidated
2002
2001
Income (loss) before taxes on income, debenture participation
and employee profit sharing ...................................................... 28,541 (15,104) 61,760
(5,128)
Income and social contribution taxes at the rate of 34% .............. (9,704)
5,135 (20,998)
1,744
Permanent differences ................................................................... 10,097
(4,768) (2,916) (5,682)
Loss generated by subsidiaries ......................................................
—
—
(6,670) (10,463)
Deferral of exchange variation......................................................
—
—
(2,585)
3,875
Other............................................................................................
—
—
297
655
Income and social contribution taxes............................................
393
367 (32,872)
Current income and social contribution taxes ...............................
Deferred income and social contribution taxes..............................
—
393
—
367
393
367 (32,872)
(9,871)
(29,351) (28,007)
(3,521) 18,136
(9,871)
F-69
11. Related parties
Receivables from and payables to subsidiaries are as follows:
Company
2002
2001
Current assets:
Natura Cosméticos S.A. ....................................................... 31,213
Dividends receivable:
Natura Cosméticos S.A. .......................................................
5,435
Natura Inovação e Tecnologia de Produtos Ltda..................
6,689
Interest on capital receivable:
3,292
Noncurrent assets:
Loan agreements:
Natura Participações S.A. ....................................................
Consolidated
2002
2001
—
—
—
—
—
—
—
—
—
—
—
—
46,629
—
—
—
4,152
1,256
8,036 5,814
4,152
1,256
8,036 5,814
Dividends payable:
Natura Participações S.A. .................................................... 16,000
Interest on capital payable:
Natura Participações S.A. ....................................................
3,292
—
16,000
—
—
3,292
—
19,292
—
19,292
—
Loan agreements:
Natura Inovação e Tecnologia de Produtos Ltda..................
Natura Logística e Serviços Ltda..........................................
F-70
—
1,600
3,502
20,039
—
3,502
—
—
—
—
—
—
5,102 23,541
—
—
Product sales
2002
2001
Product purchases
2002
2001
—
—
555,228 478,001
Indústria e Comércio de Cosméticos Natura Ltda. ................... 565,580 484,776
—
—
—
—
346
—
—
—
—
105
—
—
774
—
Natura Cosméticos S.A.—Chile................................................
—
—
1,874
1,558
Natura Cosméticos S.A.—Peru.................................................
—
—
2,587
1,577
Natura Cosméticos S.A.—Argentina.........................................
—
—
4,771
3,535
565,580 484,776 565,580 484,776
Service sales
2002
2001
Indústria e Comércio de Cosméticos Natura Ltda. ...................
—
—
74,283
52,212
126,495
—
—
49,109
25,647
Service purchases
2002
2001
103,945
15,270
—
7,280
64,052
6,902
—
3,802
74,756 126,495
74,756
Related-party transactions are carried out under usual market prices and conditions. These transactions
refer mainly to commercial operations, services and intercompany loans.
12. Receivables from shareholders
a)
Current account with shareholders
On December 31, 2001, the Company had receivables from its shareholders, which were subject to
interest rates equivalent to those for funding in the market.
b)
Receivables from sale of shares
On July 28, 2000, the Company sold 154,000 registered common shares to two of its shareholders. The
amount resulting from this sale of shares will be settled by 2010, plus interest of 3% per year. In 2001,
the amount of R$6,710 was reclassified to “Capital reserves”, until it is fully paid in.
F-71
13. Investments
Company
2002
2001
Consolidated
2002
2001
Investments in subsidiaries ................................................................. 96,859 86,212
—
—
Goodwill on acquisition of investment...............................................
—
—
8,015 8,015
Amortization of goodwill...................................................................
—
—
(2,404) (1,603)
Other investments..............................................................................
—
—
314
471
96,859 86,212
5,925
6,883
The goodwill on the acquisition made by the indirect subsidiary Nova Flora Participações Ltda. is
supported by an appraisal report issued by independent appraisers, based on expectation of future
profitability, and is being amortized over ten years. Investments in subsidiaries are as follows:
Natura
Cosméticos
S.A.
Natura
Inovação e
Tecnologia
de Produtos
Ltda.
Total
Shares of subsidiaries ..........................................................................
Number of shares held ........................................................................
Ownership interest ..............................................................................
Shareholders’ equity of subsidiaries .....................................................
Share in shareholders’ equity ...............................................................
Net income of subsidiaries...................................................................
35,955
35,951
99.99%
100,480
100,470
21,741
5,008
—
5,007
—
99.99%
—
12,387
112,867
12,386
112,856
7,960
29,701
Book value of Company investment:
Dividends received ..............................................................................
Dividends payable ...............................................................................
Interest on capital................................................................................
Income tax incentives ..........................................................................
Equity in subsidiaries ..........................................................................
78,175
—
(5,435)
(3,873)
556
21,739
8,037
(3,610)
(6,689)
—
—
7,959
86,212
(3,610)
(12,124)
(3,873)
556
29,698
91,162
5,697
96,859
14. Investment in Argentina
In 2001, the Argentine Government adopted significant measures, such as suspension of public debt
service, withdrawal from the convertibility system, devaluation of the peso and imposition of harsh
restrictions on the availability of funds deposited within the financial system.
The impacts on the financial statements of the subsidiary in Argentina, arising from the devaluation of
the peso against the U.S. dollar on December 31, 2001 (peso = 1.70/dollar = 1.00), were reflected,
according to Technical Interpretation No. 01/02 of IBRACON—Brazilian Institute of Independent
Auditors (Brazilian companies’ investments in Argentina), on the Company’s individual and consolidated
financial statements, with negative effects on shareholders’ equity and result for that year. For 2002, the
exchange rate used for translation was 3.49 pesos for 1 U.S. dollar.
F-72
Composed as follows:
Buildings...............................................................................................
Installations ..........................................................................................
Machinery and equipment ....................................................................
Vehicles ................................................................................................
Molds ...................................................................................................
Furniture and fixtures ...........................................................................
IT equipment ........................................................................................
Leasehold improvements.......................................................................
Software licenses...................................................................................
Land .....................................................................................................
Advances to suppliers ...........................................................................
Other ....................................................................................................
Accumulated depreciation/amortization ................................................
Annual
depreciation
rate —%
Consolidated
2002
2001
4
10
10
20
20
10
20
12
20
—
—
—
126,832 122,612
57,452
53,018
63,309
58,284
9,066
8,427
17,761
15,625
10,729
9,382
24,109
23,083
211
11,095
14,622
12,317
15,910
15,910
1,617
1,427
12,528
10,948
354,146 342,128
(88,335) (73,118)
265,811 269,010
Based on CVM Resolution No. 409/01 and Law No. 10,305/01, the Company elected to defer net
exchange losses incurred as a result of the adjustment of assets and liabilities denominated in foreign
currency for the year ended December 31, 2001.
Consolidated
2002
2001
Deferred exchange variation ........................................................................................ 18,491 18,491
Accumulated amortization ........................................................................................... (14,696) (7,094)
3,795 11,397
F-73
Type
Company
2002
2001
Consolidated
2002
2001
Import ............................................
—
—
6,452
72,762
BNDES (Brazilian Bank for ............
Economic and Social
Development)
—
—
16,468
28,021
58,364
50,865
BNDES ........................................... 32,473 31,171
BNDES-EXIM ................................
—
—
—
2,635
BNDES-FINAME (Government .....
BNDES-Poc ....................................
