Banco Pactual Co-Managers Credit Suisse First Boston Banco Santander

8OCT200420424322

8OCT200420140526 GRENDENE S.A. R$31.00 per share 17,304,348 common shares

The selling shareholders identified in this offering memorandum are offering 17,304,348 common shares, without par value, in a public offering in Brazil and an offering outside Brazil. The shares will be sold in the United States to qualified institutional buyers as defined under Rule 144A under the U.S. Securities Act of 1933, as amended, pursuant to exemptions from registration thereunder, and outside the United States in accordance with Regulation S under the Securities Act. Investors residing outside Brazil who wish to acquire shares in this offering must be registered with the Brazilian Securities and Exchange Commission (Comissao˜ de Valores Mobiliarios´ ), or CVM, pursuant to Brazilian foreign investment laws and regulations and the Resolution of the Brazilian National Monetary Council (Resolu¸cao˜ do Conselho Monetario´ Nacional) No. 2689/00. Currently, no public market exists for the shares. The underwriter may also purchase up to an additional 2,595,652 shares, equivalent to 15% of the shares initially offered, from certain of the selling shareholders at the offering price, less the underwriting discount, within 30 days after the date of the announcement in Brazil of the commencement of the offering to cover overallotments. The initial public offering of the shares in Brazil has been registered at the CVM. The CVM has not approved or disapproved these shares or determined if this offering memorandum or the Portuguese language prospectus used in connection with the offer of the shares in Brazil is truthful or complete. The shares are listed on the Novo Mercado segment of the Sao˜ Paulo Stock Exchange (Bolsa de Valores de Sao˜ Paulo), or BOVESPA, under the code GRND3. Investing in the shares involves risks including those that are described in the ‘‘Risk Factors’’ section beginning on page 15 of this offering memorandum.

Per share (in R$) Total (in R$) Offering price ...... 31.00 536,434,788.00 Underwriting discount ...... 0.9588 16,591,927.99 Net proceeds ...... 30.0412 519,842,860.01

The shares have not been and will not be registered under the Securities Act, any U.S. state securities laws, or under the laws of any other branch or body regulating the capital markets of any country (except Brazil). For further details about the eligible offerees and resale restrictions, see ‘‘Notice to Investors’’. The shares will be ready for delivery on or about November 3, 2004 against payment in reais, through the book-entry facilities of the Brazilian Clearing and Depositary Corporation, (Companhia Brasileira de Liquidacao˜ e Custodia´ ), or CLBC. Sole Global Coordinator and Bookrunner Banco Pactual Co-Managers Credit Suisse First Boston Banco Santander

The date of this Offering Memorandum is October 28, 2004. TABLE OF CONTENTS

Page No. Forward-Looking Statements ...... iv Presentation of Certain Information ...... v Terms Used in this Offering Memorandum ...... 1 Summary ...... 5 Risk Factors ...... 15 Enforceability of Judgments ...... 24 Exchange Rate Data ...... 25 Use of Proceeds ...... 26 Capitalization ...... 27 Selected Financial Data ...... 28 Management’s Discussion and Analysis of Financial Condition and Results of Operations .... 31 The Industry ...... 64 Business...... 71 Management ...... 96 Principal and Selling Shareholders ...... 101 Transactions with Related Parties ...... 103 Description of Capital Stock ...... 104 Bovespa’s Differentiated Corporate Governance Practices ...... 118 Dividends ...... 119 Tax Considerations ...... 120 Clearance and Settlement ...... 126 Notice to Investors ...... 128 Underwriting ...... 130 Legal Matters ...... 133 Independent Accountants ...... 134 Summary of Differences Between U.S. GAAP and Brazilian GAAP ...... 135 Index to Financial Statements ...... A-1

i Unless otherwise specified or the context otherwise requires, references in this offering memorandum to ‘‘Grendene’’, ‘‘we’’, ‘‘us’’ and ‘‘our’’ refer to Grendene S.A. and our consolidated subsidiaries. You should rely only on the information contained in this offering memorandum. We, the selling shareholders, the Brazilian underwriters and the international placement agents have not, and the underwriter has not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling shareholders, the Brazilian underwriters and the international placement agents are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this offering memorandum is accurate only as of the date on the front cover of this offering memorandum. Our business, financial condition, results of operations and prospects may have changed since that date. We and the selling shareholders are relying on an exemption from registration under the Securities Act for offers and sales of securities that do not involve a public offering. The shares offered by this offering memorandum will be subject to restrictions on transferability and resale, and may not be transferred or resold in the United States except pursuant to registration under the Securities Act or an available exemption from such registration. By purchasing these securities, you will be deemed to have made the acknowledgments, representations, warranties and agreements described under the heading ‘‘Notice to Investors’’ in this offering memorandum. You should understand that you will be required to bear the financial risks of your investment for an indefinite period of time. We have submitted this offering memorandum confidentially to a limited number of institutional investors so that they can consider a purchase of the securities. We have not authorized its use for any other purpose. This offering memorandum may not be copied or reproduced in whole or in part. It may be distributed and its contents disclosed only to the prospective investors to whom it is provided. By accepting delivery of this offering memorandum, you agree to these restrictions. See ‘‘Notice to Investors’’. This offering memorandum is based on information provided by us and by other sources that we believe is reliable. We cannot assure you that this information is accurate or complete. This offering memorandum summarizes certain documents and other information and we refer you to them for a more complete understanding of what we discuss in this offering memorandum. In making an investment decision, you must rely on your own examination of our company and the terms of the offering and the securities, including the merits and risks involved. We, the selling shareholders, the Brazilian underwriters and the international placement agents are not making any representation to any purchaser of the securities regarding the legality of an investment in the securities by such purchaser under any legal investment or similar laws or regulations. You should not consider any information in this offering memorandum to be legal, business or tax advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the securities. We may decide in the future to furnish certain information to the U.S. Securities and Exchange Commission (the ‘‘SEC’’) in accordance with Rule 12g3-2(b) under the U.S. Securities Exchange Act, as amended, an effort to be added to the list of foreign private issuers that claim exemption from the registration requirements of Section 12(g) of the Exchange Act. We have also furnished, and will be required periodically to furnish, certain information, including quarterly and annual reports, to the CVM and to the BOVESPA. We have agreed with the international placement agents to provide, upon request by holders of our shares or potential transferees, the information set forth in Rule 144A(d)(4) under the Securities Act.

ii NOTICE TO NEW HAMPSHIRE RESIDENTS 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 constitutes a finding by the Secretary of State 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 has passed in any way upon the merits or qualification 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.

Information included in certain sections of this offering memorandum regarding Brazil and the Brazilian economy consists of extracts from, or summaries of, information published by the Central Bank of Brazil (Banco Central do Brasil), or BACEN, agencies or ministries of the Brazilian government and other secondary sources. Certain industry and demographic information used in this offering memorandum has been extracted from sources we believe to be reliable. Neither we, the selling shareholders, the Brazilian underwriters nor the international placement agents accept any responsibility in respect of the accuracy or the completeness of such information included in this offering memorandum, or in respect of any event that would affect the accuracy or completeness of such information.

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 than that of this offering memorandum and contains information not generally included in documents such as this. The offering is made in the United States and elsewhere outside Brazil solely on the basis of the information contained herein. Investors should take this into account when making investment decisions.

iii FORWARD-LOOKING STATEMENTS This offering memorandum includes forward-looking statements, principally in the sections ‘‘Summary’’, ‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, ‘‘The Industry’’ and ‘‘Business’’. We have based these forward-looking statements largely on our current beliefs, expectations, projections about future events and financial trends affecting our business and results of operations. Forward-looking statements include statements regarding our intent, belief or current expectations or that of our directors or executive officers and are subject to uncertainties and assumptions, including but not limited to: • changes in market prices, consumer preferences and competitive conditions; • changes in the prices of our raw and intermediate materials; • our ability to compete successfully and the direction of future operations; • changes in our business; • changes in the tax benefits to which we are entitled; • other factors or trends affecting our financial condition, liquidity or results of operations; and • other risk factors presented in the section ‘‘Risk Factors’’. Forward-looking statements also include information concerning our possible or assumed future results of operations set forth under ‘‘Summary’’, ‘‘Risk Factors’’, ‘‘Business’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and elsewhere, as well as statements preceded by, followed by, or that include the words ‘‘believes’’, ‘‘may’’, ‘‘will’’, ‘‘continues’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘intends’’, ‘‘plans’’, ‘‘estimates’’ or similar expressions. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Our future results and share values may differ materially from those expressed in or suggested by these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Investors are cautioned not to put undue reliance on any forward-looking statements. Investors should understand that the following important factors, in addition to those discussed in this offering memorandum, among others, could affect our future results and could cause results to differ materially from those expressed in such forward-looking statements: • general economic, political and business conditions in Brazil, in other countries in Latin America, emerging countries and other countries that import our products; • general social and political conditions in Brazil; and • governmental intervention, resulting in changes to the economic, tax, tariff or regulatory environment in Brazil or other countries in which we sell our products.

iv PRESENTATION OF CERTAIN INFORMATION Our financial statements are expressed in Brazilian reais. 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 U.S.$1.00, the rate of exchange as of December 31, 2003 published by BACEN on its electronic information system, SISBACEN, using transaction PTAX 800, option 5, and we have translated the real amounts for the six months ended June 30, 2004 using a rate of R$3.1075 to US$1.00, the rate of exchange as of June 30, 2004 published by BACEN on its electronic system, SISBACEN, using transaction PTAX 800, option 5. See ‘‘Exchange Rate Data’’. All references in this offering memorandum to (a) ‘‘U.S. dollars’’, ‘‘dollars’’ or ‘‘U.S.$’’ are to United States dollars and (b) ‘‘reais’’, ‘‘real’’ or ‘‘R$’’ are to Brazilian reais. We prepare our financial statements in accordance with accounting practices adopted in Brazil, which differ in certain significant respects from U.S. GAAP. As a result, our financial statements may differ significantly from financial statements prepared in accordance with U.S. GAAP or the accounting standards of certain other countries. Thus, the items appearing on our financial statements prepared in accordance with accounting practices adopted in Brazil may not reflect our financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. GAAP. See ‘‘Selected Financial Data’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, ‘‘Summary of Differences Between U.S. GAAP and Brazilian GAAP’’ and our consolidated financial statements and the related notes included elsewhere in this offering memorandum. The corporate governance rules applicable in Brazil, such as disclosure requirements and accounting standards differ from those in the United States in certain respects. In general, there may be substantially less information available about Brazilian companies, including us, than would be generally available about public companies in the United States or certain other countries with highly developed capital markets. In addition, corporate governance standards and shareholder accountability protections applicable to Brazilian companies may be less stringent than those applicable to public companies in the United States. Information contained herein regarding Brazil and its economy is based on data published by BACEN, by Brazilian governmental bodies or ministries and other sources. Certain industry and demographic data used herein were extracted from sources deemed reliable. Neither we, the selling shareholders, the Brazilian underwriters nor the international placement agents assume any responsibility as to the accuracy or completeness of such information. Unless otherwise specified, data regarding population presented herein is based on adjusted 2001 Population Census figures compiled by the IBGE. The information deriving from our audited consolidated financial statements and related notes included elsewhere in this offering memorandum may differ from the information that would be derived from financial statements prepared on a pro forma basis to reflect the combined business of our operations and those of our subsidiaries in the years 2001, 2002 and 2003. See ‘‘Selected Financial Information’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. Certain amounts (including percentages) included in this offering memorandum have been subjected to rounding and therefore totals presented in certain tables may not add up.

v TERMS USED IN THIS OFFERING MEMORANDUM Unless the context otherwise indicates, references in this offering memorandum to the following terms have the following meanings:

Abical¸cados ...... Brazilian Association of Footwear Industries (Associa¸cao˜ Brasileira das Industrias´ de Cal¸cados) ADENE ...... Agency for the Development of Northeast of Brazil (Agˆencia de Desenvolvimento do Nordeste) AGBPar ...... Alexandre G. Bartelle Participa¸coes˜ S.A. Additional shares ...... Additional shares, equivalent to 15% of the shares initially offered, which may be sold by selling shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle at the offering price within 30 days of the notice of commencement of this offering in Brazil, to cover overallotments Adjusted EBITDA ...... Gross profit less: (a) selling expenses, (b) general and administrative expenses and, (c) management fees plus: (x) equity pick-up, and (y) tax benefits adjustments and (z) depreciation and amortization Adjusted net income ...... Net income adjusted for comparison purposes of different time periods ANBID ...... Brazilian National Association of Investment Banks (Associa¸cao˜ Nacional dos Bancos de Investimento) Austin Asis ...... Austin Asis, an agency that provides market analysis and market reports BACEN ...... Central Bank of Brazil (Banco Central do Brasil) Banco do Estado do Ceara´ or BEC State Bank of Ceara´ (Banco do Estado do Ceara´ S.A.) Banco do Nordeste ...... Bank of Northeast Brazil (Banco do Nordeste do Brasil S.A.) BOVESPA ...... Sao˜ Paulo Stock Exchange (Bolsa de Valores de Sao˜ Paulo) Brazil ...... The Federative Republic of Brazil (Republica´ Federativa do Brasil) Brazilian corporation law ...... Law 6,404/76, as amended Brazilian GAAP ...... Accounting practices adopted in Brazil Brazilian government ...... The government of the Federative Republic of Brazil Brazilian underwriters ...... Banco Pactual S.A. as sole global coordinator and bookrunner and Banco de Investimentos Credit Suisse First Boston S.A., Banco Santander Brasil S.A., Banco Bradesco S.A. and BB— Banco de Investimento S.A. Broker ...... Pactual Corretora de T´ıtulos e Valores Mobiliarios´ S.A. CAGR ...... Compound annual growth rate CBLC ...... Brazilian Clearing and Depositary Corporation (Companhia Brasileira de Liquida¸cao˜ e Custodia´ )

1 CDI ...... Interfinance Deposit Certificate (Certificado de Deposito´ Interfinanceiro) CEDIN ...... State Council of Industrial Development of the state of Ceara´ (Conselho Estadual de Desenvolvimento Industrial do Estado do Ceara´) Closing Date ...... Three business days from the date of publication in Brazil of the announcement of the commencement of the offering CMN ...... Brazilian National Monetary Council (Conselho Monetario´ Nacional) Company or Issuer ...... Grendene S.A. Coverline ...... Fabric impregnated with PVC and used as a raw material for the production of footwear CVM ...... Brazilian Securities and Exchange Commission (Comissao˜ de Valores Mobiliarios´ ) CVM Instruction No. 325/00 ..... Instruction issued by the CVM dated January 27, 2000 (Instru¸cao˜ CVM No. 325/00) CVM Instruction No. 400/03 ..... Instruction issued by the CVM dated December 29, 2003 (Instru¸cao˜ CVM No. 400/03) Datamonitor ...... Datamonitor, an agency that provides market analysis and market reports DECEX ...... Department of Foreign Trade Transactions of the Brazilian Ministry of Development, Industry and Foreign Trade (Departamento de Opera¸coes˜ de Comm´ercio Exterior) Ernst & Young ...... Ernst & Young Auditores Independentes S.S. EVA ...... Ethylene Vinyl Acetate (Estireno Vinil Acetato). A thermoplastic copolymer of ethylene and vinyl acetate and a raw material in our production process Exchange Act ...... U.S. Securities Exchange Act of 1934, as amended FDI ...... Northeast Industrial Development Fund (Fundo de Desenvolvimento Industrial do Nordeste) Federal Constitution ...... Constitution of the Federative Republic of Brazil Fitalse ...... Fitalse S.A. FNE ...... Constitutional Fund for Financing the Northeast (Fundo Constitucional de Financiamento do Nordeste) Grendene Cal¸cados ...... Grendene Cal¸cados S.A. Grendene Industrial ...... Grendene Industrial de Cal¸cados Ltda. Grendene Negocios´ ...... Grendene Negocios´ S.A. Grendha Shoes ...... Grendha Shoes Corporation IBGE ...... Brazilian Geography and Statistics Institute (Instituto Brasileiro de Geografia e Estat´ıstica)

2 IBRACON ...... Brazilian Independent Auditors Institute (Instituto dos Auditores Independentes do Brasil) ICMS ...... Sales tax on operations relating to the provision of merchandise and services, or value added tax on sales and services (Imposto sobre Circula¸cao˜ de Mercadoria e Servicios) IGP-M ...... General Price Index—Market (´Indice Geral de Pre¸cos—Mercado) Industria´ de Cal¸cados Grendene . . Industria´ de Cal¸cados Grendene Ltda. INPI ...... Brazilian National Institute of Industrial Property (Instituto Nacional de Propriedade Industrial) IPCA ...... Consumer Price Index, as calculated by the IBGE (´Indice de Pre¸cos ao Consumidor Ampliado, apurado pelo IGBE) International placement agents . . . Pactual Capital Corporation, Santander Investment Securities, Inc. and Credit Suisse First Boston LLC Novo Mercado ...... The special listing segment of the BOVESPA with differentiated rules regarding corporate governance upon which the shares will be listed PIB ...... Gross Domestic Product (Produto Interno Bruto) Placement facilitation and agency Agreement entered into by us, the selling shareholders, Banco agreement ...... Pactual S.A., Banco de Investimentos Credit Suisse First Boston S.A., Banco Santander Brasil S.A. and the international placement agents related to the placement of shares outside Brazil PROAPI ...... Program of Incentives for the Port and Industrial Activities of Ceara´ (Programa de Incentivo as` Atividades Portuarias´ e Industrias do Ceara´) PROVIN ...... Program of Incentives for the Functioning of Companies (Programa de Incentivo ao Funcionamento de Empresas) PVC ...... Polyvinyl chloride, raw material produced by us from resin and used in the production of footwear QIB ...... Qualified institutional buyer, as defined under Rule 144A Reebok Chile ...... Reebok Chile S.A. Regulation S ...... Regulation S under the Securities Act Rule 144A ...... Rule 144A under the Securities Act Saddle Calzados ...... Saddle Calzados S.A. Saddle Corp...... Saddle Corporation Sociedad Anonima´ SATRA ...... SATRA Technology Center, an agency that provides market analysis and market reports SEC ...... U.S. Securities and Exchange Commission Securities Act ...... The U.S. Securities Act of 1933, as amended

3 Selling shareholders ...... Alexandre Grendene Bartelle, Pedro Grendene Bartelle, Elida´ Lurdes Bartelle and Maria Cristina Nunes de Camargo Stabilization agreement ...... Agreement entered into by and among the selling shareholders, the Broker, Banco Pactual S.A. and us in connection with the stabilization of the price of the shares being offered SUDENE ...... Northeast Development Superintendency (Superintendˆencia do Desenvolvimento do Nordeste) TJLP ...... Long-term interest rates, as published by BACEN (Taxa de Juros de Longo Prazo) Underwriter ...... Banco Pactual S.A. as sole global coordinator and bookrunner Underwriting agreement ...... Agreement entered into by us, the selling shareholders, Banco Pactual S.A. and CBLC, relating to the secondary public offering of shares in Brazil U.S. GAAP ...... Generally accepted accounting principles in the United States Verona ...... Verona Negociose´ Participa¸coes˜ S.A. VDA ...... VDA Calzados y Art´ıculos Desportivos S.A. Vulcabras´ ...... Vulcabras´ S.A. Vulcabras´ do Nordeste ...... Vulcabras´ do Nordeste S.A.

4 SUMMARY The following summary is qualified in its entirety by the more detailed information and our audited and unaudited consolidated financial statements and related notes included elsewhere in this offering memorandum. In particular, prospective investors should carefully consider certain factors relating to an investment in the shares set forth under the heading ‘‘Risk Factors’’.

Overview We design, manufacture, distribute and sell PVC and EVA footwear, known as ‘‘full-plastic’’ footwear. Based on information provided by Abical¸cados in 2003, our production accounted for approximately 18% of the Brazilian footwear market. In 2003, we produced approximately 121.3 million pairs of shoes. We offer our consumers a diversified portfolio with six principal product lines and more than 450 different models of shoes. On average, we have an active portfolio of around 180 models at any given time. We operate in the Brazilian market through our commercial representatives. In the export market, we use both our affiliates (Saddle Corp., Grendha Shoes and Saddle Calzados in Uruguay, the United States and Argentina, respectively), other outside distributors and directly export ourselves. In 2003, we sold approximately 22% of our total production outside Brazil, representing approximately 24% of our gross revenues. Based on data from Abical¸cados and DECEX, we believe that we were responsible for nearly 15% of Brazilian shoe exports in 2003 (in terms of actual volume exported). We sell our products in 57 countries outside Brazil, of which the United States, Paraguay, Mexico and Argentina are the most important. At June 30, 2004, we had approximately 13,700 active clients and 17,300 sales points in Brazil and 19,500 sales points abroad. At June 30, 2004, we employed approximately 21,500 employees. Our manufacturing operations are concentrated principally in Sobral in the state of Ceara,´ where we manufacture and store products. We also have manufacturing facilities in Fortaleza and Crato in the state of Ceara´ and in Farroupilha in the state of Rio Grande do Sul. In addition, we have a manufacturing facility in Carlos Barbosa, in the state of Rio Grande do Sul, where we design the molds for the production of our shoes. We operate advanced equipment in all our factories. The production capacity of our manufacturing facilities is 160 million pairs of shoes per year. Our gross profit has increased from R$238.6 million as of December 31, 2001, to R$333.2 million as of December 31, 2002 and to R$518.1 million as of December 31, 2003. Our total assets have increased from R$495.9 million at December 31, 2001 to R$726.7 million as of December 31, 2002 and to R$922.4 million as of December 31, 2003. We believe that Brazil will continue to be our principal market. Nonetheless, we will continue to look for new opportunities to increase our sales outside Brazil.

Our strengths We believe that our main competitive advantages include the following: • Strength of the brand and quality of concepts and products. We have established strong brands that are recognized in the Brazilian market, making some of our products benchmarks in the footwear sector. Our products are distinguished by their originality, function, design and emotional appeal to the consumer. In addition, we have been successful in implementing a strategy of association of our products with brands and names of national and international celebrities, and, in the case of the Kid’s range, to personalities who are well known in the children’s market in Brazil and abroad. In addition, intensive marketing has made the Rider brand synonymous with its type of products in Brazil and the Melissa range synonymous with plastic sandals both in and outside Brazil.

5 • Product innovation. We believe that the success of the Kid’s, Rider, Melissa, Grendha and Ipanema ranges, as well as the association of our products with licensed names and brands, reflects our capacity to develop concepts, designs and innovative products that attract the interest of new consumers. We continually renew our product portfolio, and launched approximately 460 new models in 2003, with 180 models in our active portfolio at any given time. • Differentiated production process and modern industrial machinery. Our production process involves the development of molds and the automated production of PVC and EVA shoes by injection, which differentiates us from our competitors. Our seven production units in the manufacturing facility in Sobral (responsible for approximately 83% of our production in 2003) have an average life of 5 years and cover approximately 154,000 square meters of constructed area and 500,000 square meters of land. The advanced technology used in our production process permits the fusion of uppers and sole components during the injection process. Our production thus becomes more economic and quicker, resulting in a more competitive price for our products with higher quality. We produce all the PVC used in our production process. This allows us to develop, with greater flexibility and without having to depend on third parties, specific formulas for each type of component and for each type of shoe produced. Our production of PVC allows us to quickly correct any problems identified in this raw material during the production process. We are not dependent on any of our suppliers of raw materials for the production of PVC. • Flexibility in responding to fashion trends and consumer acceptance. Our automatic production allows us to produce a large volume of products in a short space of time, compared to most of our competitors. This production capacity is possible due to our in-house production of our molds, the production process using plastic injection, and the use of modern industrial machinery. In 2003, we launched approximately 460 new models of shoes and maintained an active portfolio of approximately 180 models, renewed on average every six months. We can rapidly create or withdraw models from the market, responding to fashion trends and consumer acceptance. • Mass marketing. According to data published by Abical¸cados, we are responsible for around 18% of national footwear production and we believe that we are among the largest footwear producers in the world. Our scale of production and financial capacity affords us the opportunity to use significant television marketing campaigns to support our product launches. We believe that the majority of our competitors do not have the scale of production or the financial capacity to carry out this type of marketing strategy. • Consistent generation of cash and financial strength. We believe that our financial performance has been historically consistent and we have been able to use operational cash flow for business expansion. At June 30, 2004, our consolidated cash, available funds and financial investments exceeded the total of our loans and borrowings by R$208.4 million (taking into account tax benefits—See ‘‘Tax Benefits’’). Our consolidated adjusted net income was R$95.8 million in 2001, R$117.2 million in 2002, R$237.8 million in 2003, R$60.5 million in the first six months of 2003 and R$87.5 million in the first six months of 2004. Our adjusted EBITDA was R$115.5 million for the first six months of 2004, compared with R$106.0 million for the first six months of 2003. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ • Growth capacity, even in adverse economic circumstances. The average price of our products is relatively low and demand is relatively inelastic in relation to price, which has allowed us to grow even in the midst of a declining economic situation both in Brazil and internationally. In the Brazilian market, our gross revenues grew by 31.5% in 2003 and 25.5% in 2002, while

6 Brazilian GDP declined by 0.2% in 2003 and grew 1.9% in 2002. We believe that if macro- economic conditions improve in the future, we will have further opportunities for growth. • No dependence on specific market segments or clients. Currently our sales are distributed over four large market segments, with no dependence on a specific segment and with a wide diversification of products. For this reason, a decrease in product sales in a particular segment will have a less significant impact on our results, and may be offset by better results in another market segment. In addition, in 2003 we sold products to more than 13,000 clients and do not depend on any single client or group of clients. Our ten largest clients are responsible for approximately 13% of our sales and our largest client represents approximately 2% of our total sales. • Strong relationship with our commercial representatives. The quality of our relationship with our sales representatives and their role as ‘‘consultants’’ to our shop-owner clients gives us a differentiated position in the sector, increasing our capacity to attract and retain clients. Our commercial representatives use software that we developed, granting them access to the details of the shoe models, sizes and colors acquired by shop-owner clients in the past and assists these clients in their purchases, based on their type of establishment, their customers and our marketing support. • Strong relationship with the community and our employees. We have developed a strong relationship with the municipalities in the state of Ceara,´ where we have manufacturing facilities. We have provided social services within that state for several years, in accordance with the terms of various agreements pursuant to which we obtain tax benefits.

Our strategy Our strategy is to increase our market share in the footwear market in Brazil, our principal market, and abroad, especially in Latin America, through the constant development of new products with quality, originality, functionality, comfort, emotional appeal and competitive prices. To achieve this, we intend in the coming years to achieve the following: • Consolidate, increase and diffuse the use of full plastic footwear. We intend to consolidate and increase the use of full plastic footwear, emphasizing their advantages in relation to other forms of footwear, such as price, lighter weight, differentiated design, versatility, comfort and ease of following fashion trends. • Growth of the domestic market. We believe that the Brazilian footwear market as a whole has a large potential for growth in relation to other countries. In addition, in 2003, both in the female segment and in the mass consumption segment, we had a market share of approximately 15%, in comparison with a market share of approximately 26% in the male segment and 44% in the children’s segment. Our strategy is, in addition to consolidating and expanding the use of full plastic footwear, to increase the loyalty of our national clients and expand our national consumer base, the main focus of our business, including the female and mass consumption segments. • Growth of the export market. In 2003, approximately 22% of the footwear we produced was exported, representing approximately 24% of our gross revenue for that year. Exports to the United States, Paraguay and Mexico accounted for approximately 68% of our total exports, reflecting potential for growth in exports to other countries. Our strategy, in addition to expanding our presence in the markets where we already operate, is to identify further markets that have the profile for our products and develop these markets through more aggressive marketing. Thus, installed capacity not absorbed by the domestic market can be allocated to the export market, especially Latin America, and we can sell our products at competitive prices, with a differentiated design and responsive to the latest fashion trends.

7 • Growth in our production capacity. Our manufacturing facilities are prepared for the rapid growth of our sales. In 2003, approximately 25% of our installed capacity was unused. In addition, as a result of expansions in our factories, we have increased our installed capacity by 10% (in real terms). We invested approximately R$25 million in the past 6 months for the expansion, completion of buildings and the delivery of machinery and equipment. • Continuous renewal of our product portfolio. We develop our products internally on a continuous basis. In 2003, we launched approximately 460 new models, while maintaining an active portfolio of approximately 180 products. The quantity of footwear models that we launch, together with structured marketing planning, is indispensable for the consolidation of the image of our products. We intend to continually improve our product portfolio and the image that they represent. Our strategies are subject to many risks described under ‘‘Risk Factors’’, which you should read carefully. The Brazilian economy has been characterized by volatile economic cycles and by occasionally drastic interventions by the Brazilian government. Uncertainties in the Brazilian economy may hinder our ability to implement our strategies as planned.

Our corporate structure Our current corporate structure is set forth in the organizational chart below:

Grendene (Brazil)

100%

Saddle Corp. (Uruguay)

100% 99.99%

Grendha Shoes Saddle Calzados (United States) (Argentina)7OCT200422153609

Our principal executive offices are located at Avenida Pimentel Gomes, no 214, Sobral—Ceara,´ Brazil. Our telephone number is 55-54-261-9000.

8 The Offering

Shares offered ...... The offering consists of an offering of 17,304,348 shares (excluding any shares which may be sold pursuant to the overallotment option), without par value, by the selling shareholders: • to the public in Brazil in reliance on Regulation S; • to investors outside the United States in reliance on Regulation S; and • to qualified institutional buyers in the United States in reliance on Rule 144A. Selling shareholders ...... The selling shareholders are selling 17,304,348 shares (excluding any shares which may be sold pursuant to the overallotment option), representing approximately 17.3% of our capital stock, as follows: Alexandre Grendene Bartelle ...... 9,472,392 shares Pedro Grendene Bartelle ...... 4,337,556 shares Elida´ Lurdes Bartelle ...... 1,747,200 shares Maria Cristina Nunes de Camargo ...... 1,747,200 shares Total ...... 17,304,348 shares See ‘‘Principal and Selling Shareholders.’’ Offering price ...... R$31.00 per share. Shares outstanding ...... 100,000,000 shares. Overallotment option ...... 2,595,652 shares, upon exercise of the option by the Brazilian underwriters at any time for 30 days from the notice of commencement of the offering. Use of proceeds ...... We will not receive any proceeds from the sale of the shares. The selling shareholders will receive all proceeds. Transfer restrictions ...... The shares have not been registered under the Securities Act and are subject to U.S. restrictions on transfer described in ‘‘Notice to Investors’’. Dividend policy ...... Brazilian corporate law and our bylaws establish an annual dividend distribution of at least 25% of net revenues, adjusted in accordance with Brazilian corporation law. Under Brazilian tax legislation Brazilian companies are permitted to pay ‘‘interest’’ to holders of equity securities and treat such payments as a deductible expense for purposes of calculating income tax and social contribution tax. Voting rights ...... Each share entitles its holder to one vote at our annual and extraordinary general shareholders’ meetings. Pursuant to the agreement entered into with BOVESPA in connection with the listing of our shares on the Novo Mercado, we may not issue shares without voting rights or with restricted voting rights.

9 Lock-up period ...... The selling shareholders and each of our directors and officers have agreed not to sell any shares during the 180-day period following the launch of the offering in Brazil except for the additional shares issued in connection with the overallotment option. Trading ...... Our shares were accepted for listing and trading on the Novo Mercado segment of the BOVESPA, under the code GRND3. International security identification number ...... BRGRNDACNOR3.

10 Summary historical financial and operating data

The following table sets forth our summary historical consolidated financial data for the periods ended and at the dates below. We have derived our summary financial statements for the fiscal years ended December 31, 2001, 2002 and 2003 from our consolidated financial statements included elsewhere in this offering memorandum. These financial statements have been audited by our auditors, Ernst & Young, which have issued their reports containing a qualification of their opinion as a result of one of our subsidiaries having been audited by another independent auditor. We have derived our summary financial statements for the six months ended June 30, 2003 and 2004 from our consolidated financial statements included elsewhere in this offering memorandum. Our financial statements for the period ended June 30, 2004 have been audited by Ernst & Young, which have issued their reports containing a qualification of their opinion as a result of one of our subsidiaries having been audited by another independent auditor. The comparability of our financial statements for the fiscal years ended December 31, 2001, 2002 and 2003, as well as the financial statements relating to the six months ended June 30, 2003 and 2004, is limited due to the accounting of certain tax benefits and certain other provisions. Until August 1, 2003, the tax benefits of Grendene Cal¸cados and its subsidiaries, which are currently owned by us, were reflected in our consolidated financial statements as equity pick-up. From August 1, 2003, these tax benefits to which we are entitled are reflected directly as shareholders’ equity in our tax benefit reserve account and no longer appear in our income statement. To facilitate the comparison of our financial statements, we present in this section net income and EBITDA for the year ended December 31, 2003 and the six months ended June 30, 2004 adjusted to reflect the value of the tax benefits generated between August 1, 2003 and December 31, 2003 and in the six months ended June 30, to eliminate deferred income tax and social contributions. We also made adjustments to reflect the reversal and the creation of various provisions during the periods. These adjustments are set out below. The information below should be read together with the audited or unaudited consolidated financial statements and respective notes included in this offering memorandum. For a more detailed analysis of the adjustments in our financial statements, see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Business—Corporate Structure’’. Solely for the convenience of the reader, we have translated the real amounts reflected in our financial statements for the year ended December 31, 2003 into U.S. dollars using a rate of R$2.8892 to US$1.00, the BACEN’s PTAX commercial selling rate at December 31, 2003, and have translated the real amounts reflected in our financial statements for the six months ended June 30, 2004 into U.S. dollars using a rate of R$3.1075 to US$1.00, the BACEN’s PTAX commercial selling rate at June 30, 2004. The following tables set forth some of the principal financial and operational indicators for the periods indicated.

11 For the year ended December 31, For the six months ended June 30, Consolidated Statement of 2003 2003 2003 2004 2004 Income Data 2001 2002 Adjusted(1) Adjusted(1) Adjusted(1) Adjusted(1) Adjusted(1) (in thousands of R$) (in thousands (in thousands of R$) (in thousands of US$) of US$) Operating income/expenses: Selling expenses ...... (123,649) (171,587) (218,773) (75,721) (89,580) (100,377) (32,302) General and administrative expenses (33,500) (46,017) (61,561) (21,307) (27,555) (29,704) (9,559) Financial expenses ...... (62,456) (142,387) (137,797) (47,694) (72,262) (37,985) (12,224) Financial income ...... 39,335 95,411 84,351 29,195 48,706 35,610 (11,459) Equity pick-up ...... 58,185 76,424 45,071 15,600 35,702 —— Management fees ...... (240) (240) (240) (83) (120) (120) (39) Other operating income ...... 5,746 10,652 23,413 6,109 14,103 10,542 3,392 Other operating expenses ...... (2,790) (2,258) (5,764) (1,995) (3,801) (2,870) (924) Operating result ...... 119,224 153,205 232,705 80,543 81,814 62,852 20,226 Non-operating result ...... (2,576) 525 (203) (70) (199) 157 51

Income before income taxes and minority interest ...... 116,648 153,730 232,502 80,473 81,615 63,009 20,276 Provision for income tax ...... (14,880) (26,442) (44,346) (15,349) (17,019) (14,680) (4,724) Provision for social contribution tax . . (5,506) (9,409) (13,480) (4,666) (3,692) (4,402) (1,417) Minority interest ...... (458) (717) (621) (215) (377) 0 — Tax benefits adjustments ...... 0 0 63,707 22,050 0 43,573 14,022 Adjusted net income(1) ...... 95,804 117,162 237,762 82,293 60,527 87,500 28,158

(1) To facilitate comparison of the financial statements relating to years ended December 31, 2003, 2002 and 2001, as well as the financial statements relating to the six months ended June 30, 2003 and 2004, we have made certain adjustments, as set forth below: (i) for the year ended December 31, 2003, we made certain adjustments to our net income, including (a) an increase of approximately R$42.9 million relating to the financing tied to our ICMS tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$20.8 million relating to our income tax benefits (items (a) and (b) are reflected in the ‘‘Tax benefits adjustments’’ item), and (c) a decrease of several provisions not included in our accounts of R$29.2 million for doubtful debts, discounts to customers for prompt payment, obsolete inventory, probable production costs and labor contingencies; and (ii) for the six months ended June 30, 2003, (a) we reversed in the respective lines of our financial statements corresponding to each provision, various provisions related to the year ended December 31, 2002, a total value of approximately R$16 million, (b) we deducted the remaining balance of approximately R$6.7 million that had originated in the reversal and creation of provisions exclusively in the item ‘‘selling expenses’’, (c) we deducted and reclassified, in the respective lines of our financial statements, approximately R$9.3 million related to provisions originally created in the first six months of 2003 and (d) we deducted various non-accounted provisions with an approximate value of R$14.4 million; and (iii) for the six months ended June 30, 2004, we made certain adjustments to our net income, including (a) an increase of approximately R$38.5 million relating to the financing tied to our ICMS and export tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$5.1 million relating to our income tax benefits (items (a) and (b) are reflected in the ‘‘Tax benefits adjustments’’ item), (c) the reversal of certain provisions not included in our accounts for the year ended December 31, 2003, of approximately R$29.2 million, and (d) elimination of the deferred income tax and social contribution effect, in the amount of approximately R$9.5 million. The adjustments in connection with the tax benefits to which we are entitled were made as a result of the merger of Grendene Cal¸cados into our company on August 1, 2003. As a result of this merger, since August 1, 2003, amounts generated by our tax benefits (which, prior to July 31, 2003, were reflected in our consolidated statement of income as equity pick-up) are accounted for directly in shareholders’ equity, in our tax benefit reserves. Other adjustments were made as a result of the non-inclusion of several provisions in our accounts in the year ended December 31, 2003 and the six months ended June 30, 2003, as described above.

12 At December 31, At June 30, Consolidated Balance Sheet Data 2001 2002 2003 2003 2003 2004 2004 (in thousands (in thousands (in thousands (in thousands of R$) of US$) of R$) of US$) Cash and cash equivalents and short-term investments ...... 84,344 211,549 246,138 85,192 191,423 347,115 111,702 Other current assets ...... 263,536 367,349 497,301 172,124 354,132 423,291 136,216 Non-current assets ...... 7,305 6,871 2,638 913 6,325 3,215 1,035 Fixed assets ...... 137,631 137,968 173,292 59,979 161,306 165,614 53,295 Investments ...... 3,062 2,926 3,029 1,048 2,726 1,764 567 Total assets ...... 495,878 726,663 922,398 319,256 715,912 940,999 302,815 Short-term loans and financings ...... 20,922 157,868 14,768 5,111 68,328 15,312 4,927 Other current liabilities ...... 51,864 73,692 97,457 33,731 77,079 81,306 26,164 Long-term loans and financings ...... 80,981 53,098 117,447 40,650 55,833 123,359 39,698 Other current liabilities ...... 0000000 Minority interest ...... 3,771 4,982 0 0 5,547 0 0 Shareholders’ equity ...... 338,340 437,023 692,726 239,764 509,125 721,022 232,026 Total liabilities and net equity ...... 495,878 726,663 922,398 319,256 715,912 940,999 302,815

For the year ended December 31, For the six months ended June 30, Adjusted Financial Data 2001 2002 2003 2003 2003 2004 2004 (in thousands (in thousands (in thousands (in thousands of R$) of US$) of R$) of US$) Gross sales revenue ...... 697,161 906,978 1,276,365 441,771 479,387 604,981 194,684 Net sales revenue ...... 577,233 755,186 1,061,093 367,262 398,921 486,893 156,683 Net income ...... 95,804 117,162 203,221 70,338 74,877 24,248 7,803 Tax benefits adjustments ...... 0 0 35,541 11,955 14,350 63,252 20,355 Adjusted net income(1) ...... 95,804 117,162 237,762 82,293 60,527 87,500 28,158 Adjusted EBITDA(2) ...... 156,513 211,800 354,169 122,584 105,996 115,506 37,170

13 (2) Adjusted EBITDA is not a measure used under Brazilian GAAP. It does not represent cash flow for the periods presented and must not be considered as 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 standard meaning and our definition of adjusted EBITDA cannot be compared to EBITDA or adjusted EBITDA as defined by other companies. Although, according to Brazilian accounting practices, adjusted EBITDA is not a measure of the operating cash flows, we use it to measure our operating performance. Moreover, we understand that certain investors and financial analysts use adjusted EBITDA as an operating performance indicator for a company and/or its cash flow. Adjusted EBITDA takes into consideration adjustments relating to our financing tied to our PROVIN, PROAPI and income tax benefits, as well as the reversal of certain provisions, as described above.

Six months ended Year ended December 31, June 30, Variation Production (in CAGR thousands of pairs) 2001 2002 2003 (2001-2003) 2003 2004 2003-2004 Domestic market: ...... 79,402 99,856 94,368 9.0% 34,407 43,532 26.5% Masculine segment ...... 24,465 22,206 18,691 (12.7)% 7,408 8,577 15.8% Feminine segment ...... 24,310 28,809 24,564 0.5% 7,421 10,419 40.4% Children’s segment ...... 18,739 19,865 24,318 13.9% 7,572 8,898 17.5% Mass consumer segment(1) ...... 11,888 28,976 26,795 50.1% 12,006 15,638 30.3% Export market:(2) ...... 14,954 16,446 26,927 34.2% 13,400 15,098 12.7% Total market ...... 94,356 116,302 121,295 13.4% 47,807 58,630 22.6%

(1) Includes other products accounting for a small percentage of our revenues. (2) Includes sales in the export market through our subsidiaries.

Six months Year ended ended December 31, June 30, Variation CAGR Average price (R$) 2001 2002 2003 (2001-2003) 2003 2004 2003-2004 Domestic market: ...... 7.43 7.41 10.32 17.9% 9.83 10.62 8.0% Masculine segment ...... 6.82 7.98 11.70 31.0% 11.01 12.02 9.2% Feminine segment ...... 8.24 8.73 12.01 20.7% 12.68 12.61 (0.5)% Children’s segment ...... 9.83 10.62 13.74 18.2% 13.64 16.58 21.5% Mass consumer segment(1) ...... 3.52 3.58 4.82 17.0% 4.94 5.12 3.7% Export market:(2) ...... 7.18 10.14 11.24 25.1% 10.54 9.46 (10.2)% Total market ...... 7.39 7.80 10.52 19.3% 10.03 10.32 2.9%

(1) Includes other products accounting for a small percentage of our revenues. (2) Includes sales in the export market through our subsidiaries.

14 RISK FACTORS Before making a decision to invest in the shares, you should consider and carefully analyze all of the information set forth in this offering memorandum. In particular, you should consider the special risks applicable to an investment in Brazil and applicable to an investment in the company, including those set forth below. In general, investing in the securities of issuers in emerging market countries, such as Brazil, involves a higher degree of risk than investing in the securities of issuers in the United States. Additional risks that are presently unknown to us or that we currently deem immaterial may also have an adverse effect on us or on your investment in the shares. For purposes of this section, when we state that a risk, uncertainty or problem may, could or would have an ‘‘adverse effect’’ on us, we mean that the risk, uncertainty or problem may, could or would have an adverse effect on our business, financial condition, liquidity, results of our operations or prospects, except as otherwise indicated or as the context may otherwise require. You should view similar expressions in this section as having a similar meaning.

Risks relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Adverse political and economic conditions may have an adverse effect on us. The Brazilian economy has been characterized by the significant involvement of the Brazilian government, which often changes monetary, credit, fiscal and other policies to influence Brazil’s economy. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, devaluation of the real, controls over remittance of moneys outside Brazil, limits on imports and exports and the freezing of bank accounts. Actions taken by the Brazilian government concerning the economy may have important effects on Brazilian corporations and other entities, including us, and on market conditions and prices of Brazilian securities, including the shares. We may be adversely affected by the following factors, among others, and the Brazilian government’s response to them: • exchange rate movements; • increases in the inflation rate; • exchange control policies; • absence of internal economic growth; • social instability; • decreases in the liquidity of domestic capital and lending markets; • energy shortages; • monetary policy; • increases in interest rates; • import and export controls; • tax policy; and • other political, diplomatic, social and economic developments in or affecting Brazil, for example, the agreement with the International Monetary Fund. In 2002, Brazil elected Workers Party leader Luiz Inacio´ Lula da Silva as president. Any negative reaction to policies eventually adopted by the Brazilian government may have an adverse effect on us.

15 An increase in the inflation rate, as well as certain measures of the Brazilian government implemented to combat it, could have an adverse effect on the Brazilian economy, the Brazilian capital markets, our business and operations and the market value of our 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 ´Indice Geral de Pre¸cos-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 ´Indice Nacional de Pre¸cos ao Consumidor Ampliado, the Brazilian price inflation rates were 7.7%, 12.5% and 9.3% in 2001, 2002 and 2003, respectively. In the first six months of 2004, IGP-M was 6.8% and the IPCA for the same period was 3.5%. Brazil may experience high levels of inflation in the future, which may have an adverse effect on us. There can be no assurance that recent lower levels of inflation will continue. Future governmental actions, including actions to adjust the value of the real, may trigger increases in inflation. Our service providers and suppliers may adjust their prices to compensate for future increases in the inflation rate, and we cannot anticipate whether we will be able to pass on the cost increase to our consumers in the future, which may have an adverse effect on us.

The volatility of the real in relation to the U.S. dollar and other currencies could have an adverse effect on us. The Brazilian currency has devalued periodically in relation to the dollar and other currencies during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations and mini-devaluations, during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems and exchange controls. Brazil has experienced significant fluctuations in the exchange rates between the real and the U.S. dollar and other currencies. For example, the real/ U.S. dollar exchange rate depreciated from R$1.955 per U.S.$1.00 at December 31, 2000, to R$2.320 at December 31, 2001, and to R$3.533 at December 31, 2002, but appreciated to R$2.889 at December 31, 2003. In the first half year of 2004, the dollar increased in value by 7.6% against the real, while during the same period in 2003, the real increased in value against the dollar by 18.7%. We cannot assure you that any future devaluation or appreciation of the real will not have an adverse effect on us. Devaluation or depreciation 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 governmental policies. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the current account and the balance of payments, as well as dampen the growth of gross domestic product driven by exportation. The potential impact of the floating exchange rate and of measures of the Brazilian government aimed at stabilizing the real is uncertain. In addition, a substantial increase in inflation may weaken investor confidence in Brazil, impacting our ability to finance our future operations through the international capital markets. In 2003, approximately 37% of our cost of goods sold were partially tied to foreign currency exchange rates and to movements in supply and demand, of which approximately 30% consists of costs associated with PVC resin and plastic oil and approximately 7% represents the costs associated with packaging. Most of such costs were partially indexed to the exchange variation between the real and the dollar. Devaluation of the real relative to the dollar increases our cost of acquisition of these raw materials and could negatively affect our business.

16 In 2003, approximately 22% of our products were sold through export, with these sales representing approximately 24% of our consolidated gross revenues. In the future, we intend to increase our export sales in order to reach our growth target. If the real strengthens against the U.S. dollar or the Euro, our products could become less competitive. In that case, we may have to adjust the prices of our export products, which may adversely affect us.

Deterioration in political, social, economic and market conditions in other emerging market countries may have an adverse effect on us. 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 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, including Latin America, 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 effect on perceptions of the risk inherent in investing in the region, including Brazil. This factor could adversely affect the trading price of our shares and could also make it more difficult for us to access capital markets and finance our operations in the future on acceptable terms or at all. Deterioration of political, economic, social and market conditions in other countries with emerging economies, which could have effects in Brazil, may have an adverse effect on us.

Risks relating to the footwear industry The footwear industry is sensitive to decreases in consumer purchasing power and unfavorable economic cycles. In the event that economic conditions in Brazil or in those countries that import our products deteriorate, our clients could significantly reduce their purchases or be unable to pay in due course, which would negatively affect our results of operations. Historically, the footwear industry has been susceptible to general economic downturns leading to declines in consumer discretionary spending. The success of our operations depends to a significant extent on a number of factors relating to consumer discretionary spending and/or affecting disposable consumer income, including: • general business conditions; • interest rates; • availability of credit to consumers; • taxation; and • consumers’ trust in future economic conditions. An economic downturn could significantly reduce consumer discretionary spending and disposable consumer income, which would have an adverse impact on our sales and, in turn, on our results of operations.

17 The footwear industry is highly competitive and we could lose our position in the market in certain circumstances. The footwear industry is highly competitive and does not have high entry barriers restricting new competitors from entering the market. Competitive factors that affect our market position within the footwear industry include the price, quality, style, strength and authenticity of our brands and our ability to promptly supply our clients. Many of our national and international competitors have significantly greater resources than we do and have greater brand recognition. To the extent that one or more of our competitors initiates a very successful marketing or sales campaign or develops rapid advances in technology, our business could be materially adversely affected. To the extent that we are not able to respond to such pressures as promptly and fully as our competitors, our financial condition and results of operations could be materially adversely affected.

Our success depends on our ability to anticipate fashion trends. The footwear industry must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Our initiatives to strengthen our brands, including market research, introduction of new products, licensing partnerships and marketing strategy may not be successful. We are also dependent on consumer receptivity to our products and marketing strategy and also on the weather. There can be no assurance that consumers will continue to prefer our brands or that we will respond quickly enough to changes in consumer preferences. The failure to introduce new products that gain market acceptance could adversely affect our sales and profits.

Changes in environmental laws and regulations could negatively impact our business. Brazilian footwear manufacturers, including us, are subject to rigorous environmental legislation at the federal, state and municipal levels, regulating, among other matters, the elimination of solid waste and other emissions in the water supply. We require authorization from governmental agencies for some of our activities. If we violate or fail to comply with these laws and regulations, we (and our management) could be fined or otherwise sanctioned, have our authorizations revoked, or be subject to criminal penalties. We may also be required to incur substantial environmental clean-up costs. In addition, the government and its agencies could in the future issue more stringent legislation or seek more restrictive interpretations of existing laws and regulations; this could result in additional costs to us for environmental compliance, which could have a material adverse impact on us.

Risks relating to our business We receive federal and state tax benefits and the suspension or cancellation of such benefits could adversely affect our results of operations. We receive federal and state tax benefits which guarantee us exemptions from, or reductions of, income taxes, in addition to the return of part of the amount of taxes we pay to the state of Ceara´ as ICMS, as well as a percentage of our exports. If we are unable to fulfill certain mandatory obligations under the tax benefit program, such as complying with social, labor and environmental legislation, not distributing dividends from funds generated by our tax benefits, submitting annually certain requested information to the relevant authorities and maintaining adequate debt and liquidity levels, our benefits would be immediately suspended or cancelled and we could be required to pay the full amount of the taxes (without the application of the benefits) due with accrued interest, which would have an adverse effect on us. The state tax benefits have a mechanism to grant financings. The granting of such subsidized financing is subject to the availability of resources to the FDI. In connection with our tax benefits for export activities, as at June 30, 2004, the state of Ceara´ owed us approximately R$6.3 million in state

18 tax benefit financing. We cannot guarantee that the FDI will have the resources available to pay us the outstanding balance or to fund future financing, such underfunding could have an adverse effect on us. In addition, we cannot guarantee that the state tax benefits will be maintained through the stated period or that, in case of the state and federal tax benefits, we will be able to renew or replace such benefits in the future. In the event that the state tax benefits to which we are currently entitled are legally questioned by third parties such as the Department of Public Prosecution, other states in Brazil or future governments of the state of Ceara,´ resulting in a judicial judgment against us, our benefits could be cancelled and/or we could be charged for the full amount of the exemption, reduction, and/or financing granted through the date of judgment, subject to the statute of limitations, which could have an adverse effect on us. Additionally, we cannot assure you that the procedure currently adopted with respect to BEC regarding the collection of ICMS will be maintained in the future, or that, if an alternative procedure is adopted, it will be as favorable to us. See ‘‘Business—Tax benefits’’.

A substantial or extended increase in the prices of our raw materials would have a material adverse effect on us. Our principal raw materials are PVC resin and plastic oils, which contributed to approximately 30% of our consolidated cost of goods sold in 2003. Such raw materials are commodities and their prices fluctuate in relation to international market prices. Historically, prices for these commodities have fluctuated in response to changes in many factors. We do not and will not have control over the factors affecting the price for such commodities. Paper and packaging are important components of our production process and contributed to approximately 7% of our consolidated cost of goods sold in 2003. The prices of these materials are relatively volatile, as they are linked to the price of cellulose on the international market. Historically, the price of wood pulp has fluctuated widely, due to a variety of factors over which we do not and will not have control. Significant and unexpected changes in the prices of raw materials and wood pulp, as well as fluctuations in supply and demand of these materials, could directly impact the price of our raw materials and have an adverse effect on us.

We may be unsuccessful in implementing our growth strategy. As part of our growth strategy, we seek to enhance the positioning of our brands, expand geographically in Brazil and internationally and improve our operational performance through, among other strategies, obtaining tax benefits. We intend to maintain our growth strategy through marketing and promotional activities, constant launch of new products, increasing sales in the domestic market and expanding production and exports. We may not be able to successfully implement any or all of these strategies for reasons including tax or tariff barriers in our export markets. If we fail to do so, our rate of growth may decrease or our operations may decline, which could have a negative effect on the value of our shares.

We may be unsuccessful in managing our growth. We experienced significant growth in 2003, 2002 and 2001. Our future performance will depend on our ability to grow through strategic marketing, development of new products, increased sales in the domestic market and expanding our export market to manage our domestic and international operations through investment in improving our financial and operational controls, infrastructure and information systems. If we fail to adequately invest in our product lines and infrastructure, our growth prospects could be materially and adversely affected and our failure to successfully implement our growth strategy could have a material adverse effect on our market share and have an adverse effect on us.

19 Our sales and profitability could be adversely affected if our investments in advertising, marketing and licensing do not achieve the results we expect. Because consumer demand is highly influenced by the image of our brands, our business requires substantial investment in advertising and marketing, including the licensing of widely recognized brands and names of national and international celebrities, personalities in children’s entertainment and children’s characters. In the event that such investments do not achieve the results we expect, or in the event that we are not capable of renewing our current licensing contacts or attracting new ones, our sales and profitability could be adversely affected.

If we fail to adequately protect our intellectual property rights, our competitive position could be adversely affected. Our brand names are our principal intellectual property and the protection of our brand names is extremely important to our business. Our brands and designs are constantly at risk of counterfeiting and infringement of our intellectual property rights, and we frequently find counterfeit products and products that infringe upon our intellectual property rights in our markets. Even though we have registered our brand names, it is generally necessary for us to defend our intellectual property rights in order to prevent others from misappropriating or infringing on our brand names in an attempt to sell similar products with similar names. We have not always been successful in defending against counterfeit products and stopping infringement of our intellectual property rights. Counterfeit and infringing products not only cause us to lose significant sales, they can also harm the integrity of our brands by associating our brand names or designs with lesser quality or defective goods. Should we be unable to adequately protect our brand names, our competitive position could be adversely affected. Moreover, although we have registered the majority of our brand names and patents, we cannot assure you that our competitors will not allege that we are in violation of their intellectual property rights in certain cases. In the event that we are prevented from manufacturing a specific product or using a certain brand name, our results of operations and financial condition could be adversely affected.

Our operations are dependent upon the services of key personnel, some of whom are also shareholders. As is common in the footwear industry, our success depends to a significant extent upon, among other factors, the continued service of key senior executives, shareholders, including Alexandre Grendene Bartelle and Pedro Grendene Bartelle, our management and personnel in research and development, production and other key areas, as well as our ability to continue to attract, retain and motivate qualified personnel. The loss of the services of any of these key personnel without adequate replacement, or the inability to attract new qualified personnel could have a material adverse effect on our results of operations and financial condition.

The untimely renewal request of environmental licenses and the absence of insurance in respect of environmental damage could adversely affect us. We requested renewal of our environmental license for the Farroupilha manufacturing facility after the deadline under the applicable legislation. We could, therefore, be subject to administrative penalties. In addition, we are not insured for environmental damage that may be caused by the operation of our five manufacturing facilities. In the event of environmental damages, we could be obliged to spend substantial amounts to implement corrective environmental measures, as well as becoming subject to administrative and judicial penalties, which could have an adverse effect on us.

20 Risks relating to the offering and our shares There is no public market for our shares. There is currently no public market for our shares. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market for our shares on BOVESPA or how liquid that market might become. The ten largest companies in terms of market capitalization represented approximately 48.5% of the aggregate market capitalization of BOVESPA as of September 30, 2004. The top ten stocks in terms of trading volume accounted for approximately 50.3% of all shares traded on BOVESPA in September 2004.

Sales of a substantial number of our shares after this offering may adversely affect the price of our shares. Sales of a substantial number of our shares on BOVESPA following this offering, or the perception that such sales could occur, could adversely affect the market price of our shares.

Our controlling shareholders have the ability to direct our business and affairs and their interests could conflict with yours. After the conclusion of this offering, the selling shareholders, directly or indirectly, will own or control shares representing in aggregate approximately 80.1% of our voting capital, assuming the exercise of the overallotment option. If the overallotment option is not exercised, the selling shareholders will hold or control shares representing, in aggregate, approximately 82.7% of our voting capital. The shares held by AGBPar, Verona and Grendene Negocios´ are subject to a shareholders agreement dated October 6, 2004. While Alexandre Grendene Bartelle continues to control, directly or indirectly, our company, he will have the power, among other things, to: • elect a majority of our directors and dismiss directors; • control our policies and the administration of our business; • determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and dispositions of all or a substantial part of our assets; and • determine the timing and payment of future dividends, subject to minimum dividend payment requirements imposed under Brazilian corporation law. Our controlling shareholder, Alexandre Grendene Bartelle, may have interests that could conflict with your interests as a shareholder.

We may need additional resources in the future, which may be obtained through increases in our capital. We may need to obtain additional resources in the future. We may not be able to continue to obtain state or private equity or debt financing on terms attractive to us, or at all. If we cannot obtain adequate funds to satisfy our capital requirements, we may need to increase our capital. Furthermore, we may choose to seek additional capital if we believe it will be on terms that are advantageous to us. Any additional funding obtained through capital increases may dilute your shareholdings in our company.

21 The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell your shares at the price and time you desire. Investing in securities in emerging markets, such as Brazil, involves greater risk than investing in securities of issuers from more developed countries, and such investments are generally considered speculative in nature. Brazilian investments, such as investments in our shares, are subject to economic and political risks, involving, among others: • changes in the regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments; and • restrictions on foreign investment and on repatriation of capital invested. The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major U.S. and European securities markets, and are not as highly regulated or supervised as these markets. The relatively small market capitalization and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the shares at the price and time you desire.

The Brazilian government may impose exchange controls and significant restrictions on transfers of foreign currency abroad, which could adversely affect your ability to remit dividends, distributions and the proceeds on the sale of your shares. Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reasons to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. For example, for approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors and held by BACEN in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian governmental directives. We cannot assure you that the Brazilian government will not take similar measures in the future. As a result, you may be restricted from remitting, in currencies other than reais, amounts that you receive in reais as dividends or as the proceeds of sales of shares. The likelihood that the Brazilian government would impose such restrictions may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy toward the International Monetary Fund, and other factors. The Brazilian government currently restricts the ability of Brazilian or foreign persons or entities to convert Brazilian currency into U.S. dollars or other currencies, other than in connection with certain authorized transactions.

Brazilian corporate governance, disclosure requirements and accounting standards differ from those in the United States. Corporate governance, disclosure requirements and accounting standards applicable to Brazilian companies differ from those in the United States in certain respects. In general, there may be substantially less information available about Brazilian companies, including us, than would be generally available about public companies in the United States or certain other countries with highly developed capital markets. In addition, corporate governance standards and shareholder accountability protections applicable to Brazilian companies may be less stringent than those applicable to public companies in the United States.

22 Like all other Brazilian companies, we prepare our financial statements in accordance with accounting practices adopted in Brazil, which differ in certain significant respects from U.S. GAAP. As a result, our financial statements may differ significantly from financial statements prepared in accordance with U.S. GAAP or the accounting standards of certain other countries. Thus, the items appearing on the financial statements of a company prepared in accordance with accounting practices adopted in Brazil may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. GAAP. We have made no attempt to identify or quantify the impact of these differences other than in the ‘‘Summary of Differences Between U.S. GAAP and Brazilian GAAP’’. In making an investment decision, investors must rely upon their own examination of us, the terms of the offering and the financial information contained in this offering memorandum. Potential investors should consult their own professional advisors for an understanding of the differences between accounting practices adopted in Brazil and U.S. GAAP, and how those differences might affect the financial information presented in this offering memorandum.

You may be unable to exercise preemptive rights with respect to our shares. Although you will be entitled to preemptive rights relating to the shares, you may not be able to exercise these preemptive rights, unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration applies, your preemptive rights will be allowed to lapse.

23 ENFORCEABILITY OF JUDGMENTS We are organized under the laws of Brazil. The selling shareholders participating in the secondary offering are Brazilian citizens. We, all of our directors and executive officers named in this offering memorandum, and all of the selling shareholders presently reside in Brazil. Additionally, most of our assets and of the assets of the selling shareholders are located in Brazil. As a result, it will be necessary for you to comply with Brazilian law in order to obtain an enforceable judgment against these foreign resident persons or our or their assets. It may not be possible for you to effect service of process within the United States upon us, our directors and executive officers, the selling shareholders, or to realize judgments against these persons obtained in U.S. courts based upon civil liabilities of these persons, including any judgments based upon U.S. securities laws, to the extent these judgments exceed these persons’ U.S. assets. Specifically, Brazilian courts will enforce judgments of U.S. courts for civil liabilities predicated on the U.S. securities laws, without reconsideration of the merits, only if the judgment satisfies certain requirements and receives confirmation from the Federal Supreme Court of Brazil. The foreign judgment will be confirmed if: • it fulfills all formalities required for its enforceability under the laws of the country that granted the foreign judgment; • it is issued by a court of a country with jurisdiction recognized by Brazilian international law after service of process is properly made in accordance with applicable laws (if made in Brazil, service of process must be effected in accordance with Brazilian law); • it is not subject to appeal; • it is for the payment of a sum certain of money; • it is authenticated by a Brazilian consular office in the country where it is issued, and is accompanied by a sworn translation into Portuguese; and • it is not contrary to Brazilian national sovereignty, public policy or public morality. Notwithstanding the foregoing, we cannot assure you that such confirmation would be obtained, that the process described above would be conducted in a timely manner or that a Brazilian court would enforce a monetary judgment for violation of U.S. securities laws with respect to this offering or the shares. In addition: • original actions predicated on the U.S. securities laws may be brought in Brazilian courts and that, subject to applicable laws, Brazilian courts may enforce liabilities in such actions against us, the Brazilian selling shareholders, our directors, and certain of our officers named in this offering memorandum under certain circumstances; • if the plaintiff resides outside Brazil and owns no real property in Brazil, the plaintiff must provide a bond sufficient to guarantee court costs and legal fees, including the defendant’s attorneys’ fees, as determined by the Brazilian court in connection with litigation in Brazil, except in the case of the enforcement of a foreign judgment which has been confirmed by the Brazilian Federal Supreme Court; and • Brazilian law places limits on investors’ abilities as judgment creditors to satisfy a judgment against their debtors by attaching certain of their respective assets.

24 EXCHANGE RATE DATA There are two legal foreign exchange markets in Brazil: • the commercial rate exchange market; and • the floating rate exchange market. Most trade and financial foreign-exchange transactions are carried out on the commercial rate exchange market. These transactions include the purchase or sale of shares or the payment of dividends or interest with respect to shares acquired through the investment mechanism set forth in Resolution No. 2,689/00 of the Brazilian National Monetary Council. Foreign currencies may only be purchased in Brazil through a Brazilian bank authorized to operate in these markets. In both markets, rates are freely negotiated but may be strongly influenced by intervention by the BACEN to control unstable movements in foreign exchange rates. In 1999, BACEN placed the commercial exchange market and the floating rate exchange market under identical operational limits, which led to a convergence in the pricing and liquidity of both markets. Since February 1, 1999, the floating market rate has been the same as the commercial market rate. However, there is no guarantee that these rates will continue to be the same in the future. Despite the convergence in the pricing and liquidity of both markets, each market continues to be regulated differently. Since 1999, BACEN has allowed the real/U.S. dollar exchange rate to float freely, and since then, the real/U.S. dollar exchange rate has fluctuated considerably. Since 2001, the Brazilian exchange market has been increasingly volatile, and, despite certain periods in which the real appreciated against the U.S. dollar, the value of the real has declined overall relative to the U.S. dollar. In the past, the BACEN has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the BACEN or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. We cannot assure you that the real will not devalue substantially in the near future. The following table sets forth the commercial selling rate, expressed in reais per U.S. dollar (R$/ U.S.$) for the periods indicated as published by BACEN. Reais per U.S. dollar Average for Period-end Period(1) Low High Year Ended December 31, 1999 ...... 1.789 1.816(1) 1.208 2.165 December 31, 2000 ...... 1.955 1.829(1) 1.723 1.985 December 31, 2001 ...... 2.320 2.352(1) 1.936 2.801 December 31, 2002 ...... 3.533 2.931(1) 2.271 3.955 December 31, 2003 ...... 2.889 3.072(1) 2.822 3.662 Month Ended March 2004 ...... 2.909 2.908(2) 2.875 2.941 April 2004 ...... 2.945 2.906(2) 2.874 2.952 May 2004 ...... 3.129 3.100(2) 2.957 3.205 June 2004 ...... 3.108 3.129(2) 3.103 3.165 July 2004 ...... 3.027 3.037(2) 2.994 3.075 August 2004 ...... 2.934 3.003(2) 2.934 3.064 September 2004 ...... 2.859 2.891 2.824 2.851

Source: U.S. dollar selling rate as published by BACEN on its electronic information system, SISBACEN, using transaction PTAX Option 5. (1) Average of the rates of each period, using the average of the exchange rates on the last day of each month during each period. (2) Average of the daily rates in the month. On October 6, 2004, the commercial selling rate was R$2.836 per U.S.$1.00.