—
—
2,511
2,171
—
—
6,012
10,229
ACE (Advances on Export..............
Contracts)
—
—
1,914
—
FINEP (Agency for Financing of.....
Studies and Projects)
—
—
16,881
—
Secured account..............................
—
—
397
—
Bank loans and financing ...............
—
—
144,561 101,812
Charges
Guarantee
Interest of 7.2%
per year +
exchange variation
Interest of 3.5%
per year + TJLP
(long-term interest
rate) variation
Interest of 4% per
year + TJLP
variation
Interest of 1.95%
per year + TJLP
variation
Interest of 4% per
year + TJLP
variation
Interest of 4.6%
per year + TJLP
variation
Interest of 6.9%
per year +
exchange variation
Interest of 3% per
year + TJLP
variation
Interest of 105% of
CDI (interbank
deposit rate)
Interest of 8.2%
per year +
exchange variation
Chattel mortgage and bank
guarantee
Total............................................... 32,473 31,171 253,560 268,495
Current...........................................
265
115
104,681 103,226
Long term....................................... 32,208 31,056 148,879 165,269
Consolidated
2002
2001
2003..........................................................................................................................
2004..........................................................................................................................
2005..........................................................................................................................
2006 and thereafter ...................................................................................................
—
87,134
34,310
27,435
71,506
82,028
11,735
—
148,879 165,269
units.
F-74
The Company signed a loan agreement with the Agency for Financing of Studies and Projects (FINEP) on
December 3, 2001, in the amount of R$39,153, with a grace period of 36 months for the payment of
principal. The first releases of this loan took place in 2002 and amounted to R$16,309. The funds are
being used in the development of new products in the biodiversity field.
18. Taxes payable
Company
2002 2001
ICMS (State VAT)..............................................................................
COFINS (tax on revenue)...................................................................
PIS (tax on revenue) ...........................................................................
IRPJ and CSLL...................................................................................
IRRF (withholding income tax) ..........................................................
IPI (Federal VAT)...............................................................................
REFIS (Tax Recovery Program)..........................................................
Other .................................................................................................
REFIS.................................................................................................
Consolidated
2002
2001
—
29
17
—
—
—
—
—
—
22
5
—
—
—
—
—
27,513 20,969
5,153
5,040
1,318
1,079
5,887
1,809
14,437
1,512
—
669
—
2,771
64
383
46
27
54,372 34,680
—
—
—
6,697
In December 2000, the Company opted for REFIS (Tax Recovery Program) and declared all its tax debts
to the Federal Revenue Service (SRF). More advantageous conditions for the amortization of the debt,
such as extension of payment term and change of index (from SELIC (Central Bank Overnight Rate) to
TJLP), were determinant factors in opting for REFIS. When the Company opted for this program, it paid
an amount of R$11,665, without any impact on result for that year. The REFIS financing was settled on
October 31, 2002.
19. Reserve for contingencies
The subsidiaries are parties to labor, tax and civil lawsuits involving contingent liabilities. These lawsuits
are at administrative level or pending decisions.
Based on the legal counsel’s analysis, the Company’s management recorded a reserve of R$15,609 in
2002 and R$5,011 in 2001 to cover possible losses on these lawsuits.
The Company has an employee profit sharing program. The amount paid in 2002 and 2001 was
determined based on the achievement of operating targets.
F-75
21. Stock options plan
In accordance with the resolution adopted by shareholders on March 31, 1998, the Board of Directors is
authorized to grant stock options to its executives, managers and eligible employees to allow them to
subscribe to a number of shares that represent up to 5% of the Company’s stock.
By means of the plan, the participants may acquire, for previously fixed terms and prices, shares of the
Company, provided that the targets foreseen in the regulation and the terms and conditions provided for
are met.
The plan participant will have to exercise the vested options within five years of the option contract
signature date. Vested options are those that meet the objectives established for the exercise of the right
of subscription or purchase of shares.
The subscription or purchase price of each share will correspond to the price of the Company’s share on
the date of signing the options contract, observing the minimum limit of the net book value of the share.
The price will be monetarily restated based on the IPCA (Broad Consumer Price Index) of the Brazilian
Institute of Geography and Statistics (IBGE) until the effective date of subscription or purchase for 2002
and 2001. For 1998 and 1999, the price will be restated based on the IGP-M (General Market Price
Index). Options assigned but not exercised as of December 31, 2002 totaled 233,436.
On March 14, 2001, the Company exchanged the purchase or subscription options, which had already
been assigned to the option holders, for options of Natura Participações S.A.
22. Debentures
Consolidated
2002
2001
Current:
4,080
—
130,659 130,659
The Extraordinary Shareholders’ Meeting held on April 14, 1998 authorized the issuance of 140,000,000
R$130,659.
debentures on the issuer’s income before provision for income tax as of June 30 and December 31 of
each year.
F-76
a)
Capital
On December 30, 2002, the shareholder Natura Participações S.A. made a capital contribution with
receivables from the subsidiary Natura Cosméticos S.A. in the amount of R$47,900.
Capital as of December 31, 2002 is R$86,950. Subscribed and paid-up capital is represented by
20,550,000 common shares without par value.
b)
Interest on capital
The Company’s management will propose, at the Board of Directors’ meeting, the payment of interest on
capital, under the terms of the bylaws, CVM Resolution No. 207/86 and Law No. 9,249/95, subject to
approval of the next Annual Shareholders’ Meeting to be held on April 30, 2003. The gross amount of
interest on capital is R$3,873, which will be considered in the calculation of the mandatory minimum
dividends, net of withholding income tax, for the year ended December 31, 2002.
c)
Distribution of dividends
The bylaws provide for a minimum dividend equivalent to 25% of net income for the year. Proposed
dividends for 2002, which will be submitted for the approval of shareholders at the annual meeting, in
the amount of R$16,000, meet the statutorily guaranteed rights, as shown below:
Company
2002
Net income ................................................................................................................................
Legal reserve ..............................................................................................................................
28,934
(1,447)
Calculation basis for minimum dividends...................................................................................
27,487
Mandatory minimum dividends (25%) ......................................................................................
Proposed dividends ....................................................................................................................
Proposed dividends per share .....................................................................................................
Amount exceeding mandatory minimum dividend .....................................................................
6,872
16,000
0.78
9,128
d)
This reserve was recorded in accordance with article 196 of Law No. 6,404/76 and is intended for use in
future investments.
rate risks. The Company and its subsidiaries do not carry out transactions in the derivatives market.
These risks are managed through the definition of strategies, establishment of control systems and
determination of exchange exposure limits. Accordingly, as of December 31, 2002 and 2001, the
F-77
Company had swap transactions with financial institutions in the amounts of approximately R$180,218
(US$51,006,000) and R$194,852 (US$83,162,000), respectively. These transactions generated gains and
losses of R$27,569 and R$25,775, respectively, which were recorded in current assets and in current
liabilities, under “Other payables”.
The conditions and terms for the financing are presented in Note 17. As of December 31, 2002 and
2001, the estimated fair values of financial instruments for assets and liabilities approximate the amounts
recorded in the financial statements.
Temporary cash investments are generally realized within a period not exceeding three months and the
agreed rates reflect usual market conditions at yearend.
25. Insurance
The Company has insurance coverage in amounts considered by management sufficient to cover possible
risks on its assets and/or responsibilities.
F-78
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
To the Board of Directors and Shareholders of
São Paulo—SP
1.