25 USE OF PROCEEDS Because the offering described in this offering memorandum will be a secondary offering of the 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 the shares in this offering.

26 CAPITALIZATION The following table sets forth our cash and cash equivalents, available funds and investments, long-term and short-term indebtedness, shareholders’ equity and total capitalization (defined as total long-term indebtedness and shareholders’ equity) as of June 30, 2004 in accordance with Brazilian GAAP. You should read this table in conjunction with ‘‘Selected Financial Data’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements and related notes contained in this offering memorandum. There have been no material changes in our capitalization since June 30, 2004, except (i) for the distribution of dividends to shareholders on July 27, 2004 and September 2, 2004, in the amounts of R$20.4 million and R$12.1 million, respectively, and (ii) for the increase in our capital stock of approximately R$137.5 million to approximately R$620.6 million approved by shareholders on September 28, 2004, through the capitalization of certain reserves and the issuance of new shares (see ‘‘Capital Stock’’).

June 30, 2004 (in thousands of R$) (in thousands of US$) Cash and cash equivalents, available funds and investments . . . 347,115 111,702 Short-term indebtedness: Loans and short-term debt ...... 15,312 4,927 Other short-term debt ...... 81,306 26,164 Total short-term indebtedness ...... 96,618 31,092 Long-term indebtedness: Loans and long-term debt ...... 123,359 39,697 Other long-term debt ...... 0 0 Total long-term indebtedness ...... 123,359 39,697 Net equity: Capital stock ...... 137,477 44,240 Revaluation reserve ...... 0 0 Capital reserve(1) ...... 107,280 34,523 Profit reserve ...... 27,495 8,848 Retained earnings(2) ...... 448,770 144,415 Total shareholders’ equity ...... 721,022 232,026 Total capitalization (long-term indebtedness and shareholders’ equity) ...... 844,381 271,724

(1) On September 28, 2004, our shareholders approved a capital increase, through the capitalization of reserves, totaling approximately R$483.1 million. As a result, our capital rose from R$137.5 million to R$620.5 million. The increase in the capital stock, through the capitalization of reserves, affected (i) the ‘‘Capital Stock’’ account, totaling R$620.6 million, (ii) the ‘‘Capital Reserves’’ account, totaling R$43.6 million (exclusively in respect of investment subsidies we obtained during the six months ended June 30, 2004) and (iii) the ‘‘Earnings Reserve’’ account balance which dropped to zero. (2) On July 27, 2004 and September 2, 2004, there were distributions of dividends to shareholders in the amount of approximately R$20.4 million and R$12.1 million, respectively. Moreover, on September 28, 2004, our shareholders approved a capital increase, through the capitalization of reserves, totaling R$483,103,393.93. The distribution of dividends and the capital increase affected the ‘‘Retained Earnings’’ account, which as a result totalled R$24.2 million.

27 SELECTED FINANCIAL DATA The following selected audited historical financial data for each of the years ended December 31, 2001, 2002 and 2003, unaudited historical financial data for the six months ended June 30, 2003 and audited historical financial data for the six months ended June 30, 2004 should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes included elsewhere in this offering memorandum. The consolidated financial statements for each of the years ended December 31, 2001, 2002 and 2003 have been audited by Ernst & Young, which have issued their reports containing a qualification of their opinion as a result of one of our subsidiaries having been audited by another independent auditor. Such financial statements have been prepared and presented in accordance with accounting practices adopted in Brazil, which are based on Brazilian corporation law, the rules and regulations of the CVM, and the accounting standards issued by the IBRACON. Our financial statements for the period ended June 30, 2004 have been audited by Ernst & Young, which have issued their reports containing a qualification of their opinion as a result of one of our subsidiaries having been audited by another independent auditor. Brazilian GAAP differs from U.S. GAAP. See ‘‘Summary of Differences Between U.S. GAAP and Brazilian GAAP.’’ The comparability of our financial statements for the fiscal years ended December 31, 2001, 2002 and 2003, as well as the financial statements relating to the six months ended June 30, 2003 and 2004, is limited due to the accounting of certain tax benefits and certain other provisions. Until August 1, 2003, the tax benefits of Grendene Cal¸cados and its subsidiaries, which are currently owned by us, were reflected in our consolidated financial statements as equity pick-up. From August 1, 2003, these tax benefits to which we are entitled are reflected directly as shareholders’ equity in our tax benefit reserve account and no longer appear in our income statement. To facilitate the comparison of our financial statements, we present in this section net income and EBITDA for the year ended December 31, 2003 and the six months ended June 30, 2004 adjusted to reflect the value of the tax benefits generated between August 1, 2003 and December 31, 2003 and in the six months ended June 30, to eliminate deferred income tax and social contributions. We also made adjustments to reflect the reversal and the creation of various provisions during the periods. These adjustments are set out below.

28 For more detailed information of the adjustments made in our financial statements see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Limited comparability of our financial statements’’ and ‘‘Business—Corporate Structure’’.

For the year ended December 31, For the six months ended June 30, Consolidated Statement of 2003 2003 2003 2004 2004 Income Data 2001 2002 Adjusted(1) Adjusted(1) Adjusted(1) Adjusted(1) Adjusted(1) (in thousands of R$) (in (in thousands of R$) (in thousands thousands of US$) of US$) Gross sales revenue ...... 697,161 906,978 1,276,365 441,771 479,387 604,981 194,684 Sales deductions ...... (119,928) (151,792) (215,272) (74,509) (80,466) (118,088) (38,001) Net sales revenue ...... 577,233 755,186 1,061,093 367,262 398,921 486,893 156,683 Cost of products sold ...... (338,640) (421,979) (557,088) (192,817) (222,300) (299,137) (96,263) Gross profit ...... 238,593 333,207 504,005 174,444 176,621 187,756 60,420 Operating income/expenses: Selling expenses ...... (123,649) (171,587) (218,773) (75,721) (89,580) (100,377) (32,302) General and administrative expenses ...... (33,500) (46,017) (61,561) (21,307) (27,555) (29,704) (9,559) Financial expenses ...... (62,456) (142,387) (137,797) (47,694) (72,262) (37,985) (12,224) Financial income ...... 39,335 95,411 84,351 29,195 48,706 35,610 11,459 Equity pick-up ...... 58,185 76,424 45,071 15,600 35,702 —— Management fees ...... (240) (240) (240) (83) (120) (120) (39) Other operating income . . . 5,746 10,652 23,413 6,109 14,103 10,542 3,392 Other operating expenses . . (2,790) (2,258) (5,764) (1,995) (3,801) (2,870) (924) Operating result ...... 119,224 153,205 232,705 80,543 81,814 62,852 20,226 Non-operating result ...... (2,576) 525 (203) (70) (199) 157 51 Income before taxes on income and minority interest 116,648 153,730 232,502 80,473 81,615 63,009 20,276 Provision for income tax ..... (14,880) (26,442) (44,346) (15,349) (17,019) (14,680) (4,724) Provision for social contribution tax ...... (5,506) (9,409) (13,480) (4,666) (3,692) (4,402) (1,417) Minority interest ...... (458) (717) (621) (215) (377) 0 — Tax benefits adjustments ..... 0 0 63,707 22,050 0 43,573 14,022 Adjusted net income(1) ..... 95,804 117,162 237,762 82,293 60,527 87,500 28,158

(1) To facilitate comparison of the financial statements relating to years ended December 31, 2003, 2002 and 2001, as well as the financial statements relating to the six months ended June 30, 2003 and 2004, we have made certain adjustments, as set forth below: (i) for the year ended December 31, 2003, we made certain adjustments to our net income, including (a) an increase of approximately R$42.9 million relating to the financing tied to our ICMS tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$20.8 million relating to our income tax benefits (items (a) and (b) are affected in the ‘‘Tax benefits adjustments’’ item), and (c) a decrease of several provisions not included in our accounts of R$29.2 million for doubtful debts, discounts to customers for prompt payment, obsolete inventory, probable production costs and labor contingencies; and (ii) for the six months ended June 30, 2003, (a) we reversed in the respective lines of our financial statements corresponding to each provision, various provisions related to the year ended December 31, 2002, a total value of approximately R$16 million, (b) we deducted the remaining balance of approximately R$6.7 million that had originated in the reversal and creation of provisions exclusively in the item ‘‘selling expenses’’, (c) we deducted and reclassified, in the respective lines of our financial statements, approximately R$9.3 million related to provisions originally created in the first six months of 2003 and (d) we deducted various non-accounted provisions with an approximate value of R$14.4 million; and (iii) for the six months ended June 30, 2004, we made certain adjustments to our net income, including (a) an increase of approximately R$38.5 million relating to the financing tied to our ICMS and export tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$5.1 million relating to our income tax benefits (items (a) and (b) are effected in the ‘‘Tax benefits adjustments’’ item), (c) the reversal of certain provisions not included in our accounts for the year ended December 31, 2003, of approximately R$29.2 million, and (d) elimination of the deferred income tax and social contribution effect, in the amount of approximately R$9.5 million.

29 These adjustments were made as a result of the merger of Grendene Cal¸cados into our company on August 1, 2003. As a result of this merger, since August 1, 2003, amounts generated by our tax benefits (which, prior to July 31, 2003, were reflected in our consolidated statement of income as equity pick-up) are accounted for directly in shareholders’ equity, in our tax benefit reserves. Other adjustments were made as a result of the non-inclusion of several provisions in our accounts in the year ended December 31, 2003 and the six months ended June 30, 2003, as described above. At December 31, At June 30, Consolidated Balance Sheet Data 2001 2002 2003 2003 2003 2004 2004 (in thousands of R$) (in thousands (in thousands of (in thousands of US$) R$) of US$) Available funds and investments . . 84,344 211,549 246,138 85,192 191,423 347,115 111,702 Other current assets ...... 263,536 367,349 497,301 172,124 354,132 423,291 136,216 Total long-term receivables ...... 7,305 6,871 2,638 913 6,325 3,215 1,035 Fixed assets ...... 137,631 137,968 173,292 59,979 161,306 165,614 53,295 Investments ...... 3,062 2,926 3,029 1,048 2,726 1,764 567 Total assets ...... 495,878 726,663 922,398 319,256 715,912 940,999 302,815 Short-term loans and financings . . 20,922 157,868 14,768 5,111 68,328 15,312 4,927 Other short-term liabilities ...... 51,864 73,692 97,457 33,731 77,079 81,306 26,164 Long-term loans and financings . . . 80,981 53,098 117,447 40,650 55,833 123,359 39,698 Other long-term liabilities ...... 000 0 00 0 Minority participation ...... 3,771 4,982 0 0 5,547 0 0 Shareholders’ equity ...... 338,340 437,023 692,726 239,764 509,125 721,022 232,026 Total liabilities and net equity .... 495,878 726,663 922,398 319,256 715,912 940,999 302,815

At or for the six month period At or for the year ended December 31, ended June 30, Other Financial Information 2001 2002 2003 2003 2003 2004 2004 (in thousands of R$) (in (in thousands of R$) (in thousands thousands of US$) of US$) Adjusted EBITDA(1) ...... 156,513 211,800 354,169 122,584 105,996 115,506 31,170 Net debt ...... 17,559 (583) (113,923) (39,431) (67,262) (208,444) (67,078)

(1) Adjusted EBITDA is not a measure used under Brazilian GAAP. It does not represent cash flow for the periods presented and must not be considered as an alternative to net profits 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 standard meaning and our definition of adjusted EBITDA cannot be compared to EBITDA or adjusted EBITDA as defined by other companies. Even if, according to Brazilian accounting practices, adjusted EBITDA does not supply a measure of the operating cash flows, our administration uses it to measure our operating performance. Moreover, we understand that certain investors and financial analysts use adjusted EBITDA as an operating performance indicator for a company and/or its cash flow. Adjusted EBITDA takes into consideration adjustments relating to our financing tied to our PROVIN, PROAPI and income tax benefits, as well as the reversal of certain provisions, as described above.

30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based on and should be read in conjunction with our consolidated financial statements and related notes, the other financial information included elsewhere in this offering memorandum and with the financial information included under ‘‘Selected Financial Data’’. This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in ‘‘Risk Factors’’ and the matters set forth in this offering memorandum in general.

Overview of our business We design, manufacture, distribute and sell full-plastic footwear. Based on information provided by Abical¸cados, in 2003 we were responsible for approximately 18% of the manufacture of footwear in the Brazilian market. In 2003, we produced approximately 121.3 million pairs of shoes, offering consumers six principal product lines comprising more than 450 models of shoes. On average, we have an active portfolio of around 180 models at any given time. We supply the Brazilian market through our commercial representatives and the international market through our overseas subsidiaries (Saddle Corp., Grendha Shoes and Saddle Calzados, in Uruguay, the United States and in Argentina, respectively), through foreign distributors and through direct exports. In 2003, we sold approximately 22% of our total production to the export market, which represented approximately 24% of our gross revenues. In the international market, our products are sold in 57 countries, with the majority of sales to the United States, Paraguay, Mexico and Argentina. On June 30, 2004, we had approximately 13,700 active clients and were supplying approximately 17,300 retail stores in Brazil. At such date, we had 94 active clients and were supporting 19,500 points of sale in export markets. At June 30, 2004, we had approximately 21,500 employees. Our operations are conducted primarily at our headquarters in the city of Sobral, in the state of Ceara,´ where our products are manufactured and warehoused. We also have manufacturing facilities in the cities of Fortaleza and Crato in the state of Ceara,´ and in the city of Farroupilha in the state of Rio Grande do Sul. In addition, we have a plant in the city of Carlos Barbosa in the state of Rio Grande do Sul, where we create the molds for the production of our footwear. Each of our plants is fitted with state-of-the-art equipment, allowing us to achieve production capacity of 160 million pairs of shoes per year. We believe that Brazil will continue to be our principal market. However, we will continue to seek new opportunities to increase our export sales.

Principal factors that affect our results of operations and financial condition Economic conditions in our principal market With the exception of the year 2000, the Brazilian economy grew at a rate of less than 2% per year in the last five years and in 2003 experienced a decline of 0.2%. The Brazilian economy has been affected by such factors as: • a crisis in the electrical energy sector in 2001 and measures implemented by the Brazilian government to reduce the consumption of electrical energy; • uncertainties associated with the future political and economic situation in Brazil before and for a period of time after the presidential election in October of 2002;

31 • high interest rates in the Brazilian market; • ongoing political and economic uncertainties in Latin America and other emerging market countries; and • the recent downturn in the global economy, the impact of the war in Iraq and the devaluation of the dollar in relation to other currencies. The substantial devaluation of the real against the dollar in the second half of 2002 increased fears in Brazil of a return to a highly inflationary economy. Financial leaders in the previous and current governments responded to these fears by raising interest rates through the end of 2002, which had the effect of restricting the credit available to the Brazilian economy and, consequently, its growth. In 2003, the devaluation of the dollar in relation to other currencies, as well as the conservative fiscal and tax policies of the current government led to the strengthening of the real against the dollar. However, the real depreciated against the dollar in the first six months of 2004. In 2004, the economy began to show the effects of a less restrictive monetary policy. Renewed economic growth became more apparent, particularly in those sectors most sensitive to the expansion of credit. Signs of economic recovery in the internal market are already visible and the labor market shows evidence of growth. For the six-month period ended June 30, 2004, Brazilian GDP increased 4.2% compared to the same period in 2003.

Effects of exchange variation and inflation on our financial condition and results of operations Our financial condition and results of operations have been affected by inflation. The majority of our costs and expenses are incurred in reais and are readjusted when our suppliers or service providers increase their prices. Generally, our service providers use the IPCA to adjust their prices for inflation, while our suppliers generally use the IPCA and variations in the price of commodities in the international markets. The price of our principal raw materials, PVC resin and plastic oils, vary according to the price of oil, supply and demand and exchange rate variation, even when acquired in Brazil. Our gross sales revenue is also partially affected by inflation and exchange rate variation as we generally pass on a part of this increase in our costs to our consumers through price increases and also because, in 2003 23.7% of our gross revenue from sales and services was derived from our sales abroad. We cannot guarantee that we will continue to be able to pass the increase of our costs on to our consumers in the future. The following table sets forth the general inflation index (according to the IPCA and the IGP-M), the TJLP, the fluctuation of the real in relation to the dollar, the conversion rate of the real against the

32 dollar for the end of each period presented and the average daily exchange rate for the periods presented.

Six months ended Year ended December 31, June 30, 1999 2000 2001 2002 2003 2003 2004 Inflation (IPCA)(1) ...... 8.9% 6.0% 7.7% 12.5% 9.3% 6.6% 3.5% Inflation (IGP-M)(2) ...... 20.1% 10.0% 10.4% 25.3% 8.7% 5.9% 6.8% Devaluation (appreciation) of the real against the dollar . . . 32.4% 8.5% 15.7% 34.3% (22.3)% (18.7)% 7.6% Exchange rate at the end of the period—U.S.$1.00 ..... R$1.79 R$1.96 R$2.33 R$3.53 R$2.90 R$2.87 R$3.11 Average (daily) exchange rate(3)—U.S.$1.00 ...... R$1.82 R$1.83 R$2.35 R$2.92 R$3.08 R$3.24 R$2.97 TJLP(4) ...... 13.2% 10.7% 9.5% 9.8% 11.5% 12% 9.9%

(1) The IPCA, the official price index to the consumer used by the Brazilian government is published by IBGE. (2) The IGP-M is a wider inflation index that attributes different weights to consumer prices, to wholesale prices and to construction prices. The IGP-M is published by the Getulio´ Vargas Foundation. (3) The daily average of the exchange rate is obtained through the sum of daily exchange rates based on the PTAX 800, Option 5, divided by the number of working days in the period. (4) The TJLP is calculated and published by BACEN and is used to adjust interest rates on long-term loan agreements made by the government.

Sources: IBGE, Getulio´ Vargas Foundation and BACEN.

Tax Benefits We are entitled to tax benefits at the federal and the state level. The tax benefit at the federal level involves the reduction of, or exemption from, income tax and other non-recoverable charges, calculated based on the revenues of the projects eligible for tax benefits. The federal tax benefit is set forth in official letters issued by the former SUDENE, now ADENE. There are two types of tax benefits at the state level: (i) PROVIN, which consists of a loan subsidized by the state of Ceara´ and directly related to the amounts we pay as ICMS and (ii) PROAPI, which consists of the provision of working capital financing to industrial exporters in the state of Ceara.´ The resources for these benefits come from FDI, which was created with the objective of encouraging the development of industrial activities in Ceara,´ through the incentives to companies considered important to the economic development of the state of Ceara´ in the implementation, functioning, relocation, expansion, modernization, diversification, or renovation of industrial projects. We classify our tax benefits in accordance with the opinions of our external lawyers. These tax benefits do not affect our calculation of net income, as they are treated as an investment subsidy and credited to our reserve capital account.

33 The table below indicates the value generated by tax benefits that we have obtained in the periods indicated, and the percentage of net sales revenue, adjusted EBITDA and adjusted net income that such benefits represented.

Six months Year ended December 31, ended June 30, 2001 2002 2003 2003 2004 Net sales revenue ...... 10.1% 10.1% 10.3% 8.9% 8.9% Adjusted EBITDA(1) ...... 37.2% 36.1% 30.7% 33.7% 37.7% Adjusted net income(2) ...... 60.7% 65.2% 45.8% 59.0% 49.8%

(1) Adjusted EBITDA is not a measure used by Brazilian GAAP, it does not represent cash flow for the periods presented and should not be considered as an alternative to the net profit as an indicator of our operational performance, or as an alternative to cash flow as an indicator of liquidity. The adjusted EBITDA does not have a standardized significance and our definition of adjusted EBITDA may not be comparable with the adjusted EBITDA or the EBITDA as defined by other companies. Even though adjusted EBITDA does not provide, in accordance with the accounting practices used in Brazil, a measure of operational cash flows, our administration uses it to measure our operational performance. In addition, we understand that certain investors and financial analysts use adjusted EBITDA as an indicator of operational performance of a company and/or its cash flow. (2) To facilitate comparison of the financial statements relating to years ended December 31, 2003, 2002 and 2001, as well as the financial statements relating to the six months ended June 30, 2003 and 2004, we have made certain adjustments, as set forth below: (i) for the year ended December 31, 2003, we made certain adjustments to our net income, including (a) an increase of approximately R$42.9 million relating to the financing tied to our ICMS tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$20.8 million relating to our income tax benefits (items (a) and (b) are reflected in the ‘‘Tax benefits adjustments’’ item), and (c) a decrease of several provisions not included in our accounts of R$29.2 million for doubtful debts, discounts to customers for prompt payment, obsolete inventory, probable production costs and labor contingencies; and (ii) for the six months ended June 30, 2003, (a) we reversed in the respective lines of our financial statements corresponding to each provision, various provisions related to the year ended December 31, 2002, a total value of approximately R$16 million, (b) we deducted the remaining balance of approximately R$6.7 million that had originated in the reversal and creation of provisions exclusively in the item ‘‘selling expenses’’, (c) we deducted and reclassified, in the respective lines of our financial statements, approximately R$9.3 million related to provisions originally created in the first six months of 2003 and (d) we deducted various non-accounted provisions with an approximate value of R$14.4 million; and (iii) for the six months ended June 30, 2004, we made certain adjustments to our net income, including (a) an increase of approximately R$38.5 million relating to the financing tied to our ICMS and export tax benefits (PROVIN and PROAPI respectively; see ‘‘Business—Tax Benefits’’), (b) an increase of approximately R$5.1 million relating to our income tax benefits (items (a) and (b) are reflected in the ‘‘Tax benefits adjustments’’ item), (c) the reversal of certain provisions not included in our accounts for the year ended December 31, 2003, of approximately R$29.2 million, and (d) elimination of the deferred income tax and social contribution effect, in the amount of approximately R$9.5 million. The adjustments in connection with the tax benefits to which we are entitled were made as a result of the merger of Grendene Cal¸cados into our company on August 1, 2003. As a result of this merger, since August 1, 2003, amounts generated by our tax benefits (which, prior to July 31, 2003, were reflected in our consolidated statement of income as equity pick-up) are accounted for directly in shareholders’ equity, in our tax benefit reserves. Other adjustments were made as a result of the non-inclusion of several provisions in our accounts in the year ended December 31, 2003 and the six months ended June 30, 2003, as described above.

Seasonality We experience a peak in demand from September to December each year, coinciding with sales related to the year-end. Between May and July we experience lower demand for our products due to winter in the south of Brazil and in Sao˜ Paulo state. In November 2003, for example, our production and gross revenue were approximately 38% higher than in June 2003.

34 The table below shows the approximate values of our net sales revenue, our adjusted EBITDA, our adjusted net income for the period and the volume of products sold, in a quarterly format for the periods stated below:

Adjusted EBITDA Adjusted net income Net sales revenue year year ended year Number of pairs Ended December 31, December 31, ended December 31, sold(1) Quarter 2001 2002 2003 2001 2002 2003 2001 2002 2003 2001 2002 2003 1st quarter 21.0% 19.4% 18.3% 17.9% 15.7% 15.3% 17.8% 15.5% 12.7% 22.2% 21.0% 22.3% 2nd quarter 16.4% 14.6% 19.3% 10.0% 12.0% 17.5% 11.7% 11.4% 12.7% 16.3% 16.5% 16.9% 3rd quarter 32.8% 26.0% 24.0% 35.2% 26.4% 33.9% 28.9% 21.5% 30.7% 28.2% 28.7% 26.0% 4th quarter 29.8% 40.0% 38.4% 36.9% 46.0% 33.3% 41.6% 51.6% 43.9% 33.3% 33.8% 34.8%

(1) Domestic and export market.

Overview Gross sales revenue Most of our gross sales revenue from sales and services is denominated in reais and is derived from the sale of our products in Brazil. Sales to the Brazilian market accounted for 76.3% of our consolidated gross sales revenue in 2003. Revenue denominated in foreign currencies is derived from the export of our products. In 2003, 68% of our total exports were to the United States, Paraguay and Mexico, which represented respectively, 31%, 19% and 18%, respectively, of the total number of pairs of shoes we sold in the international market. In 2003, sales of our products to export markets amounted to R$302.7 million, or 23.7% of our gross sales revenue. We conduct our business abroad through direct exports, distributors and our foreign subsidiaries. Since 1998, our consolidated gross sales revenue has increased annually at a rate of approximately 26.5%. The table below sets forth our consolidated gross sales revenue for the periods presented:

Year ended Consolidated gross December 31, sales revenue (in millions of R$) 1998 394 1999 461 2000 574 2001 697 2002 907 2003 1,276 CAGR 26.5% Our consolidated gross sales revenue for the six months ended June 30, 2004 was approximately R$605.0 million, compared to approximately R$479.4 million for the six months ended June 30, 2003, representing an increase of 26.2%.

Sales deductions In addition to income tax, we are subject to a number of taxes which relate to our operating income. Taxes on sales applicable to us and our subsidiaries are discussed below. • PIS/COFINS. Contribution to the Social Integration Program (PIS), and Contribution to Finance of Social Security (COFINS), are federal taxes levied on gross revenue from sales and services. We may offset our PIS and COFINS obligations against PIS and COFINS paid by our suppliers on raw materials used in the manufacture of our products. As of February 2004, our combined rate of PIS and COFINS on our products rose to 9.25% from 4.65% in 2003.

35 • IPI. Tax on Industrialized Products, or IPI, is a federal tax on industrialized products with rates varying by product. Currently the rate of IPI for the footwear sector is zero, but the rate may be modified in the future. • ICMS. Tax on the Circulation of Merchandise and Services, or ICMS, is a state value-added tax that applies to gross revenue from sales and services at each step of the production and commercialization chain. Rates vary according to product and the state in which the product is sold. We may offset the ICMS with any amounts paid by our suppliers as ICMS on raw materials and packaging used in our products. We receive certain tax benefits relating to the ICMS we pay in the state of Ceara.´ See ‘‘Business—Tax benefits’’. These taxes are reflected in the line item for sales deductions in our financial statements. In 2003, taxes represented 12.88% of our gross revenue from sales and services and returns and deductions represented 3.98% of our gross revenue from sales and services.

Cost of products sold Our production costs primarily consist of cost of raw materials, inputs, intermediate materials, freight and packaging, direct and indirect labor costs and depreciation. The following table contains the approximate percentage of total production costs that each component presented in the year ending December 31, 2003:

Components of cost of products sold Raw material for products, intermediate material, freight and packaging ...... 56% Labor ...... 32% Depreciation ...... 3% Other costs(1) ...... 9% Total ...... 100%

(1) Other costs include electricity, water, gas, consulting fees, computer services and maintenance.

Operating Expenses Selling expenses Our selling expenses primarily consist of expenses for our sales force, merchandising and marketing, third party services and others. Expenses for sales force, advertising and marketing primarily consist of commissions paid to commercial representatives and licensing expenses, and advertising and publicity expenses. Our expenses relating to third party services primarily consist of freight expenses, which represented approximately 90% of such expenses in 2003. The following table contains the main selling expenses in the year ending December 31, 2003 and the approximate percentage that each represents in selling expenses:

Components of selling expenses Expenses for sales force, advertising and marketing(1) ...... 65% Third party services ...... 30% Other, net of reversed provisions ...... 5% Total ...... 100%

(1) Includes commissions for sales representatives and licenses.

36 General and administrative expenses Our administrative and general expenses primarily include salaries and benefits for our administrative personnel, third party services and tax expenses.

Financial expenses/income Our financial expenses/income chiefly reflect (i) the cost of short and long-term loans with financial institutions, (ii) the cost of financing as a result of our ICMS and export tax benefits, (iii) discounts to customers for prompt payments, (iv) income from financial investments, and (v) other charges paid to financial institutions. On June 30, 2004 we had no financing denominated in foreign currencies. See ‘‘—Liquidity and capital resources’’. Net financial expenses referred to in item (ii) above do not include financing costs related to our tax benefits due for untimely payments. See ‘‘Business—Tax benefits’’.

Equity pick-up Our equity pick-up consisted almost entirely of the results generated by the tax benefits of our subsidiaries and controlled companies, which ceased after Grendene Cal¸cados was merged into our company on August 1, 2003. Due to this change in corporate structure, the Grendene Cal¸cados tax benefits which, through July 31, 2003 were reflected in our consolidated statement of income as equity pick-up, started to be reflected in our net equity, in the tax benefit reserve account. Through June 29, 2004 when our subsidiary Saddle Corp. sold its minority participation in Reebok Chile, our equity pick-up result also reflected our participation in that company. Reebok Chile income calculated by the equity method reflected in our non-consolidated financial statements was: (i) negative R$2,000 in the year ended December 31, 2003, (ii) negative R$102,200 in the year ended December 31, 2002 and (iii) negative R$212,000 in the year ended December 31, 2001.

Other operating income/expense Our other operating income/expense includes gains or losses in transactions in the futures market (in U.S. dollars), made in the Futures Market Stock Exchange (Bolsa de Mercadorias e Futuro) incurred during the ordinary course of business in order to protect ourselves against movements in exchange rates that may affect our export transactions.

Income tax and Social Contribution We are subject to the payment of income tax and social contribution on net profit, which together have a maximum rate of 34%. Income tax and social contribution are broken down as follows: (i) income tax paid at a rate of 15% on our profit for the period, (ii) additional income tax on the portion of profit that exceeds R$240,000 per year, paid at a rate of 10%, and (iii) social contribution on net profit paid at a rate of 9%. We are subject to tax benefits relating to income tax and other amounts levied on income generated by the production of our footwear in the state of Ceara.´ See ‘‘Business—Tax benefits’’.

Critical accounting policies Critical accounting policies are those that are relevant in accurately depicting our financial condition and our results of operations and which require the use of estimates and judgments on inherently uncertain questions. Where the number of variables relating to such uncertain future events increases, these determinations become even more subjective and complex. The following accounting policies illustrate how our management makes such determinations and estimates, and provides an example of the variables and assumptions relating to such estimates:

37 • Property, installations and equipment. Property, installations and equipment are accounted for at the cost of acquisition or construction and revaluation, adjusted for accumulated depreciation, calculated by the straight-line method at rates established based on the estimated useful life of the goods, as set forth in note 8 to the financial statements relating to the year ended December 31, 2003 and in note 10 to the financial statements for the six months ended June 30, 2004. • Investments. Investments in subsidiaries are reflected in equity pick-up, using as a basis the net equity of those companies on the same date as the controlling company’s net equity. Other investments are recorded at the cost of acquisition and adjusted to market value, when applicable. The financial statements of directly and indirectly controlled companies abroad are prepared in their local currency, converted to U.S. dollars and later converted to reais, using the official rate of the dollar in effect on the date of the closing of the balance sheet. • Provisions. Provisions with respect to litigation are recognized on the balance sheet when, based on the opinion of our external counsel, we determine that an unfavorable outcome in a legal suit is probable. The provision for doubtful accounts is maintained at the limit we deem sufficient to cover potential losses in the collection of accounts receivable from clients and other creditors. In addition, a provision for discounts for timely payment is maintained at the amount estimated for discounts to be granted on the accounts receivable of clients, by payment of the trade bills on their due dates. In 2003, we did not record certain provisions with respect to sales expenses. See ‘‘—Limited comparability of our financial statements’’ below. • Accounting of and provisions for inventory. The inventory of finished products and products under production is evaluated by tax criteria. These criteria require that finished products be valued based on 70% of the cash sale price on the date of the balance sheet, whereas products under production are valued based on 80% of the value of finished products, as previously assessed. With the objective of adjusting inventory to its likely average production cost, we make a provision for devaluation, as set forth in note 5 to the financial statements for the year ended December 31, 2003 and note 6 to the financial statements for the six months ended June 30, 2004. Our inventory of raw materials, packaging materials, merchandise for re-sale and other inventory are valued at the average cost of acquisition. In both cases, the cost is not greater than the market value. We also maintain provisions for probable losses of (i) inventory due to products that have been discontinued or that we expect to discontinue and (ii) inventory whose expiry date will occur before it can be sold. We update these provisions to the date of the balance sheet. • Financing of ICMS payments. We receive subsidized loans from Banco do Estado do Ceara´ under the PROVIN scheme calculated on the amount of ICMS paid, not subject to tax benefits and funded in installments if we pay ICMS when due and if we fulfill the other obligations set forth in the agreements regulating such financing. The installments of these loans are reflected in net equity, in our tax benefits reserve account, at the time. This financing is considered an investment subsidy. In the event that amounts due under this financing are not paid by us on their respective due dates, the full amount of each installment also becomes due. All interest and other expenses related to these portions of financing are also then payable. Although the operation of our tax credit from PROVIN was changed between October 2003 and May 2004, we continued to record it in the same way. See ‘‘Business—Tax benefits’’. • Export tax benefits. These represent part of the financing tied to export tax benefits. Disbursements linked to these tax benefits are credited directly to shareholders’ equity (a sub-account of our tax benefits reserve) at the time we receive funding. This financing is considered an investment subsidy. In the event that we do not pay the financing installments on

38 their expiration date, all amounts previously recorded in shareholders’ equity will also come due, together with all expenses relating to the financing installments. • Income tax and social contribution. Income tax and social contribution are calculated in accordance with the current legislation in each period. We receive tax benefits on income tax by virtue of our location in the Northeast region of the country. These benefits are granted in the form of exemptions from or reductions of tax due, calculated based on the revenues of projects eligible for tax benefits. Charges with respect to tax are accounted for as if they were due and later deducted from our liabilities in the counterpart of the tax benefits reserve account, in the net equity account.

Limited comparability of our financial statements The comparability of our financial statements for the year ended December 31, 2003 with the financial statements relating to the years ended December 31, 2002 and 2001, as well as our financial statements for the six months ended June 30, 2004 with the financial statements for the six months ended June 30, 2003 is subject to limitations. Through August 1, 2003 the tax benefits of Grendene Cal¸cados and its respective subsidiaries were reflected in our consolidated financial statements as equity pick-up. From August 1, 2003, these tax benefits have been directly accounted for in our net equity, and do not pass through our income statement. To facilitate the comparability between financial statements, in this section we present net income and EBITDA for the year ended December 31, 2003, the six months ended June 30, 2003 and the six months ended June 30, 2004, adjusted by the value of the tax benefits generated between August 1, 2003 and December 31, 2003, and in the six months ended June 30, 2004. In the six months ended June 30, 2003, provisions related to the year ending December 31, 2002 were reversed, totaling approximately R$16 million. In addition, new provisions amounting to approximately R$9.3 million were created. Both the reversal and the creation of provisions were reflected only in ‘‘operating expenses’’ and created a positive balance in our financial statements for the period of approximately R$6.7 million. In addition, R$14.4 million related to various provisions was also excluded. To allow comparison with our financial statements, we made the following adjustments in the financial statements for the six months ended June 30, 2003: (i) we reversed various provisions related to the year ended December 31, 2002, with a total value of R$16 million, (ii) we deducted the remaining balance of approximately R$6.7 million caused by the reversal and the creation of provisions solely in the item ‘‘selling expenses’’ in our financial statements, (iii) we deducted and reclassified approximately R$9.3 million related to provisions originally created in the first six months of 2003 and (iv) we deducted various provisions with an approximate value of R$14.4 million. The table below shows in detail the adjustments made in the financial statements related to the six months ending June 30, 2003.

39 Adjustment Six months of inventory Allowance Provision for Six months ended Accounting in relation to Unrealized for discount due Provisions ended June Reversal of for undue production income in doubtful to timely for obsolete June 30, 2003 30, 2003 provisions position costs inventory accounts payment inventory (Adjusted) (in thousands of R$) Gross sales revenue ...... 479,387 479,387 Sales deductions ...... (80,466) (80,466) Net sales revenue ...... 398,921 398,921 Cost of products sold ...... (215,663) 6,164 (9,860) (2,941) (222,300) Gross profit ...... 183,258 6,164 (9,860) (2,941) 176,621 Operating expenses: Selling expenses ...... (80,792) 1,396 (6,674) (3,510) (89,580) General and administrative expenses . (27,555) (27,555) Financial expenses ...... (74,887) 8,427 (5,802) (72,262) Financial income ...... 48,706 48,706 Equity pick-up ...... 35,702 35,702 Management fees ...... (120) (120) Other operating income ...... 14,103 14,103 Other operating expenses ...... (2,251) (1,550) (3,801) Operating result ...... 96,164 15,987 (6,674) (9,860) (2,941) (3,510) (5,802) (1,550) 81,814 Non-operating result ...... (199) (199) Income before taxes and minority interest ...... 95,965 15,987 (6,674) (9,860) (2,941) (3,510) (5,802) (1,550) 81,615 Current income taxes ...... (17,019) (17,019) Current social contribution ...... (3,692) (3,692) Deferred income tax ...... (377) (377) Deferred social contribution ...... 0 0 Minority participation ...... 0 0 Tax benefits adjustments ...... 0 0 Adjusted net income ...... 74,877 15,987 (6,674) (9,860) (2,941) (3,510) (5,802) (1,550) 60,527 In the year ended December 31, 2003, approximately R$29.2 million for miscellaneous provisions were not recorded. From January 1, 2004, we began to account for these provisions, and in the six months ended June 30, 2004, approximately R$26.9 million was recorded with respect to various provisions, and we eliminated the effect of the deferred income tax and social contribution of approximately R$9.5 million. For this reason, in order to allow the comparability of our financial statements, we carried out the following adjustments in the financial statements regarding the year ended December 31, 2003: (a) we added approximately R$42.9 million related to ICMS fiscal benefits and export incentives (PROVIN and PROAPI, respectively), (b) we added approximately R$20.8 million related to income tax benefits, and (c) we subtracted miscellaneous provisions that were not accounted for, in the value of R$29.2 million. The table below indicates, in detail, the adjustments carried out in the financial statements related to the fiscal year ended on December 31, 2003.

40 Provision for discount Provision Year ended Year ended Adjust- Unrealized Allowance for due to for Effects December 31, December 31, ment of income in Labor doubtful timely obsolete of tax 2003 2003 inventory inventory contingencies accounts payment inventory benefits (Adjusted) (in thousands of R$) Gross sales revenue ... 1,276,365 1,276,365 Sales deductions ..... (215,272) (215,272) Net sales revenue .... 1,061,093 1,061,093 Cost of products sold . . (542,978) (9,116) (4,994) (557,088) Gross profit ...... 518,115 (9,116) (4,994) 504,005 Operating expenses: Selling expenses .... (217,310) (1,463) (218,773) General and administrative expenses ...... (61,561) (61,561) Financial expenses . . (126,917) (10,880) (137,797) Financial income . . . 84,351 84,351 Equity pick-up ..... 45,071 45,071 Management fees . . . (240) (240) Other operating income ...... 23,413 23,413 Other operating expenses ...... (3,051) (450) (2,263) (5,764) Operating result ..... 261,871 (9,116) (4,994) (450) (1,463) (10,880) (2,263) 232,705 Non-operating result . . (203) (203) Income before taxes and minority interest 261,668 (9,116) (4,994) (450) (1,463) (10,880) (2,263) 232,502 Current income taxes . . (44,346) (44,346) Current social contribution ...... (13,480) (13,480) Deferred income tax . . 0 0 Deferred social contribution ...... 0 0 Minority participation . (621) (621) Tax benefits adjustments 0 63,707 63,707 Adjusted net income .. 203,221 (9,116) (4,994) (450) (1,463) (10,880) (2,263) 63,707 237,762 As we did not account for provisions in the financial statements related to the year ended December 31, 2003, in order to allow for the comparability of our financial statements, we carried out adjustments in the financial statements related to the six months ended June 30, 2004 so as to reflect the reversal of such provisions, in the approximate value of R$29.2 million. For that purpose, we carried out the following adjustments in the financial statements of the half-year ended on June 30, 2004: (a) we added approximately R$38.5 million related to the funding referring to ICMS fiscal benefits and export incentives the Company is entitled to (PROVIN and PROAPI, respectively), (b) we added approximately R$5.1 million related to income tax benefits we are entitled to, (c) we reversed provisions that were not accounted for in the year ended December 31, 2003 in the approximate sum of R$29.2 million, and (d) we eliminated the deferred income tax effect in the approximate sum of R$9.5 million. The table below indicates in detail the adjustments carried out in the financial statements related to the six months ended June 30, 2004.

41 Six months Six months Tax ended ended Elimination of benefit/ June 30, June 30, deferred income reversal 2004 2004 tax effect of provision (Adjusted) (in thousands of R$) Gross sales revenue ...... 604,981 604,981 Sales deductions ...... (118,088) (118,088) Net sales revenue ...... 486,893 486,893 Cost of products sold ...... (313,247) 14,110 (299,137) Gross profit ...... 173,646 14,110 187,756 Operating expenses: Selling expenses ...... (101,840) 1,463 (100,377) General and administrative expenses ...... (29,704) (29,704) Financial expenses ...... (48,865) 10,880 (37,985) Financial income ...... 35,610 35,610 Equity pick-up ...... 0 Management fees ...... (120) (120) Other operating income ...... 10,542 10,542 Other operating expenses ...... (5,583) 2,713 (2,870) Operating result ...... 33,686 29,166 62,852 Non-operating result ...... 157 157 Income before taxes and minority interest ...... 33,843 29,166 63,009 Current income taxes ...... (14,680) (14,680) Current social contribution ...... (4,402) (4,402) Deferred income tax ...... 0 0 Deferred social contribution ...... 7,083 (7,083) 0 Minority participation ...... 2,404 (2,404) 0 Tax benefits adjustments ...... 0 43,573 43,573 Adjusted net income ...... 24,248 (9,487) 72,739 87,500

42 Results of Operations The table below contains certain items extracted from our audited financial statements for the years ended December 31, 2002 and 2001, and the unaudited financial statements (adjusted for comparability as discussed above) for the year ended December 31, 2003 and the six month periods ended June 30, 2003 and 2004.

Six months ended Year ended December 31, June 30, 2003 2003 2004 Consolidated statement of income data 2001 2002 Adjusted Adjusted Adjusted (in thousands of R$) (in thousands of R$) Gross sales revenue ...... 697,161 906,978 1,276,365 479,387 604,981 Sales deductions ...... (119,928) (151,792) (215,272) (80,466) (118,088) Net sales revenue ...... 577,233 755,186 1,061,093 398,921 486,893 Cost of products sold ...... (338,640) (421,979) (557,088) (222,300) (299,137) Gross profit ...... 238,593 333,207 504,005 176,621 187,756 Operating expenses: Selling expenses ...... (123,649) (171,587) (218,773) (89,580) (100,377) General and administrative expenses ...... (33,500) (46,017) (61,561) (27,555) (29,704) Financial expenses ...... (62,456) (142,387) (137,797) (72,262) (37,985) Financial income ...... 39,335 95,411 84,351 48,706 35,610 Equity pick-up ...... 58,185 76,424 45,071 35,702 0 Management fees ...... (240) (240) (240) (120) (120) Other operating income ...... 5,746 10,652 23,413 14,103 10,542 Other operating expenses ...... (2,790) (2,258) (5,764) (3,801) (2,870) Operating result ...... 119,224 153,205 232,705 81,814 62,852 Non-operating result ...... (2,576) 525 (203) (199) 157 Income before income taxes and minority interest ...... 116,648 153,730 232,502 81,615 63,009 Current income taxes ...... (14,880) (26,442) (44,346) (17,019) (14,680) Current social contribution ...... (5,506) (9,409) (13,480) (3,692) (4,402) Deferred income tax ...... 0 0 0 0 0 Deferred social contribution ...... 0 0 0 0 0 Minority interest ...... (458) (717) (621) (377) 0 Tax benefits adjustments ...... 0 0 63,707 0 43,573 Adjusted net income(1) ...... 95,804 117,162 237,762 60,527 87,500

43 benefits (items (a) and (b) are reflected in the ‘‘Tax benefits adjustments’’ item), (c) the reversal of certain provisions not included in our accounts for the year ended December 31, 2003, of approximately R$29.2 million, and (d) elimination of the deferred income tax and social contribution effect, in the amount of approximately R$9.5 million. The adjustments in connection with the tax benefits to which we are entitled were made as a result of the merger of Grendene Cal¸cados into our company on August 1, 2003. As a result of this merger, since August 1, 2003, amounts generated by our tax benefits (which, prior to July 31, 2003, were reflected in our consolidated statement of income as equity pick-up) are accounted for directly in shareholders’ equity, in our tax benefit reserves. Other adjustments were made as a result of the non-inclusion of several provisions in our accounts in the year ended December 31, 2003 and the six months ended June 30, 2003, as described above.

Six months ended June 30, 2004 compared with the six months ended June 30, 2003 Gross sales revenue During the six months ended June 30, 2004, our gross sales revenue increased by approximately 26.2% compared to the six months ended June 30, 2003, from R$605.0 million to R$479.4 million. The breakdown of our gross sales revenue before sales tax, returns and deductions is set forth in our consolidated audited or unaudited financial statements included elsewhere in this offering memorandum. The table below sets forth the composition of and changes in our gross sales revenue for the six months ended June 30, 2003 and 2004.

Six months ended June 30, 2003 2004 % variation (in millions of R$) Domestic market: ...... 338.2 462.1 36.6% Masculine segment ...... 81.5 103.1 26.5% Feminine segment ...... 94.1 131.4 39.7% Children’s segment ...... 103.3 147.5 42.8% Mass consumer segment(1) ...... 59.3 80.1 35.1% Export market(2)...... 141.2 142.8 1.2% Total ...... 479.4 605.0 26.2%

(1) Includes other products which account for a small percentage of revenues. (2) Includes sales made through our foreign subsidiaries.

Sales in the domestic market The 36.6% increase in our domestic sales is due to an approximate 26.5% increase in the number of pairs sold and an approximate 8.0% increase in the average sale price. These increases are primarily due to aggressive marketing efforts, especially in the children’s segment, which allowed us to differentiate our products from those of our competitors and to position them in higher price ranges.

Sales in the export market The increase of 1.2% in export sales is primarily due to an increase of approximately 12.7% in the quantity of pairs sold, offset by an approximate 10.2% reduction in the average sales price. This reduction in the price in real is explained by the fact that the average real rate for the first six months of 2004 was 8.3% higher compared to the dollar, than for the equivalent period in 2003. Although export sales revenues in dollar terms increased, this increase was almost entirely offset by the effects of the appreciation of the real in relation to the dollar.

44 Sales deductions Sales tax, returns and deductions increased 46.8%, to R$118.1 million, in 2004 compared to R$80.5 million during the six months ended June 30, 2003. This increase was primarily due to the increase in our sales in the domestic and export markets during the first six months of 2003. Taxes on sales, returns and deductions represented 19.5% of our gross sales revenue during the six months ended June 30, 2004 and 16.8% during the six months ended June 30, 2003. This increase is primarily due to the change in the COFINS tax.

Net sales revenue Net sales revenues increased by 22.1% to R$486.9 million, in the six months ended June 30, 2004, compared to R$398.9 million in the six months ended June 30, 2003.

Cost of products sold Our cost of products sold increased 34.6%, to R$299.1 million in the six months ended June 30, 2004 compared to R$222.3 million in the six months ended June 30, 2003. The table below sets forth the components of cost of goods sold as well as the percentage variation for the periods presented.

Six months ended June 30, 2003 2004 % variation (in millions of R$) Raw material for products, inputs, intermediate materials, freight and packaging ...... 114.1 161.4 41.5% Labor ...... 79.1 102.0 29.0% Depreciation ...... 8.0 10.9 36.4% Other(1) ...... 21.1 24.8 17.5% Total ...... 222.3 299.1 34.6%

(1) Includes electrical energy, water, gas, consulting, computer services and maintenance. The increase in the total cost of raw materials, inputs, intermediate materials, freight and packaging can be explained primarily by the increase in the acquisition cost of PVC resin and plasticizing oils and by the increase in the quantity of sold products. The other items that make up the cost of our products sold and services rendered were mainly influenced by the increase in the quantity of products sold and the increase in the average inflation rate in the period. We recorded an increase in the volume of footwear sold of 22.6% to approximately 58.6 million pairs in the first half of 2004, compared to approximately 47.8 million in the same period of 2003. In terms of percentage of net sales revenue, our cost of products sold increased to 61.4% for the first six months of 2004, in comparison to 55.7% for the same period in 2003.

Gross profit Our gross profit increased 6.3%, to R$187.8 million, in the six months ended June 30, 2004 compared to R$176.7 million in the six months ended June 30, 2003. Our gross margin decreased to 38.6% for the six months ended June 30, 2004, from 44.3% for the six months ended June 30, 2003, due primarily to the deterioration of the ratio between the cost of merchandise sold and net revenues

45 of sales, the increase in the COFINS tax and the change in the exchange rate, which affected our gross export revenue.

Operating expenses The table below sets forth the breakdown of our operating expenses and the percentage variation of each component for the periods presented.

Six months ended June 30, 2003 2004 % variation (in millions of R$) Selling expenses ...... (89.6) (100.4) 12.1% General and administrative expenses ...... (27.6) (29.7) 7.8% Financial expenses ...... (72.3) (37.9) (47.4%) Financial income ...... 48.7 35.6 (26.9%) Equity pick-up ...... 35.7 0 n.a. Management fees ...... (0.1) (0.1) 0% Other operating income ...... 14.1 10.5 (25.2%) Other operating expenses ...... (3.8) (2.9) (24.5%)

Selling expenses The increase of 12.1% in our sales expenses in absolute terms was mainly due to the (i) increase in third-party service expenses (especially freight), and (ii) the increase of our sales force, advertising and marketing expenses, including licensing (the net revenue increase in the period was more than 22%). As a percentage of net sales revenues, selling expenses decreased to 20.6% in the six months ended June 30, 2004, compared to 22.7% in the six months ended June 30, 2003, primarily due to economies of scale and productivity.

General and administrative expenses The overall increase in our general and administrative expenses reflects an increase of R$2.8 million in labor costs. As a percentage of net sales revenues, general and administrative expenses decreased to 6.1% in the six months ended June 30, 2004, from 6.9% in the six months ended June 30, 2003 due to economies of scale and productivity.

Financial expenses Our financial expenses decreased to R$37.9 million in the six months ended June 30, 2004, compared to R$72.3 million in the six months ended June 30, 2003. This decrease was primarily due to the reduction of short-term debt. In 2003 we liquidated fixed rate notes, as well as exchange rate contracts paid in advance.

Financial income Our financial income decreased to R$35.6 million in the six months ended June 30, 2004, compared to R$48.7 million in the six months ended June 30, 2003. This decrease was primarily due to a decrease in income from financial investments, and, as a result, in the funds generating income given the decrease of financings in the previous year.

46 Equity pick-up There was no equity pick-up in the six months ended June 30, 2004 compared to R$35.7 million in the six months ended June 30, 2003. This is due in large part to the merger of Grendene Cal¸cados into our company on August 1, 2003. As a result of this merger, from that date the tax benefits generated by Grendene Cal¸cados, which, until that date were reflected in our consolidated statement of income as equity pick-up, are accounted for directly in our net equity, in the tax benefits capital reserve account. In addition, on June 29, 2004 Saddle Corp. sold its shareholdings in Reebok Chile, which are thus no longer reflected in our equity pick-up.

Other operating income The reduction in our other operating income from R$14.1 million in the first half of 2003 to R$10.5 million in the first half of 2004 is primarily due to lower earnings related to futures markets transactions in the U.S. dollar intended to hedge our export operations against exchange rate variations.

Other operating expenses Our other operational expenses decreased to R$2.9 million in the six months ended June 30, 2004 from R$3.8 million in the equivalent period in 2003.

Non-operating income Our non-operating income was R$0.2 million in the six months ended June 30, 2004 compared to an expense of R$0.2 million in the six months ended June 30, 2003.

Income taxes Our provision for income tax decreased to R$14.7 million in the six months ended June 30, 2004, compared to R$17.0 million in the same period in 2003. In terms of the percentage of profit before tax on profit and the participation of minority shareholders, the amount increased to 23.3% in the first half of 2004, in comparison with 20.9% in the same period the previous year. This increase was due principally to the inclusion of provisions on June 30, 2004 that cannot be deducted from income tax.

Social contribution taxes The amount of provisions for social contributions incurred increased to R$4.4 million in the first half of 2004, compared with R$3.7 million in the same period in 2003.

Adjusted net income Due to the various changes described above and taking into account the comparability adjustments that we set forth above, our adjusted net income increased 44.6%, to R$87.5 million, for the six months ended June 30, 2004, compared to R$60.5 million for the six months ended June 30, 2003.

Adjusted EBITDA Our adjusted EBITDA (net profit before net financial expenses, income tax and social contribution, depreciation and amortization) increased 9.0%, to R$115.5 million for the six months ended June 30, 2004, compared to R$106.0 million for the six months ended June 30, 2003. Adjusted EBITDA margin was 23.7% for the six months ended June 30, 2004, compared to 26.6% for the six

47 months ended June 30, 2003. This decrease in the adjusted EBITDA margin is mainly due to a greater increase in raw material costs compared to the increase of the average sales prices of our products. The table below sets forth the reconciliation of adjusted EBITDA for the periods presented.

Six months ended June 30, 2003 2004 (in millions of R$) Gross profit(1) ...... 176.7 187.8 (-)Selling expenses ...... 89.6 100.4 (-)General and administrative expenses ...... 27.6 29.7 (-)Management fees ...... 0.1 0.1 (+)Equity pick-up ...... 35.7 0.0 (+)Tax benefits adjustments ...... 0.0 43.6 (+)Depreciation and amortization ...... 10.9 14.4 Adjusted EBITDA(1) ...... 106.0 115.5

Year ended December 31, 2003 compared to the year ended December 31, 2002 Gross sales revenue Our gross sales revenue increased 40.7%, to R$1,276.4 million for the year ended December 31, 2003, compared to R$906.9 million for the year ended December 31, 2002. The breakdown of our gross sales revenues before deduction of sales tax, returns and deductions, is set forth in our consolidated and audited financial statements, and in the table below:

Year ended December 31, 2002 2003 % variation (in millions of R$) Domestic market: Masculine segment ...... 177.1 218.8 23.5% Feminine segment ...... 251.4 295.1 17.4% Children’s segment ...... 211.0 334.2 58.4% Mass consumer segment(1) ...... 100.7 125.6 24.7% Export market(2) ...... 166.7 302.7 81.6% Total ...... 906.9 1,276.4 40.7%

(1) Includes other products which account for a small percentage of revenues. (2) Includes sales to the export market through our controlled companies.

48 Sales in the domestic market The 31.5% increase in our domestic sales is primarily due to an approximate 39.3% increase in average sales price, offset by an approximate 5.5% decrease in the number of units sold. These changes reflect our successful strategy of repositioning some brands, especially some of our masculine and feminine lines, which allowed us to differentiate our products from those of our competitors and to position them in higher price ranges. In addition, in our children’s segment, the average sale price increased 29.4%, due to sales of products with greater aggregate value and the association of such products with accessories.

Sales in the export market Income from export sales increased significantly, by 81.6%, primarily due to an 86.0% increase in direct exports and a 71.3% increase in sales by our foreign subsidiaries compared to the years ended December 31, 2003 and 2002. The growth in export sales is due to an approximate 63.7% increase in the number of units sold and an approximate 10.9% increase in the average sales price abroad. These significant increases were primarily due to increased marketing efforts.

Sales deductions Sales deductions increased 41.8%, to R$215.3 million, in 2003, compared to R$151.8 million in 2002. This increase was primarily due to the increase in our gross revenues in the domestic and export markets.

Net sales revenue Our net sales revenue increased 40.5%, to R$1,061.1 million, for the year ended December 31, 2003, compared to R$755.2 million for the year ended December 31, 2002.

Cost of products sold Our cost of products sold increased 32.0%, to R$557.1 million for the year ended December 31, 2003, compared to R$422.0 million for the year ended December 31, 2002. The following table sets forth the components of our cost of products sold and the percentage variation of each component for the periods presented.

Year ended December 31, 2002 2003 % variation (in millions of R$) Raw material for products, inputs, intermediate materials, freight and packaging ...... 243.0 315.1 29.7% Labor ...... 126.4 175.8 39.1% Depreciation ...... 14.3 17.4 21.7% Other(1) ...... 38.3 48.8 27.4% Cost of products sold ...... 422.0 557.1 32.0%

(1) Includes electricity, water, gas, consulting, computer services and maintenance. The increase in our total cost for raw materials, inputs, intermediate materials, freight and packaging is primarily due to the increase in the costs of PVC resin and plastic oils.

49 The costs of PVC resin and plastifying oils, the main components used in the manufacture of our principal raw material (PVC), accounted for approximately 54% of our costs of raw materials for products, supplies, intermediate materials, freight and packaging in the year ending on December 31, 2003, in comparison with approximately 58% in the year ending in 2002. Our costs of raw materials for products, supplies, intermediate materials, freight and packaging, as well as being related to exchange variations, are connected to the variation of the prices of commodities in the international market, as well as fluctuations in offer and demand. The increase in our total cost of labor was primarily due to our need to increase manpower for the painting process of footwear. The increase in the other costs that comprise our cost of products sold was primarily due to the increase in the volume of products sold and the inflation during the period. As a percentage of net sales revenue, our cost of goods sold and services rendered decreased to 52.5% in the year ended December 31, 2003, compared to 55.9% in the year ended December 31, 2002. The decrease in our cost of products sold as a percentage of revenues was primarily due to economies of scale, increases in productivity and cost reduction initiatives. We increased the number of items produced to approximately 121.3 million pairs in the year ended December 31, 2003, compared to approximately 116.3 million in the year ended December 31, 2002.

Gross profit Our gross profit increased by 51.3%, to R$504.0 million, for the year ended December 31, 2003, compared to R$333.2 million for the year ended December 31, 2002. Our gross margin increased 47.5% in the year ended December 31, 2003, compared to 44.1% in the year ended December 31, 2002. This increase in our margin was primarily due to our strategy of launching products with a higher aggregate value, economies of scale, increases in productivity and cost reduction.

Operating expenses The following table sets forth the components of our operating expenses and the percentage variation of each component for the periods presented.

Year ended December 31, 2002 2003 % variation (in millions of R$) Selling expenses(1) ...... (171.6) (218.8) 27.5% General and administrative expenses ...... (46.0) (61.6) 33.9% Financial expenses ...... (142.4) (137.8) (3.2%) Financial income ...... 95.4 84.4 (11.5%) Equity pick-up ...... 76.4 45.1 (41.0%) Management fees ...... (0.2) (0.2) 0% Other operating income ...... 10.6 23.4 119.8% Other operating expenses ...... (2.3) (5.8) 155.3%

(1) Include expenses related to our representatives’ commissions and licensing.

Selling expenses Our selling expenses increased 27.5% to R$218.8 million from R$171.6 million. The increase in our sales expenses was primarily due to (i) an increase in third party expenses (primarily our freight expenses), and (ii) an increase in our expenses relating to our sales force, advertising, and marketing.

50 As a percentage of net sales revenue, selling expenses decreased to 20.6% in the year ended December 31, 2003, compared to 22.7% in the year ended December 31, 2002. This reduction is mainly explained a price increase for certain of our products.

General and administrative expenses The increase in our general and administrative expenses is primarily due to a R$12.1 million increase in expenses relating to personnel, third party services and taxes. As a percentage of net sales revenue, our general and administrative expenses decreased to 5.8% in the year ended December 31, 2003, compared to 6.1% in the year ended December 31, 2002.

Financial expenses Our financial expenses decreased 3.2%, to R$137.8 million, in the year ended December 31, 2003, compared to R$142.4 million in the year ended December 31, 2002. This decrease reflects a reduction in our short-term indebtedness to R$0.8 million on December 31, 2003 from approximately R$151 million on December 31, 2002, due to the repayment of fixed rate notes and exchange rate contracts paid in advance, as well as the appreciation of the real against the U.S. dollar in the year ended December 31, 2003.

Financial income Our financial income decreased 11.5%, to R$84.4 million, for the year ended December 31, 2003, compared to R$95.4 million for the year ended December 31, 2002. This decrease reflects the fact that the average amount of our financial investments in the year ended December 31, 2003 was less than the average amount of our financial investments in the year ended December 31, 2002, as well as the reduced yield on financial investments tied to the value of the dollar due to the appreciation of the real during 2003.

Equity pick-up Our equity pick-up decreased 41.0%, to R$45.1 million, in the year ended December 31, 2003, compared to R$76.4 million in the year ended December 31, 2002. This decrease is due to the merger on August 1, 2003 of Grendene Cal¸cados into our company. Due to this change in our corporate structure, the amount of Grendene Cal¸cados tax benefits, which until that date had been reflected in the consolidated statement of income as equity pick-up, is now reflected directly in our net equity, in our tax benefits capital reserve account.

Other operating income The increase in our other operating income was primarily due to gains in transactions in the futures market, in U.S. dollars, amounting to R$8.6 million. The increase also reflects a favorable judicial decision in a tax proceeding brought by us against the Brazilian Government seeking reimbursement of approximately R$7.4 million of excess collections made by Grendene with respect to the IPI and the PIS taxes.

Other operating expenses The increase in our operating expenses from R$2.3 million in 2002 to R$5.8 million in 2003 was mainly due to the adjustment made to reflect the provisions related to labor contingencies and the obsolescence of inventories of approximately R$2.7 million.

51 Non-operating income

We had a non-operating expense of R$0.2 million in 2003, compared to non-operating income of R$0.5 million in the year ended December 31, 2002.

Income taxes

The amount of income tax we owed increased 67.7%, to R$44.3 million, in the year ended December 31, 2003, compared to R$26.4 million in the year ended December 31, 2002. This increase was primarily due to the increase in our operating income. Our operating income increased by 51.9%, to R$232.7 million, compared to R$153.2 million in the year ended December 31, 2002.

Social contribution tax

The value of the provisions for social contribution owed by us increased by 43.3%, rising to R$13.5 million in 2003 in comparison with R$9.4 million in 2002. This increase was primarily due to the increase in our operating income.

Adjusted net income

As a result of the factors described above, and taking into account the comparability adjustments that we set forth above, our adjusted net income increased 102.9% to R$237.8 million in 2003, compared to R$117.2 million in 2002.

Adjusted EBITDA

Our adjusted EBITDA was R$354.2 million for the year ended December 31, 2003, representing an increase of 67.2% compared to adjusted EBITDA of R$211.8 million for the year ended December 31, 2002. Our adjusted EBITDA margin was 33.4% for the year ended December 31, 2003, compared to 28.0% for the year ended December 31, 2002.

The table below sets forth the reconciliation of adjusted EBITDA for the periods presented.

Year ended December 31, 2002 2003 (in millions of R$) Gross profit ...... 333.2 504.0 (-)Sales expenses ...... 171.6 218.8 (-)General and administrative expenses ...... 46.0 61.6 (-)Management fees ...... 0.2 0.2 (+)Equity pick-up ...... 76.4 45.1 (+)Tax benefits adjustments ...... 0.0 63.7 (+)Depreciation and amortization ...... 20.0 22.0 Adjusted EBITDA(1) ...... 211.8 354.1

52 uses it to measure our operating performance. Moreover, we understand that certain investors and financial analysts use adjusted EBITDA as an operating performance indicator for a company and/or its cash flow.

Year ended December 31, 2002 compared to the year ended December 31, 2001

Gross sales revenue

Our gross sales revenue increased 30.1%, to R$906.9 million, in the year ended December 31, 2002, compared to R$697.1 million in the year ended December 31, 2001. The breakdown of our gross sales revenues before sales tax, returns and deductions is set forth in our consolidated and audited financial statements and in the table below.

Year ended December 31, 2001 2002 % variation (in millions of R$) Domestic market: ...... 589.7 740.2 25.5% Masculine segment ...... 166.8 177.1 6.2% Feminine segment ...... 200.4 251.4 25.4% Children’s segment ...... 184.1 211.0 14.6% Mass consumer segment(1) ...... 38.4 100.7 162.2% Export market(2) ...... 107.4 166.7 55.2% Total ...... 697.1 906.9 30.1%

(1) Includes other products which account for a small percentage of revenues. (2) Includes sales in the export market made through our subsidiaries.