We have made a special review of the accompanying quarterly financial information (Company and
consolidated) of Natura Cosméticos S.A. (the “Company”) and subsidiaries, comprising the balance
sheet as of March 31, 2004, the related statement of income for the three-month period then ended,
and management’s comments on performance, all expressed in Brazilian reais and prepared in
conformity with Brazilian accounting practices under the responsibility of the Company’s
management. We also reviewed the statement of income for the three-month period ended March
31, 2003, Company and consolidated.
2.
We conducted our review in accordance with specific standards established by IBRACON—
Brazilian Institute of Independent Auditors together with the Federal Accounting Council, which
consisted principally of: (a) inquiries of and discussions with Company personnel responsible for the
accounting, financial and operating areas as to the criteria adopted in preparing the quarterly
financial information, and (b) review of the information and subsequent events that had or may
have had significant effects on the financial position and operations of the Company and its
subsidiaries.
3.
Based on our special review, we are not aware of any material modifications that should be made to
the quarterly financial information referred to in paragraph 1 for it to be in conformity with
Brazilian accounting practices and standards established by the Brazilian Securities Commission
(CVM), specifically applicable to the preparation of mandatory quarterly financial information.
4.
The balance sheet as of December 31, 2003, Company and consolidated, presented for comparative
purposes, was reviewed by us, and our special review report thereon, dated February 11, 2004, was
issued without qualification.
5.
The accompanying quarterly financial information has been translated into English for the
convenience of readers outside Brazil.
São Paulo, April 15, 2004
/s/ Deloitte Touche Tohmatsu
/s/ Edimar Facco
Edimar Facco
Engagement Partner
F-79
BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
Company
03/2004
12/2003
Consolidated
03/2004
12/2003
ASSETS
Current assets
Cash and banks.................................................................
5,601
30,801
11,700
34,072
Temporary cash investments .............................................
6,910
26,482 110,497 102,039
Trade accounts receivable ................................................. 159,665 172,123 166,878 180,118
Inventories ........................................................................
753
354
89,293
79,254
Recoverable taxes..............................................................
1,055
715
10,457
8,525
Advances to employees......................................................
4,912
3,558
6,926
4,938
Related parties ..................................................................
867
25,837
—
1,275
10,506
11,035
21,663
22,096
6,702
2,180
11,609
5,214
Total current assets ....................................................
196,971 273,085 429,023 437,531
Noncurrent assets
Related parties ..................................................................
Advance for future capital increase....................................
Tax incentives ...................................................................
Escrow deposits.................................................................
—
550
1,452
9,656
15,103
663
3,382
9,503
635
7,978
7,548
—
—
—
1,492
11,457
17,118
2,379
3,382
—
641
9,447
14,595
1,715
Total noncurrent assets ..............................................
27,424
29,046
32,446
29,780
Permanent assets
Investments ....................................................................... 355,834 332,698
2,739
2,809
Property, plant and equipment ..........................................
10,596
10,744 256,534 253,739
Total permanent assets...............................................
366,430 343,442 259,273 256,548
Total assets ..............................................................................
590,825 645,573 720,742 723,859
F-80
BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
Company
03/2004
Current liabilities
Domestic suppliers ............................................................
Foreign suppliers ...............................................................
Suppliers—related parties..................................................
Payroll and related charges................................................
Taxes payable ...................................................................
Debenture participation ....................................................
Related parties ..................................................................
Dividends ..........................................................................
Interest on capital..............................................................
Other payables ..................................................................
Reserve for losses on swap contracts .................................
31,463
4,201
—
32,058
13,561
38,843
—
94
—
—
31,922
2,847
Consolidated
12/2003
72,240
4,578
—
18,948
21,765
51,850
102,170
939
20,000
8,541
20,054
9,012
03/2004
12/2003
39,716
75,102
60,821
55,384
404
2,139
—
5,304
29,380
41,563
55,225
64,297
—
102,170
—
964
—
20,000
—
8,541
35,377
24,243
2,839
9,012
Total current liabilities ...............................................
154,989 330,097 223,762 408,719
Debentures ........................................................................
Reserve for contingencies ..................................................
Provision for losses on subsidiaries....................................
Taxes payable ...................................................................
Other payables ..................................................................
45,325
31,052 101,181
32,986
— 130,656
—
130,656
29,706
24,870
35,578
28,381
—
6,282
—
—
—
—
—
—
7,731
—
8,603
1,809
Total long-term liabilities ...........................................
82,762 192,860 145,362 193,832
Minority interest ......................................................................
—
Capital .............................................................................. 196,371
Treasury shares .................................................................
(3,762)
Capital reserves ................................................................. 110,714
Profit reserves ...................................................................
3,629
Retained earnings..............................................................
46,122
—
8
56,387 196,371
—
(3,762)
9,998 110,714
56,231
3,629
—
44,658
(30)
56,387
—
9,998
54,953
—
Total shareholders’ equity ..........................................
353,074 122,616 351,610 121,338
Total liabilities and shareholders’ equity ..................................
590,825 645,573 720,742 723,859
F-81
FOR THE QUARTERS ENDED MARCH 31, 2004 AND 2003
Gross sales to domestic market............................................
Gross sales to foreign market...............................................
Other sales ..........................................................................
Company
03/2004
03/2003
Consolidated
03/2004
03/2003
460,017
—
—
461,992
13,544
113
330,924
—
72
335,558
9,070
223
Gross operating revenues.....................................................
Taxes on sales, returns and rebates ......................................
460,017 330,996 475,649 344,851
(109,011) (78,694) (146,479) (104,972)
Net operating revenues ........................................................
Cost of sales ........................................................................
351,006 252,302 329,170 239,879
(148,700) (112,415) (108,375) (88,710)
Gross profit .........................................................................
202,306
139,887
220,795
151,169
Selling..................................................................................
General and administrative..................................................
Employee profit sharing.......................................................
Management compensation .................................................
Equity in subsidiaries...........................................................
(88,517)
(53,362)
(1,935)
(1,625)
7,984
(72,706) (103,942)
(23,713) (36,978)
(1,901)
(4,811)
(1,066)
(1,940)
(4,043)
—
(78,666)
(29,814)
(3,762)
(1,346)
—
Income from operations before financial effects...................
Financial expenses ...............................................................
Financial income..................................................................
64,851
(5,653)
9,160
36,458
(23,978)
13,027
73,124
(14,124)
13,083
37,581
(25,450)
14,861
Income from operations.......................................................
Nonoperating income (expense) ..........................................
68,358
262
25,507
210
72,083
688
26,992
(1,166)
Income before debenture participation.................................
Debenture participation.......................................................
68,620
(7,178)
25,717
(15,774)
72,771
(7,178)
25,826
(15,774)
Income before taxes on income............................................
Income and social contribution taxes...................................
61,442
(15,320)
9,943
(4,080)
65,593
(20,935)
10,052
(5,032)
Net income before minority interest ....................................
Minority interest .................................................................
46,122
—
5,863
—
44,658
—
5,020
18
Net income..........................................................................
46,122
5,863
44,658
5,038
F-82
FOR THE QUARTER ENDED MARCH 31, 2004
Capital
Balances as of
December 31, 2003 ........
Net income.........................
Capitalization of
debentures ......................
Capital increase through
the merger of Natura
Empreendimentos SA .....
Treasury shares ..................
Sale of treasury shares
through exercise of share
purchase options
(note 19, item f)..............