Sales in the domestic market

The 25.5% increase in sales to the domestic market is primarily due to an approximate 25.8% increase in the number of units sold, slightly offset by an approximate 0.3% decrease in the average sales price. This increase in sales volumes reflects our aggressive sales strategy in the mass consumer segment with lower added value, which allowed us to reach a larger target public, primarily through the consolidation of our Ipanema line and the launch of a new sandal, Ipanema by Gisele Bundchen.¨

Sales in the export markets

Income from export sales to foreign markets increased 55.2%, compared to an approximate 44.1% increase in direct exports and an approximate 89.4% increase in sales by our foreign subsidiaries. The increase in exports is due to an approximate 10% increase in the number of units sold and an approximate 41.1% increase in the average sales price abroad. These increases reflect our greater marketing efforts abroad and our greater focus on exports.

Sales deductions

Sales deductions increased 26.6%, to R$151.8 million, for the year ended December 31, 2002, compared to R$119.9 million for the year ended December 31, 2001. This increase was primarily due to an increase in our gross sales.

53 Net sales revenue

Our net sales revenues reached R$755.2 million in 2002, representing a 30.8% increase compared to net sales revenues of R$577.2 million in 2001.

Cost of products sold

Our cost of products sold increased by 24.6%, to R$422.0 million in the year ended December 31, 2002, compared to R$338.6 million in the year ended December 31, 2001.

The following table sets forth the components of our cost of products sold and the percentage variation of each component for the periods presented.

Year ended December 31, 2001 2002 % variation (in millions of R$) Raw material for products, inputs, intermediate materials, freight and packaging ...... 192.3 243.0 26.4% Labor ...... 81.7 126.4 54.7% Depreciation ...... 11.6 14.3 23.2% Other(1) ...... 53.0 38.3 (27.8%) Cost of products sold ...... 338.6 422.0 24.6%

(1) Includes electric energy, water, gas, consulting, computer services and maintenance, among others.

The increase in our total cost for raw materials, inputs, intermediate materials, freight and packaging is primarily due to the increase of approximately 23.3% in the volume of products sold.

Costs relating to PVC resin and plastic oils, the principal components for the production of our main raw material (PVC), represented approximately 58% of our expenses for raw material, inputs, intermediate materials, freight and packaging in the year ended December 31, 2002, compared to approximately 61% in the year ended December 31, 2001. These expenses are linked to exchange rate variation and commodity price variation in the international market, as well as to fluctuations in supply and demand.

The increase in our total cost of labor was primarily due to our increased output and the additional manpower needed for our production of more sophisticated footwear. The increase in the other costs that comprise our cost of goods sold and services rendered was primarily due to the increase in the number of products sold and the average inflation for the period.

As a percentage of net revenue of sales, our cost of goods sold and services rendered decreased to 55.9% in the year ended December 31, 2002, compared to 58.7% in the year ended December 31, 2001. This decrease was primarily due to economies of scale, increases in productivity and cost reduction initiatives. We increased the number of items produced to approximately 116.3 million pairs in the year ended December 31, 2002, compared to approximately 94.4 million in 2001.

Gross profit

Our gross profit increased 39.7%, to R$333.2 million, in the year ended December 31, 2002, compared to R$238.6 million in the year ended December 31, 2001. Our gross margin reached 44.1% in 2002 compared to 41.3% in 2001. This increase in our gross margin was primarily due to a

54 significant increase in the number of products sold and the resulting economies of scale, increases in productivity and cost reduction initiatives.

Operating expenses

Year ended December 31, 2001 2002 % variation (in millions of R$) Selling expenses(1) ...... (123.6) (171.6) 38.8% General and administrative expenses ...... (33.5) (46.0) 37.4% Financial expenses ...... (62.5) (142.4) 128.0% Financial income ...... 39.3 95.4 142.6% Equity pick-up ...... 58.2 76.4 31.3% Management fees ...... (0.2) (0.2) 0.0% Other operating income ...... 5.7 10.6 85.4% Other operating expenses ...... (2.8) (2.3) (19.1%)

(1) Includes expenses related to our representatives’ commissions and licensing.

Selling expenses

The increase in our selling expenses was primarily due to (i) an increase in expenses for third party services (primarily our freight expenses) and (ii) an increase in our expenses relating to our sales force, advertising and marketing and licensing.

As a percentage of net sales revenue, our selling expenses increased to 22.7% in the year ended December 31, 2002, from 21.4% in 2001.

General and administrative expenses

The increase in our general and administrative expenses is primarily due to an approximate R$7.4 million increase in expenses related to personnel, third party services and taxes.

As a percentage of net sales revenue, our general and administrative expenses increased to 6.1%, in the year ended December 31, 2002, compared to 5.8% in the year ended December 31, 2001.

Financial expenses

Our financial expenses increased 128.0%, to R$142.4 million, in the year ended December 31, 2002, compared to R$62.5 million in the year ended December 31, 2001. This increase reflects the increase in the cost of debt linked to the TJLP, the depreciation of the real in relation to the dollar and the increase in our average monthly short-term indebtedness during the period, primarily advance payments on currency exchange contracts.

Financial income

Our financial income increased 142.6%, to R$95.4 million, in the year ended December 31, 2002, from R$39.3 million in the year ended December 31, 2001. This increase is primarily due to financial income generated by an increase in our average cash balance, available funds and financial applications, as well as the higher average rate of the CDI.

55 Equity pick-up

Our equity pick-up increased 31.3%, to R$76.4 million, in the year ended December 31, 2002, compared to R$58.2 million in the year ended December 31, 2001. This increase was primarily due to a 30.1% increase in our gross sales revenue for the period, which resulted in greater tax benefits.

Other operating income

Our other operating revenues increased from R$5.7 million in 2001 to R$10.6 million in 2002. This was due to favorable legal decisions in cases taken against the Brazilian Government which aimed to obtain reimbursement of excess payment of tax in regard to Tax on Manufactured Products (IPI) and the Social Inclusion Program (PIS), with an approximate value of R$4.6 million.

Other operating expenses

Our other operating expenses fell from R$2.8 million in 2001 to R$2.3 million in 2002.

Non-operating result

Our non-operating result increased to R$0.5 million in the year ended December 31, 2002, from an expense of R$2.6 million in the year ended December 31, 2001.

Income taxes

Our income tax increased 77.7%, to R$26.4 million, in the year ended December 31, 2002, compared to R$14.9 million in the year ended December 31, 2001. This increase was primarily due to a 28.5% increase in operating income, which amounted to R$153.2 million in the year ended December 31, 2002, compared to R$119.2 million in the year ended December 31, 2001. The variation in income tax was due to a greater number of non-deductible expenses in the period.

Social contribution tax

Provision for social contributions increased 70.9%, from R$5.5 million in 2001 to R$9.4 million in 2002. This increase was due to the increase in 28.5% in operating results, as discussed above, and increased non-deductible expenses during the period.

Net income

As a result of the above, our net income increased 22.3%, to R$117.2 million, in the year ended December 31, 2002, compared to R$95.8 million in the year ended December 31, 2001.

Adjusted EBITDA

Our adjusted EBITDA increased 35.3%, to R$211.8 million, in the year ended December 31, 2002, compared to R$156.5 million in the year ended December 31, 2001. Our adjusted EBITDA margin increased to 28.0% in the year ended December 31, 2002, compared to 27.1% in the year ended December 31, 2001.

56 The table below sets forth the reconciliation of adjusted EBITDA with adjusted gross profit for the periods presented.

Year ended December 31, 2001 2002 (in millions of R$) Gross profit ...... 238.6 333.2 (-)Sales expenses ...... 123.6 171.6 (-)General and administrative expenses ...... 33.5 46.0 (-)Management fees ...... 0.2 0.2 (+)Equity pick-up ...... 58.2 76.4 (+)Tax benefits adjustment ...... 0.0 0.0 (+)Depreciation and amortization ...... 17.1 20.0 Adjusted EBITDA(1) ...... 156.5 211.8

(1) Adjusted EBITDA is not a measure used under Brazilian GAAP. It does not represent cash flow for the periods presented and must not be considered as an alternative to net profits 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 standard meaning and our definition of adjusted EBITDA cannot be compared to EBITDA or adjusted EBITDA, as defined by other companies. Even if, according to Brazilian accounting practices, adjusted EBITDA does not supply a measure of the operating cash flows, our administration uses it to measure our operating performance. Moreover, we understand that certain investors and financial analysts use adjusted EBITDA as an operating performance indicator for a company and/or its cash flow.

Liquidity and capital resources

Sources

Our principal source of funding is cash flow from operations and tax benefits. Our net operating cash flow increased by 36.8% to R$140.1 million in the six months ended June 30, 2004, compared to R$102.4 million in the six months ended June 30, 2003. This increase was primarily due to the working capital changes, mainly due to the inventory reduction of approximately R$32.8 million in the first half of 2004, in comparison to an increase in the inventory of approximately R$37.3 million in the first half of 2003.

Our net operating cash flow increased 216% in the year ended December 31, 2003 to R$182.6 million compared to R$57.8 million in the year ended December 31, 2002. That increase was mainly due to the increase in our operating revenues together with the increase of our operating margins, which resulted in a 67.2% increase of our adjusted EBITDA in the same period and in a decrease in the variation of our accounts receivable to R$71.9 million compared to R$80.8 million in 2002, despite the increase of 40.7% of the gross revenue in the same period.

Our net operating cash flow decreased 19.5%, to R$57.8 million, in the year ended December 31, 2002 compared to R$71.9 million in the year ended December 31, 2001. This decrease was primarily due to a significant increase in our accounts receivable, which increased to R$230.3 million, in the year ended December 31, 2002, compared to R$194.5 million in the year ended December 31, 2001, which resulted in a greater need for financing of our working capital. The increase was due to the extension of the average payment term to our clients from 55 days to 72 days. The decrease in our net operating cash flow was offset by an increase in our gross revenue and adjusted EBITDA in the period.

On June 30, 2004 our working capital (short-term assets excluding cash, available funds and financial investments, less short-term liabilities, loans and financings) was R$342.0 million, compared to

57 R$277.1 million on June 30, 2003, R$399.8 million on December 31, 2003, R$293.7 million on December 31, 2002 and R$211.7 million on December 31, 2001.

On July 30, 2004, Saddle Corp. received approximately U.S.$6.2 million in connection with the liquidation of certain open loan agreements. In addition, on the same date, Saddle Corp. received payment in the amount of U.S.$410,000, for the sale of its holdings in Reebok Chile, which occurred on June 29, 2004.

Uses of funds

Our financial resources are primarily used for the payment of our financing, capital expenditures, working capital needs and payment of dividends.

On June 30, 2004, we had R$0.03 million in loans and financing with financial institutions and R$15.3 million in financings relative to our ICMS and export tax benefits, both in the short term, and, in the long term, R$55.5 million in loans and financing from financial institutions and R$67.8 million in financing relative to our ICMS and export tax benefits.

On December 31, 2003, we had R$0.9 million in loans and financing with financial institutions and R$13.9 million in financing related to the ICMS and export fiscal benefit, both on short-term, and on a long-term basis, we had R$55.5 million in loans and financing with financial institutions and R$61.9 million in financing related to the ICMS fiscal benefit.

We paid dividends in the amount of R$17.1 million for the year ended December 31, 2003. In addition, during the six months ended June 30, 2004, a distribution of dividends from earnings in previous years was made, totaling approximately R$69.3 million. (See ‘‘Dividends’’ for information on our dividend distribution policy to be implemented beginning in fiscal year 2005)

Capital Expenditure

Our total capital expenditure in the years ended December 31, 2001, 2002 and 2003, were R$35.4 million, R$20.8 million and R$57.9 million, respectively and R$9.8 million for the six months ended June 30, 2004.

The following table sets forth our capital expenditures for the periods presented.

Year ended Six months December 31, ended June 30, 2001 2002 2003 2004 (in millions of R$) Industrial plants and installations ...... 11.4 5.3 23.3 4.7 Machinery and equipment ...... 19.3 9.1 20.5 2.2 Computer hardware and software ...... 1.4 4.7 6.3 1.2 Other capital expenditures(1) ...... 3.3 1.7 7.8 1.7 Total capital expenditures ...... 35.4 20.8 57.9 9.8

(1) Includes capital expenditures for vehicles, airplanes, furniture, tools, brand names and patents.

Generally, our capital expenditures are driven by the need to accommodate increasing demand for our products and the need constantly update our machinery and equipment used in our production process, as reflected by the 28.6% increase in the number of pairs we produced between the years 2001 and 2003.

58 In 2001, 2002, 2003 and in the six months ended June 30, 2004, we did not make any capital expenditures or investments related to other companies outside our consolidated group.

Indebtedness

As of June 30, 2004, our cash and cash equivalents, available funds and investments exceeded the aggregate amount of loans and financings by R$208.4 million. As of December 31, 2003, cash and cash equivalents, available funds and investments exceeded the aggregate amount of our loans and financings by R$113.9 million.

As of December 31, 2003, we had R$117.5 million in long-term loans and financings and R$14.8 million in short-term loans and financings and, as of June 30, 2004, these sums were, respectively, R$123.4 million and R$15.3 million. These loans and financings currently consist of obligations undertaken to Banco do Nordeste for the purchase of industrial equipment and the financing of construction projects and to Banco do Estado do Ceara´ under periodically executed loan agreements linked to tax credits granted to the Company by the state of Ceara´ (See ‘‘Activities—Ta x Credits’’).

The following table shows the total indebtedness, cash and cash equivalents, and financial investments, and the net indebtedness for the periods indicated:

Fiscal Year Six months ended December 31, ended June 30, 2001 2002 2003 2004 (in millions of R$) Total indebtedness ...... 101.9 211.0 132.2 138.7 Cash and cash equivalents, available funds and investments . 84.3 211.5 246.1 347.1 Net indebtedness (Liquid cash and due from banks) (A-B) . . 17.6 (0.5) (113.9) (208.4)

The change in total indebtedness from the year ended December 31, 2001 to the year ended December 31, 2002 is primarily due to the increase in indebtedness related to the ICMS export tax, as well as the balances relating to the foreign exchange agreement and fixed rate note advances during the period. In addition, the change in the IGP-M and in the U.S. dollar for the period, as well as the increase in our gross billing, contributed to the increase in our indebtedness for the period. Moreover, the increase in the item cash and cash equivalents, available funds and investments in 2002, when compared to 2001, was primarily due to increased funding from foreign exchange contracts in respect of advances on exports totaling approximately R$71.5 million, in addition to the generation of cash flows from operations for the period.

59 The following table sets forth by maturity date our long-term debt, at December 31, 2003 and June 30, 2004.

December 31, 2003 June 30, 2004 Financing of Financing of Maturity of long-term debt Financial tax Amount of long- Financial tax Amount of long- (in millions of R$) institutions benefits(1) term debt institutions benefits(1) term debt 2005 ...... 4.6 13.4 18.0 4.6 7.3 11.9 2006 ...... 9.3 13.9 23.2 9.3 14.9 24.2 2007 ...... 9.3 15.8 25.1 9.3 16.9 26.2 2008 onward ...... 32.3 18.8 51.2 32.3 28.8 61.1 Total ...... 55.5 61.9 117.5 55.5 67.9 123.4

(1) The amounts of financing relating to tax benefits presented in the table only include amounts owed by us in the event of timely payment, i.e., only a determined percentage of the amount financed or deferred, as set forth in the documents which reflect the tax benefits to which we are entitled.

Our loans and financing include the instruments described below. Despite these loans and financing, we do not believe that we are dependent on third-party resources in order to conduct our business because of our consistent generation of cash in recent periods.

Financing with Banco do Nordeste

On June 26, 2003, two industrial credit notes were issued by Grendene Cal¸cados to Banco do Nordeste, under which we were guarantors, for financing with resources from the FNE, for the acquisition of machinery and construction. Because of the merger of Grendene Cal¸cados into our company in August 2003, we assumed the obligations under these industrial credit notes. The amount of the main financing under the first industrial credit note was approximately R$36.0 million and the second was approximately R$19.5 million. The credit notes are subject to an annual interest rate of 14%, payable quarterly during the grace period between June 26, 2003 and June 26, 2005, and monthly during the period of amortization, which starts on July 26, 2005, together with the installments of principal due. A discount of 25% will be applied to such charges, as long as the installments of interest and principal are paid by the respective due dates. In both cases the payment of the principal amount of the loan must be made in 72 monthly and consecutive installments, the first of them on July 26, 2005 and the last on June 26, 2011. The amount of each monthly installment is obtained by dividing the outstanding principal amount by the number of installments falling due, plus the corresponding interest. The financing is guaranteed by a mortgage on part of our properties in Sobral and by a lien and trust deed on national and imported machinery, along with the guarantee of our shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle. On June 30, 2004 the outstanding amounts due on the industrial credit notes were approximately R$36.0 million and R$19.5 million, respectively.

Periodic loan contract with BEC

We borrowed money under five loans from BEC linked to our tax benefits, under all of which the state of Ceara´ is an intervening party. Under the terms of the loan contracts signed with BEC, we must keep our obligations with BEC and the state tax authorities strictly current, under penalty of suspension of the release of the loan funding, in addition to the loss of the tax benefits to which we are entitled. The financial contracts signed with BEC are described below:

Contracts signed with BEC linked to the tax benefit of ICMS-PROVIN. We borrowed money under three loans from BEC, which are linked to the PROVIN tax benefits related to the activities of our headquarters in Sobral and our branches in Fortaleza and Crato.

60 The following table sets forth the main terms of the loan contracts as well as the amounts outstanding under each contract on June 30, 2004. For more details about our PROVIN tax benefits, see ‘‘Business—Tax benefits’’. Payment period Approx. Amount (counted from Correction outstanding financed Amount to be the disbursement index of amounts (in (% of ICMS paid (% of of each monthly the thousands of paid the amount installment outstanding R$)(on June 30, Start Termination monthly) financed) financed) amounts 2004)(1) Sobral . . March 1994 February 2009 100% 25% 60 months IGP-M 76,041 March 2009 February 2019 75% 1% 60 months TJLP — Fortaleza May 2000 April 2015 75% 1% 36 months TJLP 131 Crato . . October 1996 September 2012 75% 1% 60 months TJLP 296

(1) Amounts listed as outstanding balances on June 20, 2004 only include the percentage of the amount financed that must be paid by the company to BEC in the event of timely payment of the financing and the absence of any default (as set forth in such agreements). The amounts which are accounted for directly in the tax incentive reserve account in net equity (including any additional interest and other expenses accrued on the amortized amount) shall only be due in the event that the installment of the amount financed is not timely paid, or in the event of default, as set forth in the loan agreements. In the three contracts, each monthly loan tranche corresponds to a promissory note issued by us, backed by a guarantee from our shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle. Repayment of each tranche so released under these contracts falls due on the 36th or 60th month after the month of the disbursement, as applicable, representing the total amounts subject to readjustment by the IGP-M or by the TJLP, as applicable. Financial contracts signed with BEC linked to the tax benefit of PROAPI. We borrowed money under two loan contracts with BEC, linked respectively to the PROAPI tax benefits related to the activities of our headquarters in Sobral and our branch in Crato. The following table sets forth the main terms of the loan contracts, as well as the amounts outstanding under each contract on June 30, 2004. For more details about our PROAPI tax benefits, see ‘‘Business—Tax benefits’’. Payment period Approx. Amount (counted from Correction outstanding financed Amount to be the disbursement index of amounts (in (% of ICMS paid (% of of each monthly the thousands of paid the amount installment outstanding R$)(on June 30, Start Termination monthly) financed) financed) amounts 2004)(1) Sobral . . . October 1996 September 2011 11% 10% 60 months TJLP 6,241 Crato . . . February 1999 January 2014 11% 10% 60 months TJLP 406

Guarantees granted under financing contracts with Vulcabras´ do Nordeste In addition to our financing contracts, we are currently joint guarantors under five financing contracts entered into by Vulcabras´ do Nordeste, a company controlled by one of our shareholders. On

61 June 30, 2004, the amount guaranteed by us under the guarantees and pledges amounted to approximately R$74.6 million. On July 29, 2004, our shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle provided a counter-guarantee to us, assuming in an unconditional, joint and irrevocable manner, (i) to reimburse, immediately and fully to us, any and all values disbursed thereby in order to comply with obligations deriving from guarantees and surety bonds granted to Vulcabras´ do Nordeste and indicated below; or (ii) to pay, immediately on our behalf any and all amounts whose disbursement has been requested for compliance with the obligations derived from payments in connection with payments due by Vulcabras´ do Nordeste. See ‘‘Transactions with Related Parties’’. The following table sets forth the financial contracts under which we are guarantors as well as the financial institution and the amounts outstanding on June 30, 2004:

Amount outstanding on June 30, 2004 (in thousands of Financial Institution Termination R$) International Finance Corporation — IFC(1) ...... 12/15/2006 25,991 Banco do Nordeste(2)...... 1/12/2009 5,318 Banco do Nordeste(3) (4)...... 10/10/2011 8,508 Banco do Nordeste(3) (5)...... 10/10/2011 14,395 BankBoston Banco Multiplo´ S.A(6)...... 4/15/2005 20,431 Total ...... 74,643

(1) The contract is further guaranteed by (i) mortgages of 15 properties owned by Agro Pecuaria´ S.A. and Agro Pecuaria´ Guanabara Ltda. and (ii) a guarantee by Vulcabras.´ (2) The contract is further guaranteed by (i) a third mortgage on property and respective improvements to the property of Vulcabras´ do Nordeste, for a total R$18.7 million, (ii) security over machines and domestic and imported equipment owned by Vulcabras´ do Nordeste, for approximately R$5.7 million, (iii) personal guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle, and (iv) a guarantee by Vulcabras.´ (3) Such contracts are also guaranteed by letters of guarantee issued by a bank with a one-year term. At the discretion of Banco do Nordeste, the renewal of letters of guarantee may be waived and, in this case, the company, which is a consenting intervening party in the contract, will become the guarantor under this contract. (4) The contract is further guaranteed by (i) a fifth mortgage on property and respective improvements to the property of Vulcabras´ do Nordeste, for a total of approximately R$31.8 million, (ii) security over domestic and imported machines and equipment, owned by Vulcabras´ do Nordeste, for approximately R$15.3 million, and (iii) personal guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle. (5) The contract is further guaranteed by (i) a fourth mortgage on property and respective improvements to the property of Vulcabras´ do Nordeste, for approximately R$31.8 million, (ii) security over domestic and imported equipment owned by Vulcabras´ do Nordeste, for approximately R$7.8 million, and (iii) personal guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle. (6) The contract is further guaranteed by personal guarantees in a Promissory Note from Alexandre Grendene Bartelle and Pedro Grendene Bartelle.

Contractual obligations and commercial undertakings We have no significant obligation under material contracts directly related to our operating activities, such as for the supply of raw materials. Contracts relating to the development of our activities include commercial representation contracts entered into with each of our 50 commercial representatives, as well as contracts for the licensing of names and brands entered into with national and international artists, athletes and companies that hold rights to the names and brands of children’s characters and children’s artists. Our business representation contracts require the payment of commissions to our business representatives based on their total sales in the respective sales area defined in the contract. Our licensing contracts generally provide for payment to the licensors based on

62 a certain percentage of our gross revenues generated by sales of products that use the brand or name of the licensee. In addition, we are party to an aircraft operational leasing agreement, dated June 30, 2003, entered into with Aero Financial Services LLC. The agreement relates only to our rental of the aircraft; we do not hold an option to purchase the aircraft. The agreement expires on July 22, 2005. The amount of the annual rental of the aircraft is approximately U.S.$1.34 million, to be paid in two semi-annual installments of U.S.$670,000 each.

Off-balance sheet arrangements There are no arrangements or transactions that are not reflected in our financial statements.

Quantitative and qualitative market risks We are exposed to various market risks including interest rate risk.

Interest rate risk On June 30, 2004, R$83.1 million of our short and long-term indebtedness (representing 59.9% of our total indebtedness) was adjusted by the IGP-M and TJLP, compared to R$75.8 million on December 31, 2003 representing to 57.3% of our total indebtedness) compared to R$58.7 million on December 31, 2002 (representing 27.8% of our total indebtedness). The net expense on additional interest incurred in the years ended December 31, 2002 and 2003 would have been approximately R$0.6 million in both years, due to a 10% increase in the rate of the TJLP.

Exchange rate risk We do not have any financing or loans in foreign currency. In addition, in 2003, approximately 37% of our cost of goods sold and services rendered were linked to the exchange rate, of which the majority represents costs of domestic raw material, partially indexed to the exchange rate variation between the real and the U.S. dollar. As the real devalues against the dollar, the acquisition cost of these raw materials increases. However, a substantial part of our costs is incurred in reais and we also have revenues denominated in U.S. dollars. In order to minimize the effects of exchange rate variation in our production cost, we monitor the trends of the exchange rate variation against the dollar and, as we deem necessary, have executed purchase agreements in the futures market of the Futures Market Stock Exchange (Bolsa de Mercadorias e Futuro). Such transactions are exclusively intended to protect us against the exchange rate variation. We are party to an aircraft operating lease agreement with Aero Financial Services LLC, under which the annual rental value is designated in U.S. dollars. We do not have any contractual protection against exchange rate variation risk related to such contract.

63 THE INDUSTRY Overview According to a report published by Datamonitor in 2004, the global footwear industry grew at an average rate of 2.3% per year between 1999 and 2003, with total production of approximately 12.8 billion pairs of shoes and total sales that reached approximately U.S.$284 billion in 2003. The table below sets forth global footwear sales in the past five years. Global footwear sales 1999 2000 2001 2002 2003 Amount (in billions of U.S.$) ...... 260.1 267.9 270.0 275.3 284.4 Growth compared to the previous year ...... — 3.0% 0.8% 2.0% 3.3% Units (in millions) ...... 11,679 12,084 12,158 12,366 12,791 Growth compared to the previous year ...... — 3.5% 0.6% 1.7% 3.4% Source: Datamonitor Datamonitor reports that the lowest rate of growth in footwear sales worldwide occurred in 2001 and 2002, due to a significant reduction in global consumption caused by economic downturns around the world. In 2003, with the improvement of the global economy, the footwear sector registered growth rates similar to those in years prior to 2001. According to SATRA, China and the United States are the two main players in the global footwear sector. China is the largest exporter (representing approximately 57% of the global market) and the largest consumer of shoes (representing approximately 22% of the global market). The United States, on the other hand, is the largest importer and the country with the highest per capitaconsumption of footwear, averaging 6.7 pairs per inhabitant. The table below sets forth by country the volume produced, the volume exported and the percentage of the global footwear sector represented for 2002. Production and exports Percentage of the Percentage of the Country Production global market Export global market (in millions (%) (%) of pairs) China ...... 6,950 55.8 4,300 57.2 India ...... 750 6.0 63 0.8 Brazil ...... 642 5.2 164 2.2 Indonesia ...... 509 4.1 176 2.3 Vietnam ...... 360 2.9 333 4.4 Italy ...... 335 2.7 322 4.3 Thailand ...... 270 2.2 136 1.8 Pakistan ...... 245 2.0 10 0.1 Turkey ...... 215 1.7 62 0.8 Mexico ...... 194 1.6 39 0.5 Others ...... 1,978 15.9 1,911 25.4 Total ...... 12,448 100.0 7,516 100.0

Source: SATRA Technology Center The growth of the footwear manufacturing industry in a particular region is largely determined by production costs, chiefly in relation to labor. This sector is sensitive to local salary levels and, to a lesser degree, to costs related to raw materials involved in production. As a result, the global footwear industry has seen a shift from manufacture in countries with more developed economies to those with less developed economies. China, Brazil and India are currently the three principal manufacturers of footwear, and accounted for approximately 67% of global production in 2002, according to SATRA.

64 This shift in the manufacture of footwear occurred primarily in relation to footwear products directed at middle class and low-income consumers in the most developed countries, which demand large volumes and competitive prices. More sophisticated footwear products whose appeal lies in design and brand names, and are directed at consumers with greater purchasing power, continue to be manufactured in developed countries by local labor. However, those production stages that require higher participation of human capital are subcontracted to lower-priced labor. Generally, it could be said that the global footwear sector presents great geographical differences according to level and distribution of income, degree of market saturation, demographic and climatic differences and cultural preferences for different types of products. In the United States and in Europe, consumption, in pairs of shoes and in terms of value of each pair, is above the world average, specially with respect to developing countries. This occurs because seasons are well defined, the high buying power of the population, and the fact that shoes are perceived as a fashion accessory in such places. In emerging countries and in third world countries, the majority of purchased shoes are utilitarian, classic shoes and commodities, the aggregate value of which is lower and for which price is a determining factor for market success. According to SATRA, the countries that reflect the greatest per capita consumption of footwear are the United States, (6.7 pairs per year), France (5.3 pairs per year), and the United Kingdom (5.2 pairs per year). In 2002, Brazil’s per capita consumption of footwear was 2.8 pairs per year. The table below sets forth by country the consumption of footwear, the percentage of the global footwear sector represented and per capita consumption of footwear in 2002.

Principal consumer countries Consumption Percentage of the Average per capita Country in pairs world market consumption (in millions) (%) (pairs) China ...... 2,656 21.6 2.1 USA...... 1,925 15.7 6.7 India ...... 689 5.6 0.7 Japan ...... 511 4.2 4.0 Brazil ...... 483 3.9 2.8 Indonesia ...... 350 2.9 1.6 France ...... 318 2.6 5.3 United Kingdom ...... 312 2.5 5.2 Germany ...... 303 2.5 3.7 Pakistan ...... 242 2.0 1.7 Others ...... 4,480 36.5 N.A. Total ...... 12,269 100.0

Source: SATRA Technology Center According to SATRA, the United States was the principal importing country in the global footwear market, representing approximately 14.5% of all imports in 2002.

65 The table below sets forth by country the principal importers of footwear in 2002.

Principal importing countries Percentage of the Countries Imported pairs world market (in millions) (%) USA...... 1,784 14.5 Hong Kong* ...... 1,718 14.0 Japan ...... 467 3.8 Germany ...... 339 2.8 United Kingdom ...... 300 2.4 France ...... 278 2.3 Italy ...... 203 1.6 Russia ...... 146 1.2 Poland ...... 119 1.0 Netherlands ...... 117 1.0 Others ...... 6,798 55.4 Total ...... 12,269 100.0

* Hong Kong essentially imports to ‘‘re-export’’ Source: SATRA Technology Center

Overview of the footwear sector in Latin America In Latin America, the volume of footwear produced, valued in U.S. dollars, increased 12.5% during the period between 1998 and 2002, corresponding to an increase from 776 million to 862 million pairs of shoes for that period. This represents an annual increase of 3%. The table below sets forth the volume sold, the value of the sales in the period and growth compared to the previous year, for the period between 1998 and 2002.

Sales of footwear in Latin America 1998 1999 2000 2001 2002 Pairs (in millions) ...... 766 757 815 831 862 Growth compared to the previous year ...... — -1.2% 7.7% 2.0% 3.7%

Source: SATRA In a region affected by the recent economic recession, SATRA reports that the growth of the footwear market in Brazil, the largest market in Latin America (representing approximately 74% of the total region in 2002), is in stark contrast to the conditions that have hindered the growth of the footwear sector in Argentina, Chile and Paraguay.

66 The tables below set forth the sizes of the principal markets in Latin America in terms of production and consumption between 1998 and 2002.

Production in Latin American markets CAGR Country 1998 1999 2000 2001 2002 1998-2002 (in millions of pairs) (%) Argentina ...... 80.0 80.0 72.5 61.3 70.8 -3.0 Brazil ...... 516.0 499.0 580.0 610.0 642.0 5.6 Chile ...... 20.9 21.2 18.5 20.6 13.5 -10.4 Colombia ...... 60.0 65.0 60.0 54.9 57.3 -1.1 Mexico ...... 210.0 231.5 250.4 217.0 194.0 -2.0 Peru...... 35.0 34.8 35.6 35.8 30.5 -3.4 Venezuela ...... 18.3 16.3 15.4 18.6 19.1 1.1 Others ...... 35.8 40.7 33.0 29.8 28.8 -5.3 Total ...... 976.0 988.5 1,065.4 1,048.0 1,056.0 2.0

Source: SATRA

Consumption in Latin American markets CAGR Country 1998 1999 2000 2001 2002 1998-2002 (in millions of pairs) (%) Argentina ...... 97.4 96.7 96.0 87.0 78.8 -5.2 Brazil ...... 414.0 374.5 426.4 445.0 483.0 3.9 Chile ...... 43.3 44.8 44.6 40.3 34.8 -5.3 Colombia ...... 69.3 71.0 83.5 82.5 88.2 6.2 Mexico ...... 181.5 198.0 216.0 206.5 182.5 0.1 Peru...... 39.9 43.6 43.8 43.9 50.0 5.8 Venezuela ...... 56.3 57.1 57.2 57.4 51.9 -2.0 Others ...... 44.1 45.9 49.3 48.5 37.1 -4.2 Total ...... 945.8 931.6 1,016.8 1,011.1 1,006.3 1.3

Source: SATRA

Overview of the footwear sector in Brazil Size of the sector Brazil is considered one of the most important countries in the global footwear sector. According to SATRA, Brazil is the market leader in Latin America, both in terms of production and consumption. With respect to the global footwear sector, it is the third largest producer and the fifth largest consumer. In addition, Brazil holds a primary position in international commerce in the footwear sector, being the sixth largest exporter in the world.

Growth of the sector The Brazilian footwear sector, when considered in reais, showed growth in recent years despite the economic uncertainty that followed the devaluation of the real at the beginning of 1999, the economic crisis in Argentina and the global economic downturn in 2001 and 2002. Although sales in Brazil have fallen in U.S. dollar terms, from U.S.$5.8 billion in 1999 to U.S.$4.8 billion in 2003 (according to Austin Asis), sales increased in real terms from R$10.5 billion to R$15.0 billion in the same period. In terms of

67 reais and ignoring the effects of inflation, the Brazilian footwear sector grew at a slower pace than gross national product between 2000 and 2003. The following table compares the growth rate of the Brazilian footwear sector against Brazilian gross national product for the period, adjusted in accordance with the IPCA to reflect inflation.

Annual growth (%) Actual growth of the Year GDP footwear sector 2000 ...... 4.4 1.5 2001 ...... 1.3 0.2 2002 ...... 1.9 1.3 2003 ...... (0.2) -1.3

Source: IBGE/Austin Asis We believe that slower growth of the Brazilian footwear sector between 1999 and 2003 was due to a variety of factors, including: • loss of buying power by Brazilian consumer and reduction of the real salary in the period; • increase in the unemployment levels of the middle class; • cooling off of the world economy; and • reduction in the levels of economic activity, with the consequent reduction in the consumption and redirection of part of the income to other consumables.

Description of the market and the sector According to Abical¸cados, the Brazilian footwear market currently comprises more than seven thousand companies that produced approximately 665 million pairs of footwear in 2003, of which 189 million pairs were destined for export. The footwear sector generates a large number of jobs in Brazil. In 2002, approximately 270,000 workers were directly employed in the footwear industry. Today, Brazil relies on 13 major centers of footwear production, spread throughout the country, in the states of Sao˜ Paulo, Minas Gerais, Santa Catarina, Ceara,´ Para´ıba and Bahia. The majority of production (approximately 40% of the total volume produced in Brazil and 74% of the total volume exported by Brazil) is concentrated in the south. Despite the fact that a great number of larger footwear manufacturing companies are located in the southern and southeastern regions of the country, Brazilian production of footwear has gradually spread to other areas, chiefly in the northeastern region of the country in the states of Ceara´ and Bahia. The production of footwear in Brazil, generally speaking, is labor-intensive in its manufacture, although Brazil imports machines and equipment used in the footwear industry. Due to the relatively low investment in technology needed to enter the Brazilian footwear market, this sector has low entry barriers and, depending on how the sector continues to grow, other Brazilian companies or multinational companies could enter in the future.

68 The following table sets forth the percentage of consumption per segment in the Brazilian footwear sector in 2002.

Global sales per segment Segment Consumption Percentage of total market (in millions of pairs) (%) Masculine ...... 70 14.5 Feminine ...... 170 35.2 Children ...... 57 11.8 Mass consumer ...... 186 38.5 Total ...... 483 100

Source: Abical¸cados

Brazil compared to other markets According to SATRA, in 2002 Brazil was: • the third largest producer of footwear in the world; • the fifth largest consumer of footwear in the world; • the sixth largest exporter of footwear in the world; and • the largest producer, consumer and exporter in Latin America. With per capita consumption at 2.8 pairs of footwear per year in 2002, Brazilian per capita consumption is well below levels in the United States and in various Western European countries. As reflected in the chart below, footwear consumption in Brazil is greater in relation to products with lower added value. Therefore, we believe that resumption of growth could increase the consumption of products in the higher value added segments where per capita consumption is lower.

69 Footwear Production for the Domestic Market - 2001

30%

50%

10%

Plastic and rubber sandals Other shoes (synthetic) Leather shoes Popular tennis (fabric) Sports tennis 7OCT200422153778

Source: Abical¸cados In Latin America, Brazil’s per capita consumption is higher than Argentina’s per capita consumption, which was 2.2 pairs per year in 2002, and Mexico’s, which was 1.8 pairs per year in 2002. However, these markets present different profiles than the Brazilian market. Whereas in Brazil the principal consumer product is that of lower added value, in Mexico and Argentina, consumption takes place on a smaller scale, but of products of greater added value.

Imports and exports In recent years, Brazilian footwear imports have decreased, primarily following the devaluation of the real in 1999. At the same time, Brazilian footwear exports have increased. Abical¸cados reports that Brazilian footwear exports increased by 189.0 million pairs in 2003, compared to 142 million pairs in 1998. Imports decreased by 5.0 million pairs in 2003, compared to 19 million pairs in 1997. The United States still is the principal purchaser of Brazilian footwear exports, as set forth in the following table:

2001 2002 2003 Exports to the United States (in millions of pairs) ...... 98 102 104 Exports to the United States (in millions of U.S.$) ...... 1,103 1,123 995 Percentage of total exports of the sector ...... 68.3% 70.6% 64.2% Number of countries of destination (globally) ...... 100 100 100

Source: Abical¸cados

70 BUSINESS Overview We design, manufacture, distribute and sell full plastic footwear. We also produce our primary raw material, PVC, for the manufacture of our footwear. Based on information provided by Abical¸cados, in 2003 we were responsible for approximately 18% of the manufacture of footwear in the Brazilian market. In 2003, we produced approximately 121.3 million pairs of shoes, offering our final consumers six principal product lines, comprising more than 460 models of shoes in 40 different colors. On average, we have an active portfolio of approximately 180 models of shoes at any given time. We supply the Brazilian market through our commercial representatives and the international market through our overseas controlled companies Saddle Corp., Grendha Shoes and Saddle Calzados in Uruguay, the United States and Argentina, respectively, and through direct exports. In 2003, we sold approximately 22% of our production to the export market, which represented approximately 24% of our gross revenues. Our products are sold across a wide range of geographical markets, to 57 countries, with the majority of sales to the United States, Paraguay, Mexico and Argentina. In addition to promoting our own brands, our marketing involves associating our products with national and international celebrities, as well as children’s characters and children’s performers. This gives our products emotional appeal and adds value. Our manufacturing operations are conducted primarily at our headquarters, located in the city of Sobral, in the state of Ceara,´ where our products are manufactured and warehoused. We also have manufacturing facilities in the cities of Fortaleza and Crato, in the state of Ceara,´ and in Farroupilha, in the state of Rio Grande do Sul. In addition, we have a plant in the city of Carlos Barbosa, in the state of Rio Grande do Sul, where we create molds for the production of our footwear. Our production capacity is 160 million pairs of shoes per year. Our manufacturing facilities are all equipped with state-of-the-art machinery. At June 30, 2004, we had approximately 21,500 employees, approximately 14,400 of whom worked in our Sobral plant. We receive state and federal tax benefits from the state of Ceara´ and the Brazilian government. See ‘‘—Tax benefits’’. In 2003, the magazine Exame named us the eleventh largest private employer in Brazil. We offer various benefits to our employees, including medical assistance, dental and mental health assistance, food and financing for the acquisition of a home. In addition, we are engaged in a number of assistance and support projects in the communities in which our manufacturing facilities are located. In 1996, we were named by the U.S. magazine Advertising Age as one of the 30 best examples of marketing in the world. This award is given to companies that stand out because of their innovative marketing strategies. Since then, we have continued to associate our products with national and international celebrities, continuously aiming to develop high-quality products based on innovative design concepts. During 2000, 2001 and 2002, our brand Rider was named the most sold brand in the footwear industry and unisex flip-flop category by Jornal Exclusivo and by Revista Lan¸camento, publications focused on the Brazilian footwear sector. In 2002, we received the ‘‘L´ıder Empresarial’’ award from Gazeta Mercantil and in 2003 and 2004 we received the ‘‘Prˆemio Funda¸cao˜ Getulio´ Vargas de Excelˆencia Empresarial’’ from the Funda¸cao˜ Getulio´ Vargas. In July 2004, we were named best company in the combined clothing, textile and footwear industrial sector in Brazil by the magazine Exame, which since 1973 has published its annual ranking,

71 Melhores & Maiores (Best & Biggest), of Brazilian companies in various sectors of the economy. Exame also named us best industrial company in 1991, 1995 and 1996. In addition, in 2004, the same publication named us third-best industrial company in the north and northeast regions of Brazil.

History and development Our company was first established as a limited partnership on February 25, 1971, to operate generally in the field of plastics manufacture. At the time of our incorporation, our business was geared toward the manufacture of plastic packaging for wine demijohns, an innovation in a market that up to that point had only produced wicker containers. In the mid 1970’s, our business expanded its range of activities and started manufacturing plastic parts for agricultural machines and tools. We then became a component supplier for shoes, such as soles and heels, having been a pioneer in using polyamide (nylon) as a raw material for the manufacture of such components. On November 26, 1979, our shareholders approved our transformation into a corporation, and adopted our current corporate name. Also in that year, using our technology developed for manufacturing shoe components, we launched our first plastic sandal under the Nuar brand. In the early 1980’s, inspired by the trends of the major fashion capitals, we launched a plastic sandal collection under the Melissa brand. In the mid 1980’s, we launched our Rider sandals in Brazil, which represented a new generation of shoe with a unique design and extreme comfort. A few years after this launch, Rider sandals came to represent after-sport footwear and the name became synonymous with the product type. In 1993, primarily because of tax benefits granted by the state of Ceara´ and its strategic location for export purposes, we transferred our central manufacturing operations from Farroupilha to the city of Sobral, in the state of Ceara.´ In 2001, we launched a new product, our Ipanema sandals. In July 2002, we signed a partnership with supermodel Gisele Bundchen¨ to launch a product bearing her signature: Ipanema by Gisele Bundchen¨ . We produced approximately 10 million pairs of Ipanema sandals in 2003.

Corporate structure Between 2001 and 2003, we underwent a corporate restructuring, aimed primarily at simplifying our corporate structure by eliminating our former controlled companies in Brazil and minority participations in companies abroad. On May 30, 2001, our subsidiary, Saddle Corp., sold all of the capital stock of Fitalse that it held to third parties for approximately U.S.$1.7 million. These shares represented 20% of the capital stock of Fitalse. Afterwards, our former subsidiary Grendene Cal¸cados merged its two subsidiaries Industria de Cal¸cados Grendene and Grendene Industrial on January 2, 2002 and November 1, 2002, respectively. Also, on August 1, 2003 our former subsidiary Grendene Cal¸cados merged into our company and we became, once again, an operating company. On June 29, 2004, our subsidiary, Saddle Corp., sold all the shares it held in Reebok Chile’s capital stock to Kevlin Corp S.A. for U.S.$410,000. On March 16, 2004, our subsidiary Saddle Corp. sold all outstanding shares held by VDA, to Vulcabras´ do Nordeste and to Pedro Bartelle, who is the son of our shareholder Pedro Grendene Bartelle for US$37,000.

72 The chart below sets forth our organizational structure before the sale of the minority shareholdings and before giving effect to the corporate restructuring which occurred between 2001 and 2003.

Grendene (Brazil)

100% 98.86% Grendene Saddle Corp. Calçados (Uruguay) (Brazil)

99.99% 100% 99.98% 99.98%

Industria de Grendene Saddle Calzados Grendha Shoes Calçados Grendene Industrial (Argentina) (United States) (Brazil) (Brazil) 7OCT200422153992

Between September 30, 2004 and October 6, 2004, some of our shares held by Alexandre Grendene Bartelle, Pedro Grendene Bartelle, Maria Cristina Nunes de Camargo and Elida´ Lurdes Bartelle, excluding the shares and the shares subject to the overallotment option, were transferred to the holding companies AGBPar, Verona and Grendene Negocios,´ which have executed a shareholders’ agreement, to which we and the selling shareholders are intervening parties. See ‘‘Principal and Selling Shareholders—Shareholders Agreement.’’ The chart below sets our current organizational structure:

Grendene (Brazil)

100%

Saddle Corp. (Uruguay)

100% 99.99%

Grendha Shoes Saddle Calzados (United States) (Argentina)7OCT200422153609

Our strengths We believe that our primary strengths are: • Strength of the brand and quality of concepts and products. We have established strong brands that are recognized in the Brazilian market, making some of our products benchmarks in the footwear sector. Our products are differentiated by their originality, function, design and

73 emotional appeal to the consumer. In addition, we have been successful in implementing a strategy of association of our products with brands and names of national and international celebrities, and, in the case of the Kid’s range, to personalities who are well known in the children’s market in Brazil and abroad. In addition, intensive marketing has made the Rider brand synonymous with its type of products in Brazil and the Melissa range has become synonymous with plastic sandals both in and outside Brazil. • Product Innovation. We believe that the success of the Kid’s, Rider, Melissa, Grendha and Ipanema ranges, as well as the association of our products with licensed names and brands, reflect our capacity to develop concepts, designs and innovative products that attract the interest of new consumers. We continually renew our product portfolio, and launched approximately 460 new models in 2003, with 180 models in our active portfolio at any given time. • Differentiated production process and modern industrial machinery. Our production process involves the development of molds and the automated production of PVC and EVA shoes by injection, which differentiates us from our competitors. Our seven production units in the manufacturing facility in Sobral (which was responsible for approximately 83% of our production in 2003) have an average life of 5 years and cover approximately 154,000 square meters of constructed area and around 500,000 square meters of land. The advanced technology used in our production process permits the fusion of uppers and sole components during the injection process. Our production thus becomes more economic, quicker, differentiated and with a higher quality, resulting in a more competitive price for our products. We produce all the PVC consumed in our production process. This allows us to develop, with greater flexibility and without having to depend on third parties, specific formulas for each type of component and for each type of shoe produced. Our production of PVC allows us to quickly correct any problems identified in this raw material during the production process. We are not dependent on any of our suppliers of raw materials for the production of PVC. • Flexibility in responding to fashion trends and consumer acceptance. Our automatic production allows us to produce a large volume of products in a short space of time, compared to most of our competitors. This production capacity is possible due to our in-house production of our molds, the production process using plastic injection, and the use of modern industrial machinery. In 2003, we launched approximately 460 new models of shoes and maintained an active portfolio of approximately 180 models, renewed on average every six months. We can rapidly create or withdraw models from the market, responding to fashion trends and consumer acceptance. • Mass Marketing. According to Abidal¸cados data, we are responsible for around 18% of national footwear production and we believe that we are among the largest synthetic footwear producers in the world. Our scale of production and financial capacity affords us the opportunity to use significant television marketing campaigns to support our product launches. We believe that the majority of our competitors do not have the scale of production or the financial capacity to carry out this type of marketing strategy. • Consistent generation of cash and financial strength. We believe that our financial performance has been historically consistent, and we have been able to use operational cash flow for business expansion. At June 30, 2004, our consolidated cash, available funds and financial investments exceeded the total of our loans and borrowings by R$208.4 million (taking into account tax benefits). Our consolidated adjusted net income was R$95.8 million in 2001, R$117.2 million in 2002, R$237.8 million in 2003, R$60.5 million in the first six months of 2003 and R$87.5 million in the first six months of 2004. Our adjusted EBITDA was R$115.5 million for the first six months of 2004, compared with R$106.0 million for the first six months of 2003.

74 • Growth capacity, even in adverse economic circumstances. The average price of our products is relatively low and demand is relatively inelastic in relation to price, which has allowed us grow even in the midst of a declining economic situation both in Brazil and internationally. In the Brazilian market, our gross revenues grew by 31.5% in 2003 and 25.5% in 2002, while Brazilian GDP declined by 0.2% in 2003 and grew 1.9% in 2002. We believe that if macro-economic conditions improve in the future, we will have further opportunities for growth. • No dependence on specific market segments or clients. Currently our sales are distributed over four large market segments, with no dependence on a specific segment and with a wide diversification of products. For this reason, a decrease in product sales in a particular segment will have a less significant impact on our results, and may be offset by better results in another market segment. In addition, in 2003 we sold products to more than 13,000 clients and do not depend on any single client or group of clients. Our ten largest clients are responsible for approximately 13% of our sales and our largest client represents approximately 2% of our total sales. • Strong relationship with our commercial representatives. The quality of our relationship with our sales representatives and their role as ‘‘consultants’’ to our shop-owner clients gives us a differentiated position in the sector, increasing our capacity to attract and retain clients. Our commercial representatives use software that we developed, granting them access to the details of the shoe models, sizes and colors acquired by shop-owner clients in the past and assists these clients in their purchases, based on their type of establishment and their customers. • Strong relationship with the community and our employees. We have developed a strong relationship with the communities in the municipalities in the state of Ceara´ where we have manufacturing facilities, because we have enjoyed tax benefits and provided social services for several years, in accordance with the terms of various agreements pursuant to which we obtain tax benefits.

Our strategy Our strategy is to increase our market share in the footwear market in Brazil, our principal market, and abroad, especially in Latin America, through the constant development of new products with quality, originality, functionality, comfort, emotional appeal and competitive prices. To achieve this, we intend in the coming years, to achieve the following: • Consolidate, increase and diffuse the use of full plastic footwear. We intend to consolidate and increase the use of full plastic footwear, emphasizing their advantages in relation to other forms of footwear, such as price, lighter weight, differentiated design, versatility, comfort and ease of following fashion trends. • Growth of the domestic market. We believe that the Brazilian footwear market as a whole has a large potential for growth in relation to other countries. In addition, in 2003, both in the female segment and in the mass consumption segment, we had a market share of approximately 15%, in comparison with a market share of approximately 26% in the male segment and 44% in the children’s segment. Our strategy is, in addition to consolidating and expanding the use of full plastic footwear, to increase the loyalty of our national clients and expand our national consumer base, the main focus of our business, including the female and mass consumption segments. • Growth of the export market. In 2003, approximately 22% of the footwear we produced was exported, representing approximately 24% of our gross revenue for that year. Exports to the United States, Paraguay and Mexico accounted for approximately 68% of our total exports, reflecting potential for growth in exports to other countries. Our strategy, in addition to expanding our presence in the markets where we already operate, is to identify further markets that have the profile for our products and develop these markets through more aggressive

75 marketing. Thus, installed capacity not absorbed by the domestic market can be allocated to the export market, and we can sell our products at competitive prices, with a differentiated design and responsive to the latest fashion trends. • Growth in our production capacity. Our manufacturing facilities are prepared for the rapid growth of our sales. In 2003, approximately 25% of our installed capacity was unused. In addition, as a result of expansions in our factories, we have recently increased our installed capacity by 10% in real terms with approximate investments of R$25 million in the past six months for the expansions, including completion of the buildings and the delivery of machinery and equipment. • Continuous renewal of our product portfolio. We develop our products internally on a continuous basis. In 2003, we launched approximately 460 new models, while maintaining an active portfolio of approximately 180 products. The quantity of footwear models that we launch, together with structured marketing planning, is indispensable for the consolidation of the image of our products. We intend to continually improve our product portfolio and the image that they represent.

Products We manufacture injected full plastic shoes, produced from molds that we develop internally. We are able to produce our shoes more efficiently, with higher accuracy, less labor and lower costs than several of our competitors. We operate in four principal shoe market segments: men, women, children and mass consumption (which segment includes men’s and women’s footwear). We offer a wide range of shoes in a portfolio of six principal product lines. We also continuously develop new products. Currently, our active portfolio has approximately 180 shoe models. Our main product lines are: • Rider. The Rider product line is directed at male consumers and was launched in August 1986. With specialized design and extreme comfort, Rider have become synonymous with this type of product in Brazil and, abroad they are considered true ‘‘after-sports’’ shoes and are sold in over 70 countries. This line is segmented into three categories, according to activity and our consumers’ preferences: sports (foot-covering slippers), beach (toe slippers) and adventure (sandals and tennis sandals). • Grendha. The Grendha product line is directed at female consumers and was launched in July 1994. This line is segmented into five categories, according to styles and market positioning: casual (classic models), tropical (beach fashion models), fashion (trends and innovations), summer (slippers and beach sandals) and promotional (licensing). • Gisele Bundchen¨ . The Gisele Bundchen¨ product line is directed at female consumers and was launched in July 2002, after we signed a licensing contract with supermodel Gisele Bundchen¨ with specific advertising support. The Gisele Bundchen¨ line comprises sandals and slippers. • Melissa. In 2001, we launched our Melissa products, a premium product line directed at female consumers. This line is marketed in specific channels, aimed at developing the brand and the type of product (full plastic), developing styles, for future launch with other brands in order to leverage our sales volume. • Ipanema. The Ipanema product line is directed at mass consumers and was launched in July 2001. This line was launched to leverage our performance in the unisex slipper, clog and sandal market with competitive prices and a focus on distribution strategy. The Ipanema line is segmented into three principal categories: basic (basic and classical models), female and male. • Kid’s. The Kid’s product line is directed at child and pre-teenage consumers and was launched in 1984. Currently, in addition to products launched with our own brands, the Kid’s line includes a series of products launched with licensed national and international children’s characters and children’s artists, in order to bring emotional appeal to the products. Certain products in this line are also marketed with accessories, adding value to the products and increasing their appeal.

76 The table below sets forth the quantity of pairs of shoes manufactured by us for the domestic market in the year 2003, as well as the representative percentage per segment of our production volume and our gross revenues in the domestic market:

Revenue (in Gross Volume millions of revenues Segment (Domestic Market) Pairs of shoes produced (%) R$) (%) Men’s (Rider line) ...... 18,691 19.8 218.8 22.5 Women’s (Grendha, Gisele Bundchen¨ and Melissa lines) ...... 24,564 26.0 295.1 30.3 Children’s (Kid’s line) ...... 24,318 25.8 334.2 34.3 Mass consumer (Ipanema line)(1) ...... 26,795 28.4 125.6 12.9 Total ...... 94,368 100% 973.7 100%

(1) Includes other products accounting for a small percentage of revenues. The chart below sets forth the growth in the number of pairs of shoes produced by us in each one of the segments in which we competed, for the years 2001, 2002 and 2003 and first half of 2003 and 2004 (in thousands of pairs of shoes).

Six months ended Year ended December 31, June 30, Production (in thousands of pairs) 2001 2002 2003 2003 2004 Domestic market ...... 79,402 99,856 94,368 34,407 43,532 Masculine segment ...... 24,465 22,206 18,691 7,408 8,577 Feminine segment ...... 24,310 28,809 24,564 7,421 10,419 Children’s segment ...... 18,739 19,865 24,318 7,572 8,898 Mass consumer segment(1) ...... 11,888 28,976 26,795 12,006 15,638 Export market(2) ...... 14,954 16,446 26,927 13,400 15,098 Total market ...... 94,356 116,302 121,295 47,807 58,630

(1) Includes other products which represent a small portion of our revenues. (2) Includes sales made through our controlled companies abroad. The chart below sets forth the growth in our gross revenues in each one of the segments in which we competed, for the years 2001, 2002 and 2003 and first half of 2003 and 2004 (in thousands of R$).

Year ended Six months December 31, ended June 30, Gross revenue (in millions of R$) 2001 2002 2003 2003 2004 Domestic market ...... 589.7 740.2 973.7 338.1 462.1 Masculine segment ...... 166.8 177.1 218.8 81.5 103.1 Feminine segment ...... 200.4 251.4 295.1 94.0 131.4 Children’s segment ...... 184.1 211.0 334.2 103.3 147.5 Mass consumer segment(1) ...... 38.4 100.7 125.6 59.3 80.1 Export market(2) ...... 107.4 166.7 302.7 141.2 142.8 Total market ...... 697.1 906.9 1,276.4 479.4 604.9

(1) Includes other products of which represent a small portion of our revenues. (2) Includes sales made through our controlled companies abroad.

77 Competition The footwear market is highly competitive, both in Brazil and abroad. See ‘‘—Industry’’. Brand positioning, image, new product launches and advertising are important factors. We face significant competition in the four segments in which we operate. The main competitors to our most significant product lines, in each of the segments in which we operate, are the following Brazilian industries, which sell their products through retail chains: • Rider line: Azaleia,´ Beira Rio and Sao˜ Paulo Alpargatas. • Grendha line: Azaleia,´ Via Marte and Beira Rio. • Gisele Bundchen¨ line: Azaleia,´ Via Uno and Sao˜ Paulo Alpargatas. • Melissa line: Arezzo, Schultz and Cravo and Canela. • Ipanema line: Sao˜ Paulo Alpargatas, Dupe´ and Balina. • Kid’s line: Klin, Bibi and Marisol.

Raw materials and suppliers Our principal raw materials are PVC resin and plastic oils that together create PVC, the main raw material produced by us, and coverline. These raw materials, added to other compounds, allow for the production of soles and other parts used in the manufacture of our shoes. PVC resin and plastic oils are commodities, whose value fluctuates partly as a result of oil prices in the international market and variations in supply and demand. We do not sign supply contracts with our raw material suppliers in connection with these potential price fluctuations. Because of the characteristics of the market in which we operate, supply operations are usually documented by product sale invoices and the periods for payment of the raw materials we buy vary according to the operative contract, as a result of variations in the supply and demand of raw materials, as well as business opportunities that we analyze with our suppliers. In addition, as a result of our concern for the environment and profitability, all PVC that is not used in the production process is fully recycled and reused by us. Our supply chain is composed of several suppliers, both Brazilian and foreign, for the supply of raw materials and other products, especially production line equipment. Approximately 37% of our raw material costs (of which almost all represent our cost for raw materials partially linked to exchange variations of the real and the dollar and subject to movements in demand) are linked to foreign exchange variations. We generally concentrate our supply requirements in a small number of suppliers for each type of raw material, in order to increase our importance in the respective suppliers’ income and, consequently, obtain more competitive prices as well as products and materials made to our specifications. On the other hand, considering that our main raw materials are considered commodities, we believe that our supply would not be adversely affected if there were an interruption of our relationship with one of our suppliers. Paper and package suppliers are among our major suppliers. The prices of these materials are relatively volatile as they are linked to the price of cellulose on the international market. As a result, we keep single-layer carton and paper inventories, in addition to scheduling our purchases in advance. In addition, as part of our environmental policy, the packaging of our products is recycled by third parties and reused by us. We have a major paper supplier with whom we have had a relationship for over 15 years, who supplies single-layer carton and paper used in manufacturing individual shoe packages. When our main

78 paper supplier is not able to promptly supply us with finished packaging, we purchase materials from this supplier and forward them to other companies for completion.

Production Our production process includes research and development of new products, creation of molds and injection testing. Once a product is approved, the respective molds are sent to our factories in the state of Ceara,´ where most of our products are manufactured. Our production process is unique in its automation, in which the body and other parts of the shoe are fused with the sole during the injection process. In addition, this process has a series of internal controls that ensures proper organization and maximum use of our raw materials and products, as well as filling our customer orders in a timely manner. For example, our production process is currently controlled electronically, with transmission of data in real time to our plant in Farroupilha, for management of sales and production. Likewise, our inventory and programming of cargo shipments are continuously controlled and monitored electronically, allowing us to provide fast and efficient service to our customers. See ‘‘—Information technology’’. In 2003, we produced 121.3 million pairs of shoes, compared to 116.3 million in 2002 and 94.4 million in 2001. In the first half of 2004, we produced approximately 58.6 million pairs of shoes, compared to 47.8 million pairs of shoes produced in the same period in 2003.

Sales and distribution All of our sales in Brazil are made through commercial representatives, including sales to large retail chains and specialized stores. We maintain strictly commercial relationships with our representatives, which are separate legal entities and whose salespeople are not our employees. They operate in specific areas determined by contract, and receive commissions based on total sales in their performance area. Our commercial representatives are not subject to working hour control and bear all costs related to their activities. On June 30, 2004, we had contracts with 50 commercial representatives. In 2003, our five major commercial representatives were responsible for approximately 35.4% of our total sales in the domestic market. The time between placement of orders by our commercial representatives and product delivery to our customers is up to 30 days. Approximately 90% of our output is based on orders from our customers, which means that we do not maintain significant product inventories. However, so as to make our production compatible with sales seasonality, we maintain stocks equivalent to 30 days of production, exclusively for more traditional products. The following table sets forth the breakdown of sales percentage of our products in 2003, in each region of the domestic market.

Percentage of sales in the Region domestic market Southeast ...... 52% Northeast ...... 18% South ...... 15% North ...... 8% Center-west ...... 7% 100%

79 Our sales base is widely distributed. In 2003, our ten major customers represented approximately 13% of our total sales and our largest customer represented approximately 2% of our total sales. In the export market, we served 94 customers in 57 countries in 2003. In that year, the three countries with the largest consumption of our products were the United States, Paraguay and Mexico, representing together approximately 68% of our exports. In 2003, we sold approximately 8.3 million pairs of shoes to the United States (representing approximately 31% of our sales to the export market), approximately 5.1 million pairs of shoes to Paraguay (representing approximately 19% of our sales to the export market) and approximately 4.9 million pairs of shoes to Mexico (representing approximately 18% of our sales to the export market). Based on data from Abical¸cados and DECEX, we believe that we were responsible for nearly 15% of Brazilian shoe exports in 2003 (in terms of actual volume exported). In the United States, all of our sales are made through our subsidiary, Grendha Shoes, which operates as our agent or distributor, as the case may be. All of our sales made in Argentina are made via our subsidiary, Saddle Calzados. In all other countries, sales are generally made by distributors.

Overseas operations We have a subsidiary in Uruguay, which, in turn, has two subsidiaries, one in Argentina and another in the United States. Saddle Corp. Saddle Corp. is a company incorporated and organized under the laws of Uruguay. Currently, it functions only as a holding company, holding equity stakes in Saddle Calzados and Grendha Shoes. Saddle Calzados. Saddle Calzados is a company incorporated and organized under the laws of Argentina. Saddle Calzados distributes our products in the Argentine market, mainly the Melissa, Grendha, Ipanema and Rider lines. In 2003, our equity pick-up of Saddle Calzados was approximately R$83,400, as shown in our non-consolidated financial statements. Grendha Shoes. Grendha Shoes is a company incorporated and organized under the laws of the state of Delaware in the United States. Grendha Shoes distributes our products in the North American market, especially the Melissa, Grendha and Rider lines, also conducting marketing campaigns for those brands in that market. It also acts as our agent and receives commissions on the sales it makes to large volume customers, such as Wal-Mart and Payless Shoes. In 2003, our equity pick-up for Grendha Shoes was approximately R$11.1 million, as shown in our non-consolidated financial statements.

Seasonality Demand for our products peaks between September and December each year, coinciding with the end of year holidays. Between May and June, there is lower demand for our products because it is winter in Brazil’s southern regions and in the state of Sao˜ Paulo. In November 2003, our production and gross revenues were approximately 38% higher than in the month of June 2003.

80 The graphs below show the approximate quarterly seasonality of our net sales revenues, adjusted EBITDA, adjusted net income and total number of pairs of shoes sold, in the periods indicated:

Net Sales Revenue Adjusted EBITDA(1) 60% 60% 48% 50% 50%

40% 38% 37% 40% 40% 35% 34% 33% 33% 30% 28% 30% 30% 26% 24% 21% 19% 18% 19% 18% 18% 20% 20% 16% 15% 16% 15% 12% 10% 10% 10%

0% 0% 2001 2002 2003 2001 2002 2003

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Adjusted Net Income(1) Pairs Sold 60% 60% 52% 50% 50% 44% 42% 40% 40% 35% 33% 34% 28% 31% 28% 29% 28% 30% 30% 22% 21% 22% 21% 20% 18% 20% 16% 17% 17% 15% 13% 13% 12% 11% 10% 10%

0% 0% 2001 2002 2003 2001 2002 2003 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th8OCT200402172960 Quarter

(1) See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Limited comparability of our financial statements’’ for a discussion of adjustments.