Receivables from
shareholders ...................
Absorption of excess
liabilities through the
merger of Natura
after elimination of the
merged company’s
investment in the
Company........................
Absorption of excess
liabilities through the
merger of Natura
Participações S.A. after
elimination of the
merged company’s
investment in the
Company........................
Absorption of reserve.........
Balances as of
March 31, 2004 .............
Treasury
shares
56,387
—
—
—
138,569
—
1,415
—
—
—
(1,415)
38
Capital reserves
Share
Investment
premium
grants
—
—
100,000
9,998
—
Profit reserves
Legal
Retention
Retained
earnings
Total
10,687
—
45,544
—
—
46,122
122,616
46,122
—
—
—
—
238,569
—
—
—
—
—
—
—
—
—
—
716
—
—
—
—
—
—
(2,385)
1,415
(1,415)
754
—
(2,385)
—
—
—
—
—
—
—
—
(23,367)
—
(23,367)
—
—
—
—
—
—
—
—
—
(7,058)
(29,235)
7,058
—
—
(29,235)
—
9,998
3,629
196,371
(3,762)
100,716
—
46,122
353,074
F-83
FOR THE PERIODS ENDED MARCH 31, 2004 AND DECEMBER 31, 2003
(Amounts in thousands of Brazilian reais—R$)
1. Operations
The Company and its subsidiaries are engaged in the development, production, distribution and sale,
substantially through direct sales by Natura beauty consultants, of cosmetics, perfumery in general, and
hygiene and health products, and hold equity interests in other companies in Brazil and abroad.
The Extraordinary Shareholders’ Meeting held on March 5, 2004 approved the merger into the
Company of the net assets of the companies Natura Empreendimentos S.A. and Natura Participações
S.A. based on the accounting valuation supported by a valuation report issued by independent experts.
These mergers did not modify the activities described in the paragraph above.
The amounts of the net assets merged into the Company as of January 31, 2004 were R$104,951 related
to Natura Empreendimentos S.A. and R$75,716 related to Natura Participações S.A.
In the recording of the adjustments of the mergers of the net assets, the eliminations of the accounts
receivable and payable existing between the merged companies and the Company, as well as corporate
investments and shareholders’ equity, were considered, as required by Brazilian accounting practices.
In light of the aforementioned, the liabilities of Natura Empreendimentos S.A. and Natura Participações
S.A., in the amounts of R$ 23,367 and R$ 29,235, respectively, were absorbed.
The amounts of the net assets are as follows:
Assets:
Current assets:
Cash and banks.................................
Recoverable taxes .............................
Other receivables ..............................
24,105
645
33,338
Total current assets ..................................
58,088
Noncurrent assets:
Related parties ..................................
Total noncurrent assets ............................
10,544
10,544
Permanent assets:
Investments .......................................
Total permanent assets.............................
136,522
136,522
Total assets......................................................
205,154
F-84
Loans and financing..........................
Taxes payable ...................................
Dividends..........................................
Other payables..................................
17,566
660
61,215
3,747
Total current liabilities .............................
83,188
Loans and financing..........................
Other payables..................................
17,004
11
Total long-term liabilities .........................
17,015
Shareholders’ equity:
Capital ..............................................
Capital reserves.................................
Profit reserves ...................................
86,950
5,347
12,654
Total shareholders’ equity ........................
104,951
Total liabilities and shareholders’ equity .........
205,154
NATURA PARTICIPAÇÕES S.A.
Assets:
Current assets:
Cash and banks..........................
Recoverable taxes ......................
Related parties ...........................
307
129
61,215
Total current assets ...........................
61,651
Noncurrent assets:
Receivables from sale of
shares .....................................
5,506
Total noncurrent assets .....................
5,506
Permanent assets
Investments ................................
Goodwill on investments............
(-) Provision for future
dividends ................................
104,951
1,028,041
(1,028,041)
Total permanent assets......................
104,951
Total assets...............................................
172,108
Other payables...........................
86,001
Total current liabilities ......................
86,001
Related parties ...........................
10,391
Total long-term liabilities ..................
10,391
Shareholders’ equity:
Capital .......................................
Capital reserves..........................
Profit reserves ............................
Accumulated deficit ...................
1,107,776
5,450
5,550
(1,043,060)
Total shareholders’ equity .................
75,716
Total liabilities and shareholders’
equity....................................................
172,108
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 statements of
income in a specific account under the heading Monetary Restatement of the Balance Sheet.
This methodology was prohibited by Law No. 9,249 of December 26, 1995.
F-85
a)
b)
maturity, stated at cost plus income earned to the balance sheet dates.
c)
d)
Inventories
e)
Investments
Investments in subsidiaries are accounted for under the equity method, plus goodwill on acquisition of
investments, as shown in Note 11.
f)
g)
Deferred charges
Represented by goodwill arising from the merger of shares of Natura Empreendimentos S.A, by Natura
Participações S.A., less the provision for adjustment to realizable value, as described in note 13.
h)
Stated at amounts payable plus, if applicable, interest and monetary and exchange variations incurred to
the balance sheet dates.
i)
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 noncurrent 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 estimated realizable values, as detailed in Note 9.
F-86
j)
Loans and financing
by contract and mentioned in Note 14.
k)
l)
Swap transactions
The nominal values of swap 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 20.
m)
financing.
n)
Interest on capital
financial statement purposes, interest on capital is presented as a distribution of profits in the statement
o)
Earnings per share
Calculated based on the number of shares at the balance sheet date.
p)
Stock option plan
The costs of stock option plans for employees and administrators to purchase shares are being recorded
as operating expenses. The estimated costs of the options granted and not yet exercised are calculated
based on estimates of the market values of the Company’s shares as of the balance sheet dates.
Information related to these plans is provided in note 19, item f).
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 the management’s judgment involves estimates of the probability of future events, actual
results may differ from the estimates.
F-87
The consolidated balance sheets as of March 31, 2004 and December 31, 2003 and the consolidated
statements of income for the three-month periods ended March 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-%
03/2004 12/2003
Direct:
Indústria e Comércio de Cosméticos Natura Ltda. .................................................
99.76
99.99
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 Cosméticos 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
—
Indirect:
99.99
99.99
Flora Medicinal J. Monteiro da Silva Ltda. ............................................................ 100.00 100.00
were proportionately eliminated against shareholders’ equity and net income of the respective
subsidiaries. Intercompany balances and transactions and unrealized profit 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.
The Company’s shareholders’ equity as of March 31, 2004 and December 31, 2003 differs by R$1,464
and R$1,278, respectively, from those amounts stated in the consolidated financial statements, due to the
elimination of subsidiaries’ unrealized profit.
In addition, net income as of March 31, 2004 and 2003 differs by R$1,464 and R$825, respectively, due
to the elimination of unrealized profit on inventories of the companies in Peru, Chile and Argentina.
F-88
Reconciliation between consolidated and individual (Company) net income and shareholders’ equity:
Net income
03/2004 12/2003
03/2004
12/2003
Company...................................................................................... 46,122 5,863 353,074 122,616
Elimination of unrealized profits of the subsidiary Indústria e
Comércio de Cosméticos Natura Ltda. with other
subsidiaries ............................................................................... (1,464) (825)
(1,464) (1,278)
Consolidated ................................................................................
44,658
5,038
351,610 121,338
The operations of the direct and indirect subsidiaries are as follows:
Š 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.