Product innovation and development Product innovation and development are crucial to our business. We maintain a department for product development, dedicated exclusively to the creation of new concepts, designs, models of footwear and color options. This department employs nearly 120 people in several professions (including stylists, designers, chemists, dress makers, marketing specialists and publicists) that research new technology and develop our products. Our methodology for new product development includes undertaking continued qualitative surveys of the consumer public, as well as confirmation surveys made at footwear trade shows in Brazil and abroad, design congresses and specialized publications. Our product development process consists, in the first phase, of the project of presenting our new products. From the projects presented and from an analysis conducted in conjunction with our sales department, we begin the stages of development of the new product, which include (i) the experimental development of the layout of the new product, (ii) the manufacture of the experimental model and its approval, (iii) the definition of the technical specifications of the product and (iv) the production of the prototype. Once the prototype is approved, and we have made a technical evaluation as to the feasibility of the product in relation to our technology, we initiate the production of samples of the new product to test it in our sales outlets. Once these samples have been approved, we begin the production of the new product for its commercial sale to our client base.

81 Our concern for the environment is evident in our innovation efforts and development of new products. We strive to develop products that can be recycled, even when they are made from more than one raw material. This results in financial benefits and reduces the impact on the environment. The period from conception of a new project idea to availability of the new product in the market is generally approximately 150 days. In 2003, we invested approximately R$9.3 million in the development and creation of new products, compared to approximately R$8.3 million in 2002 and R$7.4 million in 2001. Such amounts represented 0.73%, 0.92% and 1.07% of our gross revenues in 2003, 2002 and 2001, respectively. In 2003, we developed more than 460 new products, compared to 351 and 301 new products in 2002 and 2001, respectively.

Marketing and licensing The purpose of our strategic marketing is to add value to the image of our products. Our marketing actions range from undertaking market surveys to purchasing advertising space in various publications, to production of advertising spots and licensing of brands and national and international celebrity names, including children’s characters and children’s performers nationally and internationally known. Furthermore, in our children’s product lines, our marketing efforts include associating our products with accessories and gifts, which we believe sets us apart in the eyes of the consumer public. Licensing of brands and national and international celebrity names is contractual. Generally, the compensation we pay to licensors is based on a certain percentage of our revenues derived from the sale of our products using the licensor’s brand or name. Our licensing agreements include, among others, licenses to use the names Xuxa, Senninha, Guga, Sandy, Gisele Bundchen,¨ Wanessa Camargo, Eliana, Rouge, Kelly Key, Ivete Sangalo, Adriane Galisteu, Alexandre Hercovich, Pininfarina, Ortope,´ Mormaii, Romero Britto, besides the children’s characters and children’s artists SpongeBob Squarepants, Hello Kitty, The Powerpuff Girls and characters by Disney, Mattel (such as Barbie), Warner Bros. (such as Looney Tunes) and S´ıtio do PicaPau Amarelo. Each year, we invest a significant amount of our revenues in marketing our products. In the year ended December 31, 2003, our selling expenses, which include payments for licensing (in addition to commissions paid to business representatives) totaled R$218.8 million, compared with R$171.6 million and R$123.6 million in the years ended December 31, 2002 and 2001, respectively. In the first half of 2004, selling expenses totaled R$100.4 million, compared to R$89.6 million for the same period in 2003. In 2003, we invested approximately R$68.5 million (or 5.92% of our net revenue) in advertising and marketing, compared to investments of approximately R$51.6 million (or 6.27% of our net revenue) in 2002 and R$37.5 million (or 5.53% of our net revenue) in 2001.

Intellectual property Our principal intellectual property is our brands, such as Grendene, Grendene Kid’s, Melissa, Melissinha, Rider, Grendha and Ipanema. We manage our brands carefully through innovation and specialized products in order to preserve the appeal of our products with the different segments of the Brazilian population. We have registered our main brand names both in Brazil and abroad. As of June 30, 2004, we held 285 brand name registrations in Brazil (and more than 60 pending registrations) and approximately 280 brand name registrations in more than 80 other countries (and approximately 136 pending registrations).

82 In addition to our own brands, we license certain national and international celebrity names and brands as well as children’s characters and children’s performers known nationally and internationally. See ‘‘—Marketing and licensing’’. As of June 30, 2004, we hold rights in Brazil related to approximately 7 industrial patents, 12 utility models and 342 industrial designs, which are primarily used in our shoe production. We have already obtained definitive registration of the patents that are most important to our productive process. There are certain patents, utility models and industrial designs still pending registration. On June 30, 2004, we held rights overseas, related to approximately three industrial patents and 21 industrial designs. We also hold domain names in Brazil and the United States related to the names of the majority of our principal products. We have identified certain competitors that have been using our intellectual property in Brazil and abroad and we have taken steps to cause these competitors to cease this unfair competition. See ‘‘—Judicial and administrative proceedings’’.

Properties, facilities and equipment Currently we maintain plants in the state of Ceara´ and the state of Rio Grande do Sul, totaling 254,800 square meters currently in use for production, these plants are located as indicated in the map below:

Sobral Fortaleza

Crato

Carlos Barbosa Farroupilha

7OCT200422153408 Our main plants are located in the state of Ceara´ because of the tax benefits we hold and the state’s strategic location for export purposes. See ‘‘—Tax benefits’’. Our plants are modern and contain the necessary facilities and state-of-the art equipment for the plastic injection process. They are also designed to assure the safety of our employees, compliance with environmental requirements, and high productivity. We have adopted internal controls to enable the organization and utilization of our raw materials and finished products, to improve services rendered to our clients and to render such services in a timely manner. Our automated production is specialized; shoe components are fused directly to the sole during the injection process. Most of our competitors use a non-automated production process. Our plant in the city of Sobral was opened in 1993 and is located 240 kilometers from Fortaleza. The Sobral plant consists of seven units occupying approximately 154,000 square meters on an approximately 500,000 square meter property. Our Sobral plant produces PVC shoes, shoe components and PVC.

83 Our plant in Fortaleza, which was opened in 1991, consists of two units occupying approximately 21,900 square meters on an approximately 38,000 square meter property. Our plant in Crato, opened in 1997, occupies approximately 22,100 square meters on an approximately 300,000 square meter property. Our Fortaleza plant produces shoe components that are sent to Sobral for assembly of shoes, as well as the assembled shoe line, while our Crato manufacturing facility produces shoes in EVA, as well as EVA components that are incorporated into the shoes produced in Fortaleza. We conduct our commercial and marketing activities primarily at our plant located in the city of Farroupilha, which opened in 1978 and is located approximately 100 kilometers from the state capital of Porto Alegre. This plant, which is also the location of product development testing for all products to be manufactured in the state of Ceara,´ includes two units occupying approximately 54,000 square meters on a property of approximately 90,600 square meters. We also have a plant in the city of Carlos Barbosa, located approximately 95 kilometers from Porto Alegre, which occupies approximately 2,800 square meters, and is where we produce molds for the full plastic shoes manufactured in our other plants. Our total current production capacity is 160 million pairs of shoes per year, compared to 150 million pairs in 2002 and 110 million in 2001. Our plant in Sobral has production capacity of 138 million pairs a year and our plants in Fortaleza, Crato and Farroupilha can produce five million, 12 million and five million pairs per year, respectively. The mold production capacity at our Carlos Barbosa plant is sufficient to renew our entire shoe production line every six months. Based on previous experience, we estimate that barring any unforeseen adverse events, every 10% incremental growth in our production capacity would require an outlay of R$25 million over approximately six months, which permits us to expand quickly.

Information technology Our data processing center consists of modern machinery, equipment and state-of-the-art software, which enables our internal control system to be connected to a company-wide computer system, which is constantly updated. We constantly monitor our production and cargo shipments, sending data in real time to our plant in Farroupilha, which enables us to provide faster and more efficient service to our customers. The programming and control of our production process is fully computerized and virtually all of our purchase and delivery procedures are conducted electronically. In addition, we have a back-up database in a different location, which is updated simultaneously with our main database. This back-up system is designed, in the event of a power outage or disturbance in one location, to reestablish the system in approximately eight hours, without losing any data and provide additional control over and security in the running of our business. The telecommunications system we currently use is a triplicate system, which operates our data, voice and video transmission services in a safe and continuously controlled environment.

Environmental Our manufacturing facilities are subject to environmental laws and regulations at the local, state and federal level. In order to maintain and run our factories in Brazil, we must comply with administrative procedures relating to the grant of environmental licenses. The construction, installation, expansion and execution of activities that make use of natural resources considered to be effectively or potentially environmentally hazardous, and projects capable, under any circumstances, of causing environmental damage are subject to prior licensing by the

84 competent federal and/or state body within the National Environmental System (‘‘Sistema Nacional do Meio Ambiente—SIAMA’’). In addition to criminal liability and the obligation to repair potential environmental damage or to compensate for such damage, failure to obtain necessary environmental licenses or non-compliance with applicable environmental laws and regulations may make us subject to administrative penalties, such as notices, fines, temporary or permanent injunctions, embargoes, demolition, suspension of our tax benefits and temporary or permanent closings of our business. These licenses also determine the conditions, restrictions and supervision measures applicable to our business. We have valid environmental licenses and we comply with all conditions to maintain these licenses in each of our plants. We have some environmental licenses which are in the process of being renewed. The renewal applications of our manufacturing facility in Farroupilha was filed after the stipulated expiration date of the old license. This untimely renewal application can make us subject to administrative penalties. We seek to maintain sustainable growth, reduce the impact of our business on the environment and to prioritize, from the conception of our new products, the reduction, reutilization and recycling of our unused inputs and raw material. We have improved our production process in order to reduce the generation of solid waste. Currently, we have procedures in place to adequately dispose of solid wastes resulting from our production process and we are constantly reviewing our methods of reducing such wastes. Due to our use of modern technology, we were able to achieve zero levels of certain industrial wastes. Unused PVC and coverline are fully reutilized by us in our production process. Coverline residues are completely reprocessed and our product packages are reutilized by us or recycled by third parties. The sandals that we produce, when not sold, are also recycled. The only solid waste that is still generated by our production process is the remaining dye in the dyeing compartments. We maintain an air washing system in dyeing compartments and all residues generated by the dyeing process in our production are reutilized by glue manufacturers. The organic waste we generate is transported to waste sites, in cooperation with local governments. We have similar environmental concerns in relation to our generation of effluents. Our production process does not make use of water. Water is only used to lower the temperature of certain equipment. To reduce and limit the disposal of liquid effluents, we have adopted a closed system to use and refresh water. In addition, we have our own sewage treatment system in our Crato plant and in two units of Sobral plant, which consists of the utilization of anaerobic filters, demijohn decanters, stabilization and water airing system. Our environmental policies have also reduced our production costs, primarily costs associated with the acquisition of raw materials, due to the reutilization and recycling of our raw materials and inputs. In 2003, for example, the recycling of unused sandal parts and PVC represented approximately 1,991 tons of PVC, equivalent to 4.68% of the total amount of PVC used by us in that year for the manufacture of our products.

Tax benefits We are entitled to federal and state tax benefits. Our federal tax benefits either reduce or provide certain exemptions from income tax other income tax relief, calculated on the ‘‘exploration profit’’, which is the profit resulting from business activities

85 relating to an industry sector or projects that are entitled to tax benefits. The federal tax benefit is based on reports issued by the former SUDENE (Superintendency for the Development of the Northeast), which was replaced by ADENE. Our state tax benefits are divided into two categories: (i) the PROVIN, which consists of a loan subsidized by the state of Ceara´ and directly related to amounts paid by us as ICMS (Value-Added Tax on Sales and Services), and (ii) the PROAPI, which consists of working capital financing to exporting industrial companies established in the state of Ceara.´ State tax benefit funds originate from the FDI, which was created in order to promote the development of industrial activities in the state of Ceara,´ by incentives granted to companies considered to be important to the economic development of the state of Ceara´ for the implementation, operation, relocation, expansion, modernization, diversification or recovery of industrial activities. According to the applicable law such incentives may be granted under the forms of tax benefits, financial incentives, subscriptions of shares, stock interest, loans (including with subsidies over the principal amount of the loan, interests, fees and other costs), guarantees, acquisition of debentures and water and sewage subsidies. State tax benefits are established by protocols of intent signed with the state of Ceara,´ CEDIN resolutions and periodic loan contracts signed with BEC, with the state of Ceara´ as intervening party. For a description of financial contracts linked to state tax benefits, see ‘‘Management’s Discussion and Analysis of Financial Condition and Result of Operations—Indebtedness’’. Our state tax benefits are dependent on our accomplishment of certain investment goals, creation and/or maintenance of direct jobs, production and capacity in each of our plants. We believe that all of the state tax benefit-related goals set for us are being met. We register tax benefits in our accounts based on opinions issued by our external legal counsel. To the extent that amounts linked to our tax benefits are investment subsidies, such amounts are not counted for purposes of determining net income. These amounts are credited in our capital reserve account. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness’’. The terms and conditions of our current tax benefits are set forth below:

Federal Benefits Income tax Our plants in Sobral, Fortaleza and Crato are entitled to federal tax benefits. Sobral: Since the beginning of 2003, we have been entitled to a tax benefit under which we receive a 75% reduction in income taxes and non-refundable additional amounts payable by us, calculated on an exploration profit basis. This benefit is valid through 2012. Between 1993 and 2002, we also had a federal tax benefit, which provided an exemption from income tax and non-refundable additional amounts, calculated on an exploration profit basis. Fortaleza: Since 2002 (with validity for 2001), our Fortaleza plant has been entitled to a benefit consisting of the right to a 75% reduction in income tax and additional non-refundable amounts payable by us, calculated on an exploration profit basis. This benefit is valid through 2010. Between 1991 and 2000, we also had a federal tax benefit, which provided an exemption from income tax and additional non-refundable amounts, calculated on an exploration profit basis. Crato: Since 1998 (with validity for 1997), our Crato plant has been entitled to a tax benefit consisting of the right to a 100% exemption in income tax and additional non-refundable amounts payable by us, calculated on an exploration profit basis. This benefit is valid through 2006. Our management is considering presenting a project to modernize our Crato plant, which may enable renewal of our Crato tax benefit for another 10 years, resulting in a 75% reduction in income tax and

86 additional non-refundable amounts payable by us, calculated on an exploration profit basis, according to the legislation currently in force. Exemption from or reduction in, as the case may be, income tax and additional non-refundable amounts payable by us is applicable up to a certain production limit within a given capacity established by reports for each one of our plants entitled to tax benefits. In the event that our production exceeds the product volume indicated as the maximum production in such reports, without previously presenting an expansion project of the particular plant to SUDENE, the exemption or reduction, as the case may be, will not be applicable to our production surplus which will be subject to normal taxation, which means without the tax benefit. The table below sets forth the production capacity limits for our federal tax benefit which applies to each of our plants in the state of Ceara´ as well as the current production capacity at each plant:

Production capacity limit for federal tax benefit (in Installed production capacity thousands (in thousands of pairs of shoes of pairs of shoes per year) per year) as of June 30, 2004 Sobral ...... 168,230 138,000 Fortaleza ...... 20,000 5,000 Crato ...... 34,200 12,000 Currently, our production capacity for each one of our plants listed above does not exceed the limit set forth in the reports for reduction in or exemption from income tax and additional non-refundable amounts payable by us, as the case may be. For details about the current capacity in each of our plants, see ‘‘—Production capacity and expansion potential’’. All reports relating to federal tax benefits currently valid for our Sobral, Fortaleza and Crato plants set forth certain obligations with which we must comply, during the period within which we are entitled to the income tax reduction or exemption, as the case may be. We must, among other obligations: • comply with labor and social legislation and environmental protection and control standards; • annually file our income tax return, indicating the reduction or exemption amount, as the case may be, corresponding to each year, in compliance with the regulations in force on the matter; • not distribute to our shareholders the income tax amount that we do not pay as a result of the reduction or exemption, as the case may be, for which we could lose the federal tax benefit and be subject to an obligation to pay, with respect to the distributed amount, the tax that had not been paid on that amount, as income tax on distributed profit and other applicable penalties; • establish a capital reserve with the amount resulting from the reduction or exemption, as the case may be, which may only be used for offsetting losses or increasing capital; • apply the reduction or exemption amount, as the case may be, in an activity directly connected to production, in the operation area of the former SUDENE; and • annually submit to the Ministry of National Integration a tax regularity certificate in relation to federal taxes and social security, accompanied by documented evidence of the establishment of the above-mentioned capital reserve, as well as its utilization solely for offsetting losses or increasing capital, when applicable, and an indication that the exemption amount is being used for an activity related to production.

87 State benefits ICMS-PROVIN The PROVIN tax benefit consists of loans subsidized by the state of Ceara,´ in an amount equivalent to 75% or 100% of the ICMS amount payable by us, as the case may be. The amortization of the loan is 1% or 25% of the amount financed to us monthly, adjusted by the IGP-M or TJLP, as the case may be. In the event we make a timely payment of the amount of the amortization, we need not pay the remaining 99% or 75% of the ICMS amount payable provided we fulfill the other obligations provided for in the respective documents governing the benefit. These funds originate from the FDI and the loan is made directly by BEC. Our Sobral, Fortaleza and Crato plants are entitled to PROVIN state tax benefits. Sobral: Our headquarters in Sobral holds a PROVIN tax benefit applicable through February 2019. Pursuant to the loan agreement, the state of Ceara´ will provide us with monthly loans through February 2009, for our working capital, in an amount equivalent to 100% of the ICMS calculated and payable by us within the period. During that period, we shall pay to BEC 25% of the amount financed to us monthly, duly adjusted by the IGP-M, within 60 months of the respective disbursement. Between March 2009 and February 2019, we will be financed monthly in an amount equivalent to 75% of the ICMS calculated and payable by us within that period. During that period, we shall pay to BEC 1% of the amount financed to us monthly, duly adjusted by the TJLP, within 60 months of the respective disbursement. Fortaleza: Our Fortaleza branch holds a PROVIN tax benefit valid through April 2015. The state of Ceara´ provides us with monthly loans, for working capital, in an amount equivalent to 75% of the ICMS calculated and payable by us within that period. During that period, we shall pay to the BEC 1% of the amount financed to us monthly, duly adjusted by TJLP, within 36 months from the respective disbursement. Crato: Our Crato branch holds a PROVIN tax benefit valid through September 2012. The state of Ceara´ will provide us with monthly loans, designed to form our working capital, in an amount equivalent to 75% of the ICMS payable by us within the period. We must pay to the BEC 1% of the amount financed to us monthly, duly adjusted by TJLP, within 60 months of the respective disbursement. The documents evidencing the PROVIN state tax benefits currently held by our Sobral, Fortaleza and Crato plants set forth certain obligations with which we must comply while we are entitled to those benefits. We must, among other obligations: • execute the financed project; • use borrowed funds exclusively in the ordinary course of business relating to the submitted project and its future expansions; • keep our labor, tax and social security obligations up to date; • maintain adequate indebtedness and liquidity ratios, so as to preserve the ordinary course of our business; • not allow the transfer of our control, without prior approval except to affiliated companies; and • not transfer our headquarters to another state. In case we default on the payment of installments of the loans linked to the PROVIN state tax benefit on the respective due date or fail to comply with any obligation set forth in such contracts, we must pay to BEC the entire amount that has been advanced to us, adjusted by the IGP-M in the case

88 of Sobral, and by the TJLP in the cases of Fortaleza and Crato, in addition to 12% per year interest on the updated unpaid amounts. For further information on financial contracts linked to tax benefits which we are entitled, see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations— Indebtedness’’. State Law No. 13,377, dated September 29, 2003 and Decree No. 27,206, dated October 7, 2003, which regulated the state law, changed the benefit system that granted loans subsidized by the state to a deferral of the ICMS amounts due, with a reduction in the percentage of the deferred amount in the event of payment of the due amount on or before the termination date of the deferral. The same rules and conditions for ICMS payment set forth in the loan contracts signed between us and BEC in relation to our headquarters in Sobral and our branches in Crato and Fortaleza were used for the definition of the ICMS deferral and the deduction of the percentage of the deferred amount. Whereas the former system significantly involved a loan subsidized by the state of Ceara´ based on ICMS percentages effectively paid by us, the new system consists of the deferral of a part or the totality, as the case may be, of the ICMS due and reduction of the part of the amount deferred for the same term and under the same conditions set forth in the documents establishing the tax benefit under the former legislation. On June 16, 2004, the government of the state of Ceara´ issued Decree 27,470 with the purpose of establishing an alternative treatment to the PROVIN fiscal benefit granting system, defined by Law No. 13,377/03 and in Decree 27,206/03. Decree 27,470 determines that the state of Ceara´ may provide the FDI, on an onerous basis and as set forth in Agreement No. 104/02 entered into within the National Council of Treasury Policy—CONFAZ, with the credit rights derived from the ICMS installment whose payment date has been deferred pursuant to the terms of Law No. 13,377/2003. After having formally requested adoption of the alternate treatment provided for in Decree 27,470 in July 2004, we signed addenda to the loan agreements for periodic execution with the BEC and adopted the alternate treatment for the payment of ICMS, as provided for in Decree 27,470. Based on Decree 27,470, every month, on the ICMS due dates, we have (a) carried out the payment to the state of Ceara´ of the ICMS percentage due and not subject to fiscal benefit, and (b) signed the statement term in the amount related to the ICMS installment subject to the fiscal benefit (‘‘Term’’). The Term is the instrument through which the state of Ceara´ grants ICMS credits to FDI, which becomes the creditor of the deferred ICMS sums. The Company submits to the BEC (financial agent to FDI), the Term, which has been considered settled in the respective amount upon the inclusion of a mechanical stamp on the Term itself without an effective transfer of funds. From this point on the Company has been considered BEC debtor, pursuant to the terms and in the same periods and conditions established in the loan contract of periodical performance entered into between Grendene and BEC. The settlement presented by BEC in the Term, upon mechanical stamp without the effective transfer of financial resources regarding the value subject to the deferring fiscal benefit, as well as the fact that, as from the settlement of such Term the Company becomes the debtor of the loan carried out by BEC, are not expressly established in Decree No. 27,470/04. The PROVIN benefit is based on a regulation which did not result from an agreement executed among the states, and which could, therefore, be judicially challenged. If a final judicial decision in connection with this tax benefit is unfavorable, such tax benefit will be no longer available to us. In addition, the procedure currently used by us before BEC in relation to the collection of ICMS could not be maintained in the future, or, in case it is changed, a procedure with favorable conditions to us may not be adopted and we may have the PROVIN fiscal benefit canceled and/or we can be charged for the value subject of the exemption, reduction and/or financing granted until the date of such decision (subject to the statute of limitations).

89 PROAPI The PROAPI tax benefit is an export incentive whereby the state of Ceara´ makes available to us funds for working capital, through FDI credit operations made through BEC. The receipt of funds by us is subject to FDI fund availability. Our Sobral and Crato units are entitled to PROAPI state tax benefits. Sobral: Since October 1996, the state of Ceara´ has made available to us financing equivalent to 11% of the FOB amount of products exported, after approval of goods shipment. The financing is made by BEC, according to the periodic loan contract we have signed with it, which sets forth the amount of monthly disbursements. We are obliged to pay to BEC, at the end of the 60-month period starting on the disbursement of each loan installment, 10% of the financed amount, adjusted by the TJLP. The PROAPI tax benefit held by our Sobral headquarters is valid through September 2011. Crato: Since February 1999, the state of Ceara´ has made available to us financing equivalent to 11% of the FOB amount of products exported by us, after approval of shipment of goods. The financing is made by BEC, according to the periodic loan contract we have signed with it, which sets forth the amount of monthly disbursements described above. We are obliged to pay to BEC, at the end of the 60-month period starting on the disbursement of each loan installment, 10% of the financed amount, adjusted by the TJLP. The PROAPI tax benefit held by our Crato plant is valid through January 2014. The documents evidencing the PROAPI state tax benefits currently valid for our Sobral and Crato plants set forth certain obligations with which we must comply, so long as we are entitled to these benefits. We must, among other obligations: • execute the financed project; • use borrowed funds exclusively in the ordinary course of business relating to the submitted project and its future expansions; • keep our labor, tax and social security obligations up to date; • maintain adequate indebtedness and liquidity ratios, so as to preserve the ordinary course of our business; • not allow the transfer of our control without prior approval except to affiliated companies; and • not transfer our headquarters to another state. BEC has not regularly or fully released amounts that should have been disbursed to us under the financial contracts linked to the PROAPI tax benefits. In 2003 and 2004, the FDI only provided part of the funds related to the PROAPI tax benefit of our Sobral and Crato plants. In 2003 we did not receive approximately R$2.9 million and through June 30, 2004 we failed to receive approximately R$3.4 million. In July 2003, the Economic Development Department of the state of Ceara´ forwarded a circular letter to companies holding PROAPI tax benefits informing us that fund onlending would occur using a R$2.83 to U.S.$1.00 foreign exchange rate between July and December 2003. For purposes of this tax benefit, the FOB amount for each export would be converted to reais at a rate of R$2.83 per dollar in the respective period. However, the R$2.83 foreign exchange rate amount is still being used by the BEC during 2004. Furthermore, the same circular letter that was sent to us in July 2003 informed us that, at the end of 2003, in case there was a remaining unpaid amount, the CEDIN would issue a promissory note in favor of the companies holding PROAPI tax benefits guaranteed by the national treasury with a 180-day maturity date. This promissory note has not been issued and our management is in contact with the Ceara´ State Government, together with a committee made up of businessmen seeking measures to enable full release of these overdue funds.

90 Protocol of Intent signed with the Sergipe State Government On September 1, 2003, we signed a protocol of intent with the state of Sergipe in order to establish general guidelines for the implementation of a manufacturing facility for footwear, component and PVC compound manufacture in the state of Sergipe. The protocol of intent sets forth the implementation of a manufacturing facility, and estimates that production would begin 36 months from the signing of the protocol, and would generate 1,500 direct jobs and approximately 300 indirect jobs. The state of Sergipe would initially make available to us approximately 20,000-square meters of developed area, by assigning to us a remunerated usage permit for 15 years, renewable for an equal term. The remuneration amount, readjusted annually, would be 0.5% of the property’s appraisal value for industrial purposes, in addition to a commitment to sell us the property should we deem it in our interest. Furthermore, water supply, sanitary sewerage and a rainwater gallery infrastructure would be made available to us, in addition to asphalted access and electric grid implementation at the plant’s location. The state of Sergipe undertakes further to grant Grendene, for an initial period of 10 years (which may be extended for 15 years), fiscal support foreseeing that the payment of ICMS by Grendene shall be equivalent to 6.2% of the due ICMS, as it is an industrial undertaking of relevant importance for the State, in terms of generation of new employments, sector integration and strengthening of the productive network in the industrial segment. Furthermore, the state of Sergipe would provide us consistent tax support in (i) deferral of ICMS incurred on raw materials, components, inputs, packages, institutional accessories, parts, accessories and tools imported by us for 15 years, and (ii) deferral of ICMS on purchases, overseas or in other Brazilian states, of new machines and equipment needed for production and to integrate our fixed assets, for 15 years. The protocol also sets forth that similar tax benefits would be granted to other companies in the same sector and in the same municipality in which our plant is eventually to be installed. We have not yet begun the installation of our plant in the state of Sergipe and our management continues to analyze the feasibility of such a project. In addition, even if our management finds such a project is feasible, implementation may depend upon the publication of laws or other documents that are not completely within our control.

Investments in the state of Bahia On September 1, 2004, we signed a protocol of intent with the state of Bahia to establish binding relations between the Company and the state of Bahia for infrastructure support and the awarding of tax and financial incentives, administered by the state public authorities, through the implementation of an industrial plan for the manufacture of shoes, components and thermo-plastic compounds in the city of Teixeira de Frietas and other cities in the state of Bahia. The protocol of intent, which is valid for 36 months for project implementation purposes, provides that we must make an estimated initial investment totaling approximately R$30 million, with the creation of 1,100 direct or indirect jobs, and a production volume of 15 million pairs of shoes per year in the first phase of implementation. We also promised to address all the requirements of the environmental authorities, as well as to hire and maintain, as paid interns, two Bahian university students, in addition to maintaining at least two disabled employees on our staff. The production volume and number of jobs to be generated might vary in accordance with market conditions, with the protocol of intent providing that future reductions will not constitute a violation in the view of the state of Bahia. Similarly, the size of the total investment as indicated in the protocol of intent constitutes a mere reference, and is not binding. In return for the investments to be made by us, the state of Bahia would provide us with an area of 400,000 square meters of land in the city of Teixeira de Frietas at a price of R$0.05 per square meter. We would also be provided with infrastructure for the supply of electricity, drinking water, a

91 telephone network, sewers, and rain water catchment, in addition to asphalt access roads, a natural gas network (after completion of the gas pipeline from Brazil’s northeast region) and training for the labor force to be hired by us. The state of Bahia also promised to award us, for 15 years after issuance of the first bill of sale for the project, an assumed ICMS credit of 90% upon production of the products. The state of Bahia would also provide us with 15 years of tax support consisting of (i) the deferral of ICMS corresponding to foreign acquisitions of machinery, equipment, tooling, molds, models, instruments, and manufacturing and quality control devices, and their replacement parts needed for production and intended to form part of our fixed assets, to be paid upon release of the good. In this case, the deferral will apply even if such amounts are disembarked outside the state of Bahia, provided that such goods are intended in their entirety for the our manufacturing unit located in the state of Bahia, (ii) the deferral of ICMS applying to incoming raw materials, supplies, components and packaging, as well as accessories that the final product will contain, for domestic purchases and operations carried out by us within the state of Bahia, as well as our imports. In that case, the deferral will apply even if such imports are disembarked in other locations outside the state of Bahia, (iii) to the settlement of additional ICMS on purchases of machinery and equipment needed for production and intended to form part of our fixed assets and purchased in other states of Brazil, and (iv) to the deferral, until after manufacture, of ICMS applying to operations involving production when the products intended for companies that produce shoes and components are located in the state of Bahia. The state of Bahia also committed to extending the protocol and, awarded the tax benefits provided for in such instrument, within the same period and conditions, to future expansions or new manufacturing plants that we may develop in the state of Bahia, for the production of shoes, components and thermo-plastic compounds. Under the protocol of intent, the Company may establish a subsidiary or controlled company in the state of Bahia, for which it is assured the same rights and obligations as derive from the protocol of intent. The state of Bahia also promised that no tax or financial benefits will be awarded to other companies in the same activity sector as the Company, in the city of Teixeira de Freitas, or in any other city in which the Company may have facilities in the future. To date, we have not initiated the installation of a manufacturing plant in the state of Bahia and our management is analyzing the feasibility of such a project. Furthermore, even if our management believes that this project is feasible, its implementation may depend upon the publication of laws or other documents that do not fall solely under our purview.

Insurance We insure our facilities and equipment against losses and for replacements in accordance with market standards in the footwear sector in Brazil. We also insure against natural disasters covering property damage, inventory and 12 months of payment roll (as defined in the policy), additional expenses, as well as civil liability insurance except for environmental damages. We consider the coverage amounts to be adequate for a company of our size and in our line of business and adequate to meet the risks associated with our operations. We are not insured for environmental damages caused by the operation of each of our five manufacturing facilities. In the event of claims involving environmental damages, we may be forced to spend substantial funds to apply corrective environmental measures, as well as in order to support penalties within the administrative and judicial sphere.

92 Employees On December 31, 2003 and on June 30, 2004, we had approximately 21,500 employees in our manufacturing facilities, and in 2003 we were named by Exame magazine as the 11th largest private employer in Brazil. Our employees are approximately 50% female and 50% male. The table below sets forth the number of employees at their respective locations on the dates indicated.

On December 31, On June 30, Location 2001 2002 2003 2004 Sobral—CE...... 9,367 12,241 14,084 14,315 Crato—CE...... 2,936 2,716 2,984 2,980 Fortaleza—CE...... 2,517 2,535 2,991 2,696 Farroupilha—RS...... 746 850 1,164 1,122 Carlos Barbosa—RS...... 282 298 326 380 Other branches ...... 44 21 —— Total ...... 15,892 18,661 21,549 21,493

In 2003, our employee turnover rate was 1.61%. We invested approximately R$346,000 in employee training in 2003, compared with investments of approximately R$303,000 in 2002 and R$256,000 in 2001. Our employees completed 405,000 hours of training in 2003, 320,000 hours in 2002 and 347,000 hours in 2001. We encourage our employees to provide their teams with training, without resulting in additional costs to us in training investment terms. On June 30, 2004, approximately 21% of our employees in Brazil were union members. Our unionized employees are represented by four different labor unions and entities representing different categories of employee. We have collective bargaining agreements with each union, which are renegotiated yearly. We believe that our relations with these unions are good.