Š Foreign operations (Natura Cosméticos S.A.—Argentina, Natura Cosméticos S.A.—Chile and Natura
Cosméticos S.A. — Peru)—Their operations are an extension of the operations developed by the
parent company Natura Cosméticos S.A.—Brazil.
Š Nova Flora Participações Ltda.—Holds equity interest in the subsidiary Flora Medicinal J. Monteiro
da Silva Ltda.
Š Natura Logística e Serviços Ltda.—Engaged in the provision of administrative and logistics services to
other Group companies.
Š Flora Medicinal J. Monteiro da Silva Ltda.—Engaged in the production and sale of phytotherapics of
its own brand.
Bank CDs .....................................................................................
Investment funds ..........................................................................
Company
03/2004 12/2003
Consolidated
03/2004
12/2003
474
6,436
26,482
—
48,269
62,228
6,910
26,482 110,497 102,039
57,527
44,512
As of March 31, 2004, bank CDs are remunerated at rates ranging from 100% to 101.5% of the CDI
(interbank deposit rate) (100% to 101.5% as of December 31, 2003). As of March 31, 2004, investment
funds are remunerated at rates ranging from 100% to 106% of the CDI (100% to 106% as of
December 31, 2003).
F-89
Company
03/2004
12/2003
Consolidated
03/2004
12/2003
Trade accounts receivable......................................................... 174,951 187,670 182,835 197,845
Allowance for doubtful accounts.............................................. (14,916) (15,203) (15,587) (17,383)
Allowance for return of goods..................................................
(370)
(344)
(370)
(344)
159,665 172,123 166,878 180,118
7. Inventories
Company
03/2004 12/2003
Finished products..............................................................................
Raw materials and packaging ...........................................................
Work in process................................................................................
Promotional material ........................................................................
Imports in transit ..............................................................................
Reserve for losses..............................................................................
Consolidated
03/2004 12/2003
739
—
—
14
—
—
354
—
—
—
—
—
44,299 35,163
40,311 42,486
8,844
5,931
4,326
2,239
906
824
(9,393) (7,389)
753
354
89,293 79,254
Company
03/2004 12/2003
Social contribution tax ......................................................................
IRPJ (corporate income tax)..............................................................
IPI (Federal VAT)..............................................................................
ICMS (State VAT).............................................................................
Other ................................................................................................
F-90
Consolidated
03/2004 12/2003
267
—
—
737
51
—
—
—
715
—
284
4,151
—
1,925
4,097
583
2,688
1,063
1,827
2,364
1,055
715
10,457
8,525
a)
Deferred
differences (Company) and temporary differences and tax loss carryforwards (subsidiaries). These credits
are recorded in current and noncurrent assets, in view of their expected realization based on projections
of taxable income, considering the limit of 30% for annual taxable income offset by tax loss
carryforwards, pursuant to the applicable legislation. The amounts are as follows:
Company
03/2004 12/2003
Current:
Tax loss carryforwards..............................................................
Reserve for inventory losses ...............................................
Allowance for doubtful accounts .......................................
Reserve for losses on swap contracts ..................................
Other .................................................................................
Deferred income and social contribution tax credits .........................
Consolidated
03/2004 12/2003
—
—
4,765
6,468
—
5,072
968
4,466
—
5,169
3,064
2,802
3,193
5,072
968
7,665
2,512
5,169
3,064
4,883
10,506 11,035 21,663 22,096
Noncurrent:
Reserve for contingencies ...................................................
Other .................................................................................
9,010
646
7,368 10,506
610
951
8,562
885
Deferred income and social contribution taxes .................................
9,656
7,978 11,457
9,447
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 noncurrent assets will be realized as follows:
2005..............................................................................................................................
2006..............................................................................................................................
2007..............................................................................................................................
2008..............................................................................................................................
03/2004
12/2003
5,339
1,171
3,115
1,832
5,514
1,102
1,143
1,688
11,457
9,447
F-91
b)
Current expense
Company
03/2004
03/2003
Consolidated
03/2004
03/2003
Income before taxes on income ...................................................... 61,442 9,943 65,594 10,052
Income and social contribution taxes at the rate of 34% ................ (20,890) (3,381) (22,302) (3,419)
Equity in subsidiaries .....................................................................
2,715 (1,375)
—
—
Losses generated by subsidiaries.....................................................
—
—
(1,475) (2,028)
Deferral of exchange variation .......................................................
—
(362)
—
(362)
Amortization of goodwill ...............................................................
4,161
—
4,161
—
Other .............................................................................................
(1,306) 1,038
(1,319)
777
Income and social contribution taxes in income .............................
Current income and social contribution taxes ................................
Deferred income and social contribution taxes ...............................
F-92
(15,320) (4,080) (20,935) (5,032)
15,188
132
4,259
(179)
20,758
177
4,898
134
15,320
4,080
20,935
5,032
10. Related parties
Receivables from and payables to related parties are as follows:
Company
03/2004 12/2003
Current assets:
Indústria e Comércio de Cosméticos Natura Ltda. .............
Natura Participações S.A....................................................
Natura Empreendimentos S.A ............................................
Nova Flora Participações Ltda. (a) .....................................
Natura Logística e Serviços Ltda. .......................................
Natura Inovação e Tecnologia de Produtos Ltda. (b)..........
Dividends:
Indústria e Comércio de Cosméticos Natura Ltda. .............
Noncurrent assets:
Loan agreements:
Natura Participações S.A. (c)..............................................
Advance for future capital increase:
Nova Flora Participações Ltda. ..........................................
Suppliers:
Natura Inovação e Tecnologia de Produtos Ltda. (d)..........
Indústria e Comércio de Cosméticos Natura Ltda. (e) ........
Natura Logística e Serviços Ltda. (f)...................................
Loan agreement:
Natura Empreendimentos S.A (c) ..............................................
Accounts payable:
Natura Inovação e Tecnologia de Produtos Ltda. ......................
Natura Participações S.A...........................................................
15
—
—
833
15
4
Consolidated
03/2004 12/2003
49
—
—
—
58
8
—
—
—
—
—
—
—
14
27
—
—
1,234
25,722
—
—
867 25,837
—
1,275
—
3,382
—
3,382
550
9,503
—
—
5,935
5,304
19,997 10,379
6,125
3,265
—
—
—
5,304
—
—
32,057 18,948
—
5,304
791
—
816
—
—
—
148
—
148
939
—
964
—
—
95
—
95
Dividends:
Natura Empreendimentos S.A ...................................................
—
20,000
—
20,000
Interest on capital:
Natura Empreendimentos S.A ...................................................
—
8,541
—
8,541
F-93
Transactions with related parties in the quarters ended March 31, 2004 and 2003 are summarized below:
Natura Cosméticos S.A..............................................................................
Indústria e Comércio de Cosméticos Natura Ltda. ....................................
Natura Inovação e Tecnologia de Produtos Ltda. ......................................
Flora Medicinal J. Monteiro da Silva Ltda.................................................
Natura Cosméticos S.A.—Chile.................................................................
Natura Cosméticos S.A.—Peru ..................................................................
Natura Cosméticos S.A.—Argentina..........................................................
Product sales
03/2004
03/2003
Product purchases
03/2004
03/2003
—
183,362
—
—
—
—
—
—
141,003
—
—
—
—
—
178,690
—
—
16
915
1,538
2,203
137,995
—
52
142
566
955
1,293
183,362
141,003
183,362
141,003
Service sales
03/2004
Guarantees commission: (g)
Natura Empreendimentos S.A. ...........................................................
Natura Cosméticos S.A ......................................................................
Indústria e Comércio de Cosméticos Natura Ltda. .............................
Natura Logística e Serviços Ltda. .......................................................
Administrative structure: (h)
Natura Cosméticos S.A. .....................................................................
Natura Inovação e Tecnologia de Produtos Ltda................................
Product research and development: (i)
03/2004
03/2003
—
—
—
—
733
—
—
—
—
—
—
—
—
630
100
3
—
733
—
733
28,155
—
—
—
15,000
—
—
—
—
20,323
6,014
1,818
—
12,000
3,000
—
28,155
15,000
28,155
15,000
11,251
—
10,500
—
—
11,251
—
10,500
11,251
10,500
11,251
10,500
Lease of properties and common charges:
Natura Empreendimentos S.A ............................................................
Natura Participações S.A....................................................................
—
—
—
—
1,330
—
Total service sales/purchases......................................................................
224,098
1,330
F-94
Service purchases
03/2003
—
—
—
—
—
—
—
167,236
262
27
14
217
—
810
1,330
224,098
—
—
—
—
—
—
—
167,236
(a) Amount receivable due to the capital reduction made on January 30, 2004, approved by the
shareholders’ meeting held on the same date.
(b) Refers substantially to receivables for the provision of services described in item (a).
(c) Interest-free loan settled on March 5, 2004 upon the merger of the company into Natura
Cosméticos S/A.
(d) Payables for the provision of services described in item (i).
(e) Payables for the purchase of products. Prices and terms are within normal market conditions.
(f) Payables for the provision of services described in item (h).
(g) As detailed in Note 14.
(h) Provision of general administrative services, including accounting, tax, audit, human resources,
economic planning, accounts payable, treasury, information technology, data management and
information processing services.
(i) Services related to market opportunity analysis, product development, brand suggestion, product
and market research, sales estimate, launch strategy validation, and financial assessment of projects.
Prices and payment terms are established in accordance with usual market conditions.
11. Investments
Company
03/2004
12/2003
Investments in subsidiaries ............................................................ 355,834 332,698
Goodwill on acquisition of investment..........................................
—
—
Amortization of goodwill..............................................................
—
—
355,834 332,698
Consolidated
03/2004 12/2003
—
—
8,015 8,015
(5,276) (5,206)
2,739
2,809
The goodwill on the acquisition made by the subsidiary Nova Flora Participações Ltda. is supported by
an appraisal report issued by independent appraisers, based on expectation of future profitability which,
as of December 31, 2003, was reviewed by management based on new projections of future results, also
supported by an appraisal report issued by independent appraisers, and is being amortized over ten years.
F-95
Natura
Natura
Indústria
Natura
Brasil
Inov.
Comércio e
Natura
Natura
Cosméticos Cosméticos Commodities Nova Flora
Tec.
Cosméticos Cosméticos Cosméticos
S.A.
Ltda.
Trading S.A. Participações Prod.
Ltda.
S.A. Chile
S.A. Peru Argentina Portugal
Uruguay
Ltda.
Ltda.
Shares of subsidiaries.......
Number of shares
(common shares)
held ..............................
Ownership interest...........
Capital.............................
Shareholders’ equity of
subsidiaries...................
Share in shareholders’
equity ...........................
Net income (loss) of
subsidiaries...................
Book value of Company
investment:
Balances as of
December 31, 2003 ......
Increase in
investments ...........
Increase in
investment
through merger of
Natura
Empreendimentos S/A......
Dividends paid..........
Equity in
subsidiaries: ..........
Dilution of shares of
Natura
Cosméticos S/A .....
Recognition
(Reversal) of
provision for
losses.....................
Balances as of March 31,
2004.............................
328,213
28,498
327,436
28,493
99.76% 99.96%
328,992
43,810
23,453
595,538
23,418
595,478
99.85%
99.99%
22,521
63,413
2
1
99.99%
13
2,500
2,500
100.00%
323
2,413
Total
30,865
2,413
30,862
100.00% 99.99%
2,413
5,008 466,493
339,563
836
2,828
2,793
11
26
1,668
8,920 356,645
338,758
836
2,824
2,793
11
26
1,668
8,919 355,834
10,209
328,574
(1,154)
328
(1,374)
—
(720)
715
8,008
22
—
—
332,698
639
1,921
1,531
—
1,350
574
2,635
—
—
9,503
—
14,062
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,205
—
8,205
—
(1,154)
328
(1,374)
—
(720)
715
7,984
—
—
—
—
—
—
(833)
—
(833)
—
—
—
—
—
—
(6,282)
—
(6,282)
835
2,823
2,792
10,185
338,759
11
4
11
4
26
1,668
8,920 355,834
Reserve for losses:
Balances as of
December 31, 2003 ......
Reversal of
provision...............
—
—
—
—
—
—
(6,282)
—
(6,282)
—
—
—
—
—
—
6,282
—
6,282
Balances as of March 31,
2004.............................
—
—
—
—
—
—
—
—
—
F-96
Is composed of:
Annual
depreciation
rate %
Buildings ...........................
Installations .......................
Machinery and
equipment ......................
Vehicles .............................
Molds................................
Furniture and fixtures........
IT equipment .....................
Leasehold improvements ...
Software licenses ...............
Land..................................
Advances to suppliers ........
Other.................................
Construction in progress....
Restated
cost
Company
03/2004
Accumulated Net book Restated
depreciation
value
cost
12/2003
Accumulated Net book
depreciation
value
4
10
—
—
—
—
—
—
—
—
—
—
—
10
20
33
10
20
12
20
—
—
—
950
9,036
—
3,868
6,823
660
2,578
—
—
207
—
543
4,016
—
2,804
5,194
135
832
—
—
2
—
407
5,020
—
1,064
1,629
525
1,746
—
—
205
—
888
9,143
—
3,844
6,497
553
2,578
—
78
6
—
700
3,577
—
2,726
5,006
128
704
—
—
2
—
188
5,566
—
1,118
1,491
425
1,874
—
78
4
—
24,122
13,526
10,596
23,587
12,843
10,744
Consolidated
Buildings ...........................
Installations.......................
Machinery and
equipment......................
Vehicles.............................
Molds................................
Furniture and fixtures........
IT equipment.....................
Leasehold improvements ...
Software licenses ...............
Land..................................
Advances to suppliers ........
Other ................................
Construction in progress ...
03/2004
depreciation
value
Annual
depreciation
rate %
Restated
cost
4
10
126,963
62,703
15,408
20,497
10
20
33
10
20
12
20
—
—
—
69,460
14,955
19,780
11,910
29,682
776
9,522
15,910
2,753
6,711
244
27,182
6,523
14,646
5,530
17,462
154
3,357
—
—
4,076
—
371,369
114,835
Restated
cost
111,555 126,925
42,206 62,809
12/2003
depreciation
value
14,165
18,872
112,760
43,937
66,137
14,859
21,084
11,114
25,765
571
8,981
15,910
1,534
5,147
—
25,622
5,772
12,876
5,812
16,159
147
2,881
—
—
4,791
—
40,515
9,087
8,208
5,302
9,606
424
6,100
15,910
1,534
356
—
256,534 360,836
107,097
253,739
42,278
8,432
5,134
6,380
12,220
622
6,165
15,910
2,753
2,635
244
F-97
13. Deferred charges
As mentioned in note 1, on March 5, 2004 the Company merged the company Natura Participacões S.A.,
which had goodwill on the investment in the then subsidiary Natura Empreendimentos S.A. in the
amount of R$1,028,041 and a corresponding provision for future dividends in the same amount. This
goodwill arose from the merger of the shares of Natura Empreendimentos S.A. into Natura Participações
S.A. on December 27, 2000. This share merger operation 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
03/2004
12/2003
Goodwill on investments .........................................................................................