Social responsibility The transfer of our industrial operation to the state of Ceara´ resulted in the generation of a great number of jobs in that state. At June 30, 2004, we employed approximately 14,000 workers in our Sobral plant, which represented approximately 40% of the economically active population in the Sobral municipality. We offer a number of benefits to our employees, including: • meals; • agreements with pharmacies and opticians; • medical assistance in the plant; • mental health assistance in the plant; • dental assistance in the plant; • social assistance in the plant; • daycare centers for employees’ children up to 12 years old; • distribution of food baskets to our employees; and • financing for the acquisition of a personal home.

93 Furthermore, we are also engaged in social projects, including the Solidarity Literacy Program, ‘‘Adopt a Square’’ Project, the Rio Grande do Sul Junior Achievement Association, as well as welfare programs with hospitals and health clinics. We also participate in anti-drug and anti-violence programs as well as programs providing support to sports associations.

Judicial and administrative proceedings General We are party to civil, tax, labor and environmental lawsuits and administrative proceedings relating to the ordinary course of our business. Based on the opinion of our external legal counsel, we have not made provisions for eventual losses from these proceedings, except in the case of labor proceedings for which the potential for liability was not deemed to be remote.

Tax At June 30, 2004, we were defendants in 15 tax proceedings (including administrative or judicial proceedings), relating to a total of approximately R$18.5 million. Based on the opinion of our external counsel, the probability of a negative outcome in the proceedings in which we are defendants is ‘‘remote’’ or ‘‘possible’’. At June 30, 2004, we were plaintiffs in 19 tax proceedings filed to challenge the legality of various taxes, as well as to have the right to use certain credits recognized, which during the course of the tax proceedings we are not using and which we are paying despite the filing and process of claims. We estimate that the aggregate value of these proceedings is approximately R$336.7 million. We believe an eventual unfavorable final decision in respect of these proceedings would not result in any significant loss to us. Based on the opinion of our external counsel, the probability of success in recognizing the credits is ‘‘possible’’.

Labor On June 30, 2004 we were defendants in 262 labor proceedings. Total claims in these proceedings amount to approximately R$3.3 million. Approximately 64% of outstanding labor claims were brought by employees of an outsourced company that had rendered services to us in the past and which had been declared bankrupt. Such proceedings are generally based on the non-payment of severance benefits and extra pay for unhealthful working conditions. These claims involve an amount of approximately R$1.3 million. We are party to six labor claims brought by former commercial representatives who acted on behalf of the company before our current commercial representation structure was adopted. These individuals are demanding recognition of a formal employment relationship and payment of the resulting labor obligations. Three of these suits have been ruled warranted in lower-court decisions still subject to appeal. Such labor claims involve approximately R$550,000. Based on the opinion of our external counsel, on June 30, 2004 we made provisions of R$450,000 for losses in labor proceedings.

Civil On June 30, 2004, we were defendants in 64 civil claims amounting to approximately R$3.8 million. The majority of these claims are claims for compensation for pain and suffering and are related to work-related accidents and injuries caused by repetitive activity. There are also claims related to our intellectual property rights and other claims, insignificant in quantity, related to the use of our products by our consumers.

94 Besides this, we are plaintiffs in 90 civil suits without defined value, filed to prevent improper use of our marks and patents and violation of our industrial property rights. Among the civil claims, the following, involving our company’s competitor, are of primary significance. On August 1, 2002, we brought a suit in Sobral seeking a restraining order against our competitor Sao˜ Paulo Alpargatas to protect our right to the production and commercialization of our Ipanema sandal. The preliminary order sought by us was granted by the court of first instance and was upheld at the second instance on August 28, 2002, but is still subject to further appeal. On August 6, 2002, Sao˜ Paulo Alpargatas brought an ordinary suit in Sao˜ Paulo, claiming that a basic model of the Ipanema sandal produced by us is an imitation of the Havaianas Top sandal produced by this competitor. For this reason, our competitor requests that we be prohibited from selling and advertising this model of our Ipanema sandal, in addition to compensation for damages incurred. The injunction sought by our competitor was denied by the court of first instance, and this decision was upheld at the second instance on August 21, 2002, but is still subject to appeal. The main suit, of which the injunction request is part, is awaiting the production of evidence by the court-appointed experts, which has not yet been initiated. Because our competitor brought suit in a venue other than the one where our original suit seeking injunctive relief was filed, we argued for removal to the Brazilian Superior Court of Justice in Bras´ılia (Superior Tribunal de Justi¸ca), which on June 23, 2004 decided that both cases shall be judged jointly in the Sobral Court District. Based on an opinion by our external lawyers, the probability of a successful outcome in such proceedings is ‘‘possible’’.

95 MANAGEMENT We are managed by a board of directors and an executive board. From the date that we make a public announcement of this offer in Brazil, we will be subject to certain rules relating to corporate governance, pursuant to the regulations of the Novo Mercado, as described below.

Board of directors Our board of directors is our decision-making body, responsible for, among other things, establishing our general business policies and supervising our executive officers. Decisions of our board of directors are taken by majority vote of those directors in attendance at the meeting. Under the Brazilian corporation law, a company’s board of directors must be comprised of 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 number of shares that an individual must hold in order to serve as a director. The Novo Mercado regulation, however, provides that the board of directors must be composed of at least five members, elected at the general shareholders’ meeting, with a one-year term of office, and with a right of reelection. All members of the board of directors and of the executive board must sign a term of agreement of management, as a condition to assuming their respective positions. This agreement imposes personal responsibility on each director and officer for compliance with the contract signed by the company and BOVESPA, the Regulation of the Market Arbitration Chamber and with the regulations of the Novo Mercado. Our bylaws provide that our board of directors must be composed 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 general shareholders’ meeting. Our board of directors currently comprises six members. Each of our current directors was elected at the extraordinary shareholders’ meeting held on August 18, 2004, and will remain in office until our 2005 annual shareholders’ meeting. The table below sets forth the name, age, position and year of appointment of each of the members of our board of directors.

Name Age(1) Position Date of Election Alexandre Grendene Bartelle . . 54 Chairman of the board of directors 2004 Pedro Grendene Bartelle ...... 54 Vice-chairman of the board of directors 2004 Ma´ılson Ferreira da Nobrega´ . . . 62 Director 2004 Renato Ochman ...... 44 Director 2004 Elizabeth Bartelle Laybauer . . . 49 Director 2004 Oswaldo de Assis Filho ...... 54 Director 2004

(1) As of June 30, 2004. Directors Alexandre Grendene Bartelle and Pedro Grendene Bartelle are brothers. Elizabeth Bartelle Laybauer is the sister of Alexandre Grendene Bartelle and Pedro Grendene Bartelle. In addition, one of our directors, Ma´ılson Ferreira da Nobrega,´ provides business-consulting services to us through a company controlled by him. Another of our directors, Renato Ochman, is a partner at the law firm of Ochman, Real Amadeo Advogados Associados, which provides legal services to us. Oswaldo de Assis Filho is a partner of Banco Pactual S.A.

96 None of our directors or executive officers is entitled to receive any payment upon termination of service. There are currently no plans regarding options to purchase of shares issued by us. 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, in which that director has an interest that may conflict with the interest of the company.

Executive board Our executive officers are our legal representatives and are primarily responsible for the administration of our operations and the implementation of the general policies and guidelines set by the board of directors. Executive officers are appointed by our board of directors to a three-year term of office, and may be removed by the board of directors at any time. Under 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 executive officers at any given time. Pursuant to our bylaws, our executive board shall be composed of a minimum of three and a maximum of five members. Currently, our executive board is made up of four members, appointed (or whose appointment was ratified) at a meeting of the board of directors held on August 18, 2004. The terms of our current executive officers will expire at our first meeting of our board of directors to be held after our 2007 annual shareholders’ meeting. The table below sets forth the name, age, position and year of appointment of each of the members of our executive board.

Name Age(1) Position Officer since Alexandre Grendene Bartelle ...... 54 Chief Executive Officer 1979 Pedro Grendene Bartelle ...... 54 Vice-president 1979 Gelson Luis Rostirolla ...... 51 Investor Relations and Finance Officer 2004 Rudimar Dall’Onder ...... 47 Commercial and Industrial Officer 2004

(1) As of June 30, 2004 Alexandre Grendene Bartelle and Pedro Grendene Bartelle are brothers and are also members of our board of directors. Our Investor Relations Department is located in the city of Farroupilha, Rio Grande do Sul, at Avenida Pedro Grendene, 131. This department is headed by Mr. Gelson Luis Rostirolla, elected Director of Investment Relations at a meeting of our board of directors held on August 18, 2004. The telephone number of our Investor Relations Department is +55 54 261 9000, the fax number is +55 54 261 9691, and the e-mail address is [email protected].

Biographical information Set forth below are the principal occupations and employment histories of our directors and executive officers.

Board of directors Alexandre Grendene Bartelle. Mr. Alexandre Grendene Bartelle, age 54, chairman of the board of directors, chief executive officer and founder, has a law degree from Caxias do Sul University. In 1971, together with his grandfather, Pedro Grendene, he founded Grendene, which was initially involved in the production of plastic wine bottles. Over the years, Mr. Alexandre Grendene Bartelle was

97 responsible for redirecting the company’s line of business, for the development of projects relating to product development and innovative design. He also oversaw the transfer of Grendene’s principal manufacturing facility to the state of Ceara.´ Mr. Alexandre Grendene Bartelle is involved in other business in Brazil and abroad, including Telasul S.A., a furniture company on whose board of directors he serves, Dell’Anno Moveis Ltda., a modular wood kitchen and closet manufacturing company, Agropecuaria Jacarezinho Ltda., a sugar milling and farming company, and Reebok Chile, a footwear company. Pedro Grendene Bartelle. Mr. Pedro Grendene Bartelle, age 54, is vice-chairman of the board of directors and vice president. Over the years, Mr. Pedro Grendene Bartelle was responsible for redirecting the company’s line of business, for the development of projects relating to conceptual products and innovative design. He also oversaw the transfer of Grendene’s principal manufacturing facility to the state of Ceara.´ Mr. Pedro Grendene Bartelle is involved in other business in Brazil and abroad, including Vulcabras and Vulcabras do Nordeste, footwear companies. He acts as the chief executive officer and chairman of the board of directors of Agropecuaria Manaca´ Ltda., a sugar milling and farming company, and Reebok Chile, a shoe company. Ma´ılson Ferreira da Nobrega.´ Mr. Ma´ılson Ferreira da Nobrega,´ age 62, holds a degree in economics from Centro Universitario´ de Bras´ılia—CEUB. Mr. Ma´ılson Ferreira da Nobrega´ started his career with Banco do Brasil S.A., as head of the rural and industrial credit department of the Pernambuco branch. After nine years with Banco do Brasil Mr. Ma´ılson Ferreira da Nobrega´ assumed the management of the Department of Economic Affairs of the Ministry of Industry and Trade and, subsequently, of the Department of Economic Affairs of the Treasury Department. Mr. Ma´ılson Ferreira da Nobrega´ was twice Secretary General of the Treasury Department and, between 1988 and 1990, he was Minister of the Treasury and President of the National Monetary Council—CMN, of the National Council for Foreign Trade—CONCEX, of the National Council of Private Insurance—CNSP, of the Federal Council for Denationalization and of the Council of Treasury Policy—CONFAZ. Currently, Mr. Ma´ılson Ferreira da Nobrega´ is a partner of Integrated Consulting Trends, which provides consulting services in the economic and business sectors, and participates in several social organizations in Brazil and abroad. He is also a member of the board of directors of the Brazilian Geography and Statistics Institute—IBGE, of the Brazil-Holland Chamber of Commerce, of the newspaper O Estado de Sao˜ Paulo and of the Higher Economic Council of the Federation of Industries of Sao˜ Paulo—FIESP. Mr. Ma´ılson Ferreira da Nobrega´ also acted as representative of the Brazilian government in a series of special events and international committees and is the author of several articles on Brazilian economics, published in Brazil and abroad. Renato Ochman. Mr. Renato Ochman, age 44, is a lawyer. He holds a law degree from the Catholic University of Rio Grande do Sul. Mr. Renato Ochman also holds a master’s degree in business law from the Catholic University of Sao˜ Paulo—PUC/SP, and was a lecturer at Funda¸cao˜ Getulio´ Vargas between 1989 and 1993, and between 2001 and 2003. Since 1989, Mr. Renato Ochman has been a partner in the law firm of Ochman, Real Amadeo Advogados Associados, specializing in corporate law and the capital markets. Mr. Renato Ochman participates in social and business organizations, and is currently a member of the board of directors of Ultrapar Participa¸coes˜ S.A. and member of the statutory audit committee of AACD—an association providing assistance to handicapped children. He is also the author of various legal articles published in specialized newspapers and magazines. Elizabeth Bartelle Laybauer. Mrs. Elizabeth Bartelle Laybauer, age 49, holds degrees in biological sciences from the University of Taubate,´ in literature from the Higher School of Sciences and Pedagogy, and an academic laureate in psychology from the University of Caxias do Sul. She has continued to participate in congresses and seminars in all of her fields of study. Between 1981 and 1995, Mrs. Elizabeth Bartelle Laybauer worked as administrative manager of Faster Ltda., a company

98 in the footwear sector. Mrs. Elizabeth Bartelle Laybauer has also worked as administrative manager of Ottone Importa¸coes˜ e Exporta¸coes˜ Ltda., which operates generally in the import and export sector. Oswaldo de Assis Filho. Mr. Oswaldo de Assis Filho, 54 years old, graduated in 1973, in electric engineering from the Aeronautical Technological Institute—ITA. Mr. Oswaldo de Assis Filho has a master degree in economics from the Economics and Administration College of the Sao˜ Paulo University. Since 1976, Mr. Oswaldo de Assis Filho has acted in the financial market, having occupied several positions in various financial institutions since then. Between 1978 and 1983, Mr. Oswaldo de Assis Filho was an officer of Banco Mercantil in Sao˜ Paulo. Between 1984 and 1991, he was a member of Planibanc Corretora de Valores and between 1992 and 1994 he was a member of Conven¸cao˜ Corretora de Valores. In 1994, Mr. Oswaldo de Assis Filho assumed Banco Itamarati’s Vice-Presidency, which position he occupied until 1996. Between 1996 and 1997, Mr. Oswaldo de Assis Filho was a Vice-President of Banco de Credito´ Nacional—BCN, and in 1998, he became a member of Banco Pactual S.A., which position he still holds, currently acting as a member of the Banco Pactual S.A.’s Corporate Finance group.

Officers (excluding those who serve on the board of directors) Gelson Luis Rostirolla. Mr. Gelson Luis Rostirolla, age 51, investor relations and finance officer, has a degree in Business Administration and Accounting Science from the Universidade do Oeste Catarinese. Mr. Rostirolla joined the company in 1980 as financial manager, and in 1985 he assumed the position of finance director, which he has held since that time. He began his career in 1972, as administrative manager of Leticia Av´ıcola S.A., a poultry company that is a supplier to Sadia S.A., Perdigao˜ S.A., Frangosul S.A. and Seara Av´ıcula S.A. Mr. Gelson Luis Rostirolla is vice president of the executive board of Saddle Corp. and a member of the board of directors of Vulcabras do Nordeste. Rudimar Dall’Onder. Mr. Rudimar Dall’Onder, age 47, holds a degree in mechanical engineering from the University of Caxias do Sul. He joined the company in 1979 as manager of the information technology department, and in 1987 he assumed the position of the Company’s Manufacturing and Sales Director, which he has held since that time.

Statutory Audit Committee Under the Brazilian corporation law, the statutory audit committee is a corporate body independent from the management of the company and the company’s external auditors. The statutory audit committee’s primary responsibility is to review management’s activities and the company’s financial statements and to report its findings to the shareholders. The statutory audit committee is not intended to be the equivalent of an audit committee for purposes of the U.S. federal securities law. The statutory audit committee is not a permanent body and, when installed, shall be composed of three to five members with an equal number of alternates. Under the Brazilian corporation law, members of this committee may be elected at a general shareholders’ meeting upon the request of shareholders who, in the aggregate, hold at least 10% of our voting shares, and its members shall remain in office until the general shareholders’ meeting of the year following their election. Currently, we do not have a statutory audit committee. The statutory audit committee may not include members who serve on our board of directors, our executive board, are employees of any company we control or that is under common control with us, or who are spouses or relatives of our management. Furthermore, the Brazilian corporation law requires that each member of the statutory audit committee receive as compensation an amount equal to at least 10% of the average amount paid to each executive officer.

99 Share ownership The table below sets forth the number of shares directly or indirectly held by each of our directors and executive officers, as well as the percentage that their individual holdings represent as of October 28, 2004. Some of these directors and executive officers are selling shareholders who will be selling shares in this offering. See ‘‘Principal and Selling Shareholders’’.

Board Members/Directors Number of shares Percentage of total capital Alexandre Grendene Bartelle ...... 55,000,002 55.0% Pedro Grendene Bartelle ...... 25,031,986 25.0% Ma´ılson Ferreira da Nobrega´ ...... 03 less than 0.01% Renato Ochman ...... 03 less than 0.01% Elizabeth Bartelle Laybauer ...... 03 less than 0.01% Oswaldo de Assis Filho ...... 03 less than 0.01% Total ...... 80,032,000 80.0%

Compensation According to our bylaws, our shareholders are responsible for setting 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 among its members and our executive officers. Aggregate compensation for our management totaled R$240,000 for the year ended December 31, 2003. For the current year compensation for our management was fixed, globally, by the shareholders meeting in up to R$1 million.

100 PRINCIPAL AND SELLING SHAREHOLDERS Principal shareholders Our capital stock consists exclusively of shares. With the exception of our board members, there are only four shareholders holding our shares. The table below sets forth our principal shareholders, their current shareholdings, as at October 5, 2004 and their expected shareholdings after giving effect to this offering:

On October 28, 2004 After the offering(1) Number of Number of Shareholders shares (%) shares (%) AGBPar...... 30,000,000 30.0% 30,000,000 30.0% Verona ...... 24,000,000 24.0% 24,000,000 24.0% Grendene Negocios´ ...... 20,100,000 20.1% 20,100,000 20.1% Alexandre Grendene Bartelle (*) ...... 13,900,002 13,9% 4,427,610 4.4% Pedro Grendene Bartelle (*) ...... 8,505,586 8.5% 4,168,030 4.2% Elida´ Lurdes Bartelle (*) ...... 1,747,200 1.7% 0 0% Maria Cristina Nunes de Camargo (*) ...... 1,747,200 1.7% 0 0% Others(2) ...... 12 less than 0.001 17,304,360 17.3% Total ...... 100,000,000 100% 100,000,000 100%

(1) Excludes the exercise of the overallotment option. (2) Includes shares held by the members of our board of directors which are not selling shareholders and, after the offering, the shares subject to the offering. Pursuant to Brazilian law, members of the Board of Directors must be shareholders. (*) Selling Shareholders Our board of directors and executive officers including certain of the selling shareholders, directly or indirectly, as a group held 80,030,602 shares on October 28, 2004, representing approximately 80.03% of our outstanding shares. After giving effect to the offering, without giving consideration to the overallotment option, we expect those persons to hold 66,220,654 shares, representing 66.22% of our outstanding shares. Between September 30, 2004 and October 6, 2004, shares issued by us and owned by the selling shareholders, other than the shares and the shares subject to the overallotment option, were transferred to the holding companies AGBPar (of which 99.9% of the shares are held by Alexandre Grendene Bartelle), Verona (of which 50.08% of the shares are held by Pedro Grendene Bartelle, 24.96% are held by Maria Cristina Nunes de Camargo, and 24.96% are held by Elida´ Lurdes Bartelle), and Grendene Negocios (of which 55.22% of the shares are held by AGBPar and 44.77% are held by Verona), which have entered into a shareholders’ agreement in which we and the selling shareholders themselves are intervening participants. See ‘‘—Shareholders Agreement.’’ Except as described above, there have been no significant changes in the holdings of our principal shareholders in the past three years.

101 Selling shareholders Our shares being sold in this offering are being sold by Alexandre Grendene Bartelle, Pedro Grendene Bartelle, Elida´ Lurdes Bartelle and Maria Cristina Nunes de Camargo as indicated in the table below.

Shareholder Number of shares offered(1) Percentage of the total capital Alexandre Grendene Bartelle ...... 9,472,392 9.47% Pedro Grendene Bartelle ...... 4,337,556 4.34% Elida´ Lurdes Bartelle ...... 1,747,200 1.75% Maria Cristina Nunes de Camargo ...... 1,747,200 1.75% Total ...... 17,304,348 17.31%

(1) Not including the potential exercise of the overallotment option.

Alexandre Grendene Bartelle. Mr. Alexandre Grendene Bartelle is Grendene’s founder, chairman of our board of directors and chief executive officer. Mr. Alexandre Grendene Bartelle’s resum´ e´ is included in the section ‘‘Management—Biographical information’’. Pedro Grendene Bartelle. Mr. Pedro Grendene Bartelle is vice-chairman of our board of directors and our vice president. Mr. Pedro Grendene Bartelle’s resum´ e´ is included in the section ‘‘Management—Biographical information’’.

Elida´ Lurdes Bartelle. Mrs. Elida´ Lurdes Bartelle is our shareholder as of September 27, 2004. Until that date, she held an indirect interest in our capital stock through a holding company. Maria Cristina Nunes de Camargo. Mrs. Maria Cristina Nunes de Camargo is our shareholder as of September 27, 2004. Until that date, she held an indirect interest in our capital stock through a holding company. The selling shareholders intend to sell, jointly, 17,304,348 shares in this offering. This amount may be increased by up to 2,595,652 shares.

Shareholders Agreement On October 6, 2004, a shareholders’ agreement was signed between AGBPar, Verona and Grendene Negocios,´ in which we and the selling shareholders are intervening participants. The shareholders’ agreement will be valid until October 17, 2023. The shareholders’ agreement also provides that: • shareholders that are parties to the shareholders’ agreement must meet prior to the general shareholders meetings to discuss the positions to be taken at such general meeting. If shareholders representing at least 50.01% of the issued shares agree at a prior meeting to vote in a specific way with regard to a specific matter to be discussed at the general meeting, all shareholders signing the shareholders’ agreement must vote in a block in accordance with the decision taken at the prior meeting; and • in the event of the legal incapacity or death of Alexandre Grendene Bartelle, provided that Pedro Grendene Bartelle has full legal capacity and is the controlling shareholder of Verona, the shareholders who signed the shareholders’ agreement must exercise their voting rights in accordance with the votes to be proffered by the shareholder Verona at the Company’s general shareholder meetings and private meetings.

102 TRANSACTIONS WITH RELATED PARTIES Guarantees under financial contracts with Vulcabras´ do Nordeste We are currently joint guarantors under five financing contracts entered into with Vulcabras´ do Nordeste, a company controlled by one of our shareholders. On June 30, 2004, amounts guaranteed by us as a result of guarantees made and collateral pledged under such contracts totaled approximately R$74.6 million. On July 29, 2004, our shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle granted us a counter-guarantee, assuming in an unconditional, joint and irrevocable manner, (i) to restitute, immediately and fully to the Company, any and all values disbursed thereby in order to comply with obligations deriving from guarantees and surety bonds granted to Vulcabras´ do Nordeste and indicated below; or (ii) to pay, in an immediate and integral way and on behalf of the Company, any and all values whose disbursement has been requested from the Company for compliance with the obligations derived from guarantees and surety bonds granted to Vulcabras´ do Nordeste and indicated below. The table below sets forth the financial contracts under which we are guarantors, as well as the respective financial institutions and balances: Balance on June 30, 2004 Institution Maturity date (in thousands of R$) International Finance Corporation—IFC(1) ...... 15 December 2006 25.,991 Banco do Nordeste(2) ...... 01 December 2009 5,318 Banco do Nordeste(3)(4) ...... 10 October 2011 8,508 Banco do Nordeste(3)(5) ...... 10 October 2011 14,995 Bank Boston Multiplo´ S.A.—IFC(6) ...... 15 April 2005 20,431 Total ...... 74,643

(1) The contract is further guaranteed by (i) mortgages of 15 properties owned by Agro Pecuaria´ S.A. and Agro Pecuaria´ Guanabara Ltda. and (ii) a guarantee by Vulcabras.´ (2) The contract is further guaranteed by (i) a mortgage of third degree on property and respective improvements to the property of Vulcabras´ do Nordeste, for a total R$18.7 million, (ii) security over machines and domestic and imported equipment owned by Vulcabras´ do Nordeste, for approximately R$5.7 million, (iii) personal guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle, and (iv) a guarantee by Vulcabras.´ (3) Such contracts are also guaranteed by letters of guarantee issued by a bank with a one-year term. At the discretion of Banco do Nordeste, the renewal of letters of guarantee may be waived and, in this case, the company, which is a consenting intervening party in the contract, will become the guarantor under this contract. (4) The contract is further guaranteed by (i) a mortgage of fifth degree on property and respective improvements to the property of Vulcabras´ do Nordeste, for a total of approximately R$31.8 million, (ii) security over domestic and imported machines and equipment, owned by Vulcabras´ do Nordeste, for approximately R$15.3 million, and (iii) personal guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle. (5) The contract is further guaranteed by (i) a mortgage of fourth degree on property and respective improvements to the property of Vulcabras´ do Nordeste, for approximately R$31.8 million, (ii) security over domestic and imported equipment owned by Vulcabras´ do Nordeste, for approximately R$7.8 million, and (iii) guarantees of Alexandre Grendene Bartelle and Pedro Grendene Bartelle. (6) The contract is further guaranteed by a promissory note with personal guarantees from Alexandre Grendene Bartelle and Pedro Grendene Bartelle. Rendering of services to Vulcabras´ do Nordeste In addition, we render industrialization services to Vulcabras´ do Nordeste. We generally document such transactions through product sales invoices at market rates. In the six-month period ending June 30, 2004, such transactions reached an aggregate total of R$1.96 million. Sale of Products to Tela Sul S.A. Grendene sells plastic items to Tela Sul S.A., a company controlled by our shareholder Alexandre Grendene Bartelle, in insignificant volumes, and generally documents such operations with product sales invoices and exercises the market prices and conditions.

103 DESCRIPTION OF CAPITAL STOCK Set forth below is certain information regarding our shares, with a brief summary of significant provisions of our bylaws and Brazilian corporation law. Because it is a summary, it may not contain all of the information that is important to you. Therefore, this description is qualified by references to our bylaws and Brazilian corporation law. Following the publication of the announcement of the commencement of this offering on October 28, 2004, the shareholder rights mandated for shareholders of companies listed on the Novo Mercado segment of the BOVESPA became effective in favor of our shareholders. We are currently a publicly held corporation (sociedade por a¸coes˜ de capital aberto) incorporated under the laws of Brazil.

Novo Mercado In December 2000, BOVESPA started its special listing segment called Novo Mercado. This new segment’s purpose is to attract publicly registered companies wishing to supply more information to the market and their shareholders relating to their business, and who are committed to adopting certain practices of corporate governance, such as specialized management practices and protection of minority shareholders. The companies entering the Novo Mercado submit, voluntarily, to certain more rigid rules than those imposed by Brazilian corporation law, as detailed below. See ‘‘BOVESPA’s Differentiated Corporate Governance Practices’’. A company wishing to list its securities in the Novo Mercado must obtain registration as a publicly held company from the CVM. In addition, it must sign a contract of participation in the Novo Mercado and adjust its bylaws to include the certain minimum provisions required by BOVESPA, as described below. After the commencement of the offering and the execution of the Novo Mercado agreement with BOVESPA, the provisions of the Novo Mercado regulations will apply us, and certain provisions of our bylaws will become effective as well.

Capital Stock As of October 5, 2004, our capital stock was R$620,580,163.27, all of which was fully subscribed and paid-in. Our share capital comprises 100,000,000 common shares, without par value. 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 100,000,000 new shares without seeking specific shareholder approval. Our shareholders must approve any capital increase above that amount at a general shareholders’ meeting. Pursuant to our bylaws and the agreement entered into with the BOVESPA on October 6, 2004 for the listing of our shares on the Novo Mercado, we may not issue preferred shares.

Corporate purpose Our corporate purpose, as set forth in article 2 of our bylaws, consists of: (i) the manufacture, commercialization, export and import of (a) footwear/shoes and clothing items in general; (b) components and parts of footwear/shoes and clothing items in general; (c) molds for the footwear, clothing and plastics sector; (d) PVC, Resin, plastifying oils, EVA and other raw materials and inputs used in the manufacture of footwear/shoes; and (e) accessories, promotional gifts and material linked with products produced by us; (ii) the rendering of services, including in the information technology area related to the activities described in (i) above; and

104 (iii) the import of industrial machines and their respective accessories, as well as equipment, special tools and apparatuses relating to our corporate purposes. Our company may also hold an interest as a partner or shareholder in any other company or business in Brazil or overseas through the application of our own funds or tax benefits, and engage in other activities directly related to those listed above.

Rights of shares Each share entitles its holder to one vote at our annual and extraordinary general shareholders’ meetings. Pursuant to our bylaws and the agreement entered into with BOVESPA on October 6, 2004, in connection with the listing of our shares on the Novo Mercado, we may not issue shares without voting rights or with restricted voting rights. In addition, our bylaws and the Brazilian corporation law provide that shares are entitled to dividends or other distributions made in respect of shares in proportion to their share of the amount of the dividend or distribution. See ‘‘Allocation of net income and distribution of dividends’’ for a more detailed description of dividend payments and other distributions relating to our shares. In addition, upon our liquidation, our shares are entitled to return of capital in proportion to their share of our net worth, after payment of our liabilities. Holders of our shares are not required to make any additional contributions of capital for our shares in the future.

General meetings At our general shareholders’ meetings, shareholders are generally empowered to take any action relating to our corporate purpose and to pass such resolutions as they deem necessary. At the annual general shareholders’ meeting, shareholders have the exclusive power to approve our financial statements and to determine the allocation of our net profit with respect to the fiscal year ended immediately prior to the shareholders’ meeting. The election of our directors typically takes place at the general shareholders’ meeting. Fiscal council members, if the requisite shareholders request its establishment, may be elected at any general shareholders’ meeting. Extraordinary shareholders’ meetings may be held concurrently with the annual general shareholders’ meeting. The following actions, among others, may only be taken at a shareholders’ meeting: • amendment of our bylaws; • election and dismissal of members of our board of directors; • determining the aggregate compensation of the board of directors and executive officers, as well as the statutory audit committee’s compensation, if established; • premiums on shares; • approval of stock splits; • review and approval of management accounts and financial statements prepared by management; • resolution on proposals submitted by management relating to the allocation of net profit and dividend distribution; • election of a liquidator and election of the statutory audit committee; • delisting of our shares from the Novo Mercado; • appointment of an evaluation company, from among firms identified by our board of directors, responsible for determining the company’s value for the purposes of any public offering provided for in our bylaws;

105 • issuance of convertible debentures; • suspension of the rights of a shareholder who has violated Brazilian law or our bylaws; • valuation of in-kind contributions offered by a shareholder in consideration for issuance of shares of our capital stock; • transformation into a limited liability company or any other corporate form under Brazilian corporation law; • approval of any merger with another company or a spin-off; • approval of dissolution and 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 bankruptcy or request the compulsory rescheduling of our debts. According to Brazilian corporation law, neither a company’s bylaws nor actions taken at a shareholders’ meeting may deprive our shareholders 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 our liquidation; • preemptive rights in the event of subscription of shares, convertible debentures or subscription bonuses, except under certain circumstances as set forth in the Brazilian corporation law, as described in ‘‘—Preemptive rights’’; and • the right to withdraw in cases specified in Brazilian corporation law, as described in ‘‘—Withdrawal and redemption rights’’.

Quorum As a general rule, Brazilian corporation law provides that a quorum required for valid shareholders’ meeting on first call is at least 25% of our issued and outstanding voting capital, and, if that quorum is not reached, any percentage on second call. In the event that a general shareholders’ meeting has been convened to amend our bylaws, the quorum for the first call consists of at least two thirds of our issued and outstanding voting capital and any percentage on the second call. As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and outstanding shares present in person or by proxy is required to ratify any proposed action and abstentions are not taken into account. However, the affirmative vote of shareholders representing at least 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 or spin-off; • our participation in a group of companies; • cancellation of any voluntary liquidation; • our dissolution; and • the merger of our shares by another company.

106 As long as we are listed on the Novo Mercado, we may not issue preferred shares. In order to delist