Provision for future dividends .................................................................................
1,028,041
(1,028,041)
—
—
—
—
The provision for future dividends will result in the payment of goodwill amortization tax benefits to all
shareholders. The goodwill amount is being amortized over a 7-year period.
F-98
Type
Company
03/2004 12/2003
Consolidated
03/2004 12/2003
Import financing ...............
(BNDES Exim)
—
—
4,403
—
BNDES (Brazilian Bank.....
for Economic and Social
Development)
BNDES..............................
—
—
—
1,269
BNDES-FINAME..............
(Government Agency
for Machinery and
BNDES-Poc (*) .................
75,195
42,294
75,195
42,294
—
—
3,943
2,786
1,593
2,009
1,593
2,009
ACE (Advances on ............
Export Contract)
FINEP (Financing..............
Agency for Studies and
Projects)
Floating Rate Notes ..........
—
—
—
—
—
Bank loans and financing...
—
Total .................................
—
76,788
26,215
58,989
—
103,292
—
29,548
741
—
58,989
—
140,897
108,088
Current..............................
31,463
72,240
39,716
75,102
Long term .........................
45,325
31,052
101,181
32,986
Charges
TJLP (long- term interest
rate)
TJLP
85% (71% in 12/2003)
Interest of 4% per year +
TJLP + 15% (29% in
12/2003) Interest of 4%
per year + UMBNDES (**)
TJLP
TJLP
Exchange variation
Interest of 3% per year +
TJLP
exchange variation
exchange variation
Guarantee
Natura Cosméticos
Cosméticos
Mortgage and bank
guarantee
Cosméticos
Natura Indústria
Cosméticos S.A.
Natura Indústria
Indústria
Indústria
(*) Poc—Proposal for Credit Operation
(**) UMBNDES—BNDES monetary unit
Consolidated
2004
2003
2005 ...........................................................................................................................
2006 ...........................................................................................................................
2007 ...........................................................................................................................
2008 ...........................................................................................................................
2009 ...........................................................................................................................
2010 ...........................................................................................................................
2011 ...........................................................................................................................
21,570 12,352
29,272 11,572
19,758
9,018
16,438
44
5,028
—
4,711
—
4,404
—
101,181 32,986
F-99
units.
On December 3, 2001, the subsidiary Natura Inovação e Tecnologia de Produtos Ltda. contracted
financing from the Financing Agency for Studies and Projects (FINEP) in the amount of R$39,153, with
a 36-month grace period for payment of the principal. The amount of R$24,287 was released. The funds
are being used in the development of new products in the biodiversity segment.
Bank loans and financing in the amount of R$29,548 refer to short- and long-term credit lines,
substantially for maintenance of the subsidiaries’ working capital. These operations require the
maintenance of financial ratios as follows:
➤
Ratio of net debt / EBITDA for the last 12 months
➤
Ratio of net debt / shareholders’ equity + net debt
➤
12-month EBITDA / Net financial expenses
Debenture balances payable, as well as debenture participation, are not included in net debt for purposes
of computation of the above ratios.
15. Taxes Payable
Company
03/2004 12/2003
Consolidated
03/2004 12/2003
ICMS (state VAT) ..................................................................... 32,962 30,922 35,387 34,008
COFINS (tax on revenue)..........................................................
2
284
7,589
6,159
PIS (tax on revenue) ..................................................................
1
88
1,670
1,386
Income tax ................................................................................
2,522
687
4,868
876
Social contribution tax ..............................................................
1,554
222
1,989
327
Withholding income tax............................................................
1,135 19,647
1,637 20,319
PIS/COFINS/CSLL (Law No. 10,633/2003) ..............................
629
—
838
—
Other ........................................................................................
38
—
1,247
1,222
38,843 51,850 55,225 64,297
As of December 31, 2003, a significant portion of the balances recorded under “Withholding income
tax” refers to income tax withheld on debenture participation.
16. Reserve for Contingencies
The Company and its subsidiaries are parties to labor, tax and civil lawsuits involving contingent
liabilities. These lawsuits are at administrative or judicial levels.
F-100
Reserves for contingencies are recognized by management based on the opinion of legal counsel, at
amounts restated according to estimates of probable losses.
Consolidated
03/2004 12/2003
Labor ............................................................................................................................
Civil ..............................................................................................................................
Tax ...............................................................................................................................
3,032
2,935
2,644
1,580
29,902 23,866
35,578 28,381
The Company and its subsidiaries are parties to other labor, civil and tax lawsuits, for which the chance
of loss is considered possible but not probable by management and its legal counsel. The amounts
involved in these lawsuits as of March 31, 2004 are as follows: tax—R$11,183, civil—R$3,528, and
labor—R$6,498 (R$10,950, R$3,270 and R$6,889, respectively, as of December 31, 2003). The
Company did not record a provision for these lawsuits.
a) Labor/civil lawsuits
The Company and its subsidiaries are parties to 156 labor lawsuits filed by former employees and third
parties (168 as of December 31, 2003) claiming the payment of severance amounts, salary premiums and
overtime, as well as 325 civil lawsuits (263 as of December 31, 2003), mostly related to indemnity
claims.
b) Tax lawsuits
Refer mainly to tax assessment notices related to IPI (Federal VAT) and ICMS (State VAT) of the State of
Minas Gerais, as well as injunctions contesting the deductibility of social contribution on profit in its
own tax basis and in the income tax basis, the II (import tax) rate, and the judgment of the lawsuit
referring to payment of PIS on a six-month basis.
c) Escrow deposits
The Company and its subsidiaries have escrow deposits for certain lawsuits amounting to R$17,118 as
of March 31, 2004 (R$14,595 as of December 31, 2003). A substantial part of these deposits refers to
tax lawsuits.
The Company and its subsidiaries pay profit sharing to their employees, based on the achievement of
operating targets and specific goals established and approved at the beginning of each year. As of
March 31, 2004, the amount payable as profit sharing was R$4,811 (R$3,762 as of March 31, 2003),
recorded as operating expense.
F-101
18. Debentures
Consolidated
03/2004
12/2003
Debenture participation........................................................................................
—
102,170
Debentures payable ..............................................................................................
—
130,656
The Extraordinary Shareholders’ Meeting on April 14, 1998 authorized the issue of 140,000,000
R$130,656.
debentures on the shareholders’ equity, applied on the issuer’s income before provision for income tax as
of June 30 and December 31 of each year.
In the Extraordinary Shareholders’ Meeting held on March 2, 2004, after the debentureholders’ approval
in the General Debentureholders’ Meeting held on February 27, 2004, it was decided that the
130,656,000 debentures issued by the Company, corresponding to R$238,569 (R$130,656 related to the
principal amount of the debentures and R$107,913 related to the debenture participation payable
balance, as of January 31, 2004, net of withholding income tax (IRRF) – the effect on the result for the
period was R$7,178), will be transferred to the Company’s shareholders’ equity, of which R$138,569 as
a capital contribution, corresponding to 3,299 common shares, and the remaining R$100,000, related to
the goodwill arising from the issuance of shares and recorded as capital reserve. The effects of this
corporate act are being presented in the statement of changes in shareholders’ equity in note 19.
19. Shareholders’ Equity
a) Merger of companies
As mentioned in note 1, on March 5, 2004 the Company conducted the merger of the companies Natura
Empreendimentos S.A. and Natura Participações S.A.
F-102
The merger adjustments referring to the shareholders’ equity accounts of the merged companies
produced significant effects on the statement of changes in shareholders’ equity of the Company (merging
company) for the quarter ended March 31, 2004. To allow for an analysis of these effects, the changes in
shareholders’ equity of the Company are stated below.
Capital reserves
Capital
BALANCES AS OF DECEMBER 31,
2003.........................................................
Net income ..................................................
Capitalization of debentures ........................
Capital increase through the merger of
Natura Empreendimentos S.A. ................
Treasury shares............................................
Sale of treasury shares through exercise of
share purchase options (item f) ................
Receivables from shareholders.....................
Absorption of excess liabilities through the
merger of Natura Empreendimentos S.A,
after elimination of the merged
company’s investment in the Company....
Absorption of excess liabilities through the
merger of Natura S.A., after elimination
of the merged company’s investment in
the Company ...........................................
Absorption of reserve ..................................
BALANCES AS OF MARCH 31, 2004.......
56,387
—
138,569
Treasury
shares
—
—
—
Profit reserves
Share
premium
Investment
grants
Legal
Retention
Retained
earnings
Total
—
—
100,000
9,998
—
—
10,687
—
—
45,544
—
—
—
46,122
—
122,616
46,122
238,569
1,415
—
—
(1,415)
—
—
—
—
—
—
—
—
—
—
1,415
(1,415)
—
—
38
(2,385)
716
—
—
—
—
—
—
—
—
—
754
(2,385)
—
—
—
—
(23,367)
—
—
—
—
—
—
—
—
—
(29,235)
(7,058)
7,058
196,371
(3,762)
100,716
9,998
3,629
—
(23,367)
—
—
46,122
(29,235)
—
353,074
F-103
b)
Capital
On December 31, 2003, our 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 general 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 they were applied to a capital reserve in the amount of
R$100,000 and a capital increase in the amount of R$138,569 through the issuance of 3,299 new
common shares at the issue price of R$72.3 thousand per share, which 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 addition, on March 5, 2004, the
cancellation of shares of the Company and the capital increase were approved in connection with the
corporate reorganization in which the Company incorporated Natura Empreendimentos S.A. and Natura
Participações S.A. The Company’s capital became R$196,371, divided into 83,266,061 common shares.
At March 31, 2004, the capital of the Company is of R$196,371. The subscribed and paid-up capital of
the Company is represented by 83,266,061 common shares without par value.
c)
Dividend distribution policy
Each year, shareholders are entitled to a minimum dividend equivalent to 30% of net income for the
year, considering the following adjustments:
Š The increase in the amounts resulting from the reversal, in the year, of reserves for contingencies,
recognized previously.
Š The decrease in the amounts intended for the recognition, in the year, of the legal reserve and reserve
for contingencies.
The Company’s bylaws provide for the proposal of interim dividends based on income as of June 30 of
each year.
d)
Goodwill on the issuance of shares
Refers to the goodwill arising from the issuance of 3,299 common shares resulting from the
capitalization of debentures in the amount of R$100,000, as mentioned in note 18.
e)
As of December 31, 2003, this reserve was recorded in accordance with article 196 of Law No. 6,404/76.
On March 5, 2004 it was used for absorbing excess liabilities arising from the mergers of the companies
Natura Empreendimentos S/A. and Natura S/A. See details in item a) above.
F-104
f)
Stock option program
On August 25, 1998 and March 14, 2001, the Company’s shareholders approved a stock option
program offering its directors and certain managers the option of purchasing the Company’s shares. The
options are offered annually and the price for exercising these options is determined by estimates of the
market value of the Company’s shares. The market value is calculated based on a fixed formula
established in the agreement of said stock option plan. The amount for the exercising of options is
restated according to inflation measured by the General Market Price Index (IGP-M) for the plan for
1999, and measured by the Broad Consumer Price Index (IPC-A) for the plans for 2002 and 2003.
The plans for 1999, 2000 and 2001 have a 3-year term to exercise options. The plans for 2002 and 2003
have a 4-year term to exercise options, of which 50% by the end of the 3rd year and 50% by the end of
the 4th year.
The Board of Directors administers the plans.
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).....
Cancelled options ............................................................................................................
Exercised options (*) .......................................................................................................
2,476,351
(24,127)
(511,321)
Balance of options as of March 31, 2004.........................................................................
Options converted into shares and sold...................................................................................
Options converted into shares and held ..................................................................................
1,940,903
488,828
22,493
Total options exercised ...........................................................................................................
511,321
(*) Breakdown of exercised options
The options converted into shares and held by stock option participants were recorded as sale of treasury
shares in the amount of R$754, equivalent to R$33.52 per option, as stated in item a) of this note.
The accrued amount as of March 31, 2004 referring to the cost of the options granted is R$16,558 and is
recorded under the headings “Other payables” in Current liabilities (R$8,827), and “Other payables” in
Long-term liabilities (R$ 7,731). A significant portion of this balance was recorded in the statement of
income of the company Natura Participações S.A. and merged by Natura Cosméticos S.A. on March 5,
2004, as mentioned in note 1.
g)
Receivables from shareholder
On December 30, 2002, the Company sold 2,413 registered common shares to a shareholder. The
amount of the sale will be settled through 2009, with interest rate of 3% p.a For 2004, the amount of
R$2,385 was classified as capital reserves until full settlement.
20. Financial Instruments
a)
General conditions
F-105
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 return rates, since the companies intend to
hold these investments to redemption. These investments reflect the market conditions at the balance
sheet dates.
b)
Exchange risk
The Company has entered into swap transactions to hedge against exchange variation on its liabilities
resulting from financing agreements. According to the Company’s policy, swap transactions should 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 March 31, 2004 and December 31, 2003, the Company had swap transactions with financial
institutions in the amounts of R$36,336 (US$12,493,000) and R$65,558 (US$22,691,000), respectively.
These transactions generated losses and gains of R$2,839 and R$9,012, which were recorded in current
liabilities and current assets, respectively. The exchange risk is substantially indexed to the U.S. dollar.
The Company and its subsidiaries do not have derivative financial instruments.
c)
Interest rate risk
the financing agreements entered into with BNDES.
d)
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.
As of March 31, 2004 and December 31, 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. The fair values of debentures are equal to those recorded in the financial statements since the
Company has the option to settle these debentures at their book value at any time.
The book values and fair values of swap transactions are as follows:
Consolidated
03/2004
12/2003
Book value Fair value Book value Fair value
Payables—swap transactions................................................
F-106
2,839
1,248
9,012
6,783
21. 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 March 31, 2004, the insurance coverage was
as follows:
Item
Industrial complex/inventories
Coverage
Any material damages to buildings, installation and
machinery and equipment
Vehicles
Fire, theft and collision for 805 vehicles
Loss of profits
Nonrealization of profits arising from material
damages to production installation, buildings and
machinery and equipment
Insured amount
365,033
14,928
428,398
* * * * *
F-107

Initial Equity Offering Natura Cosméticos S.A.

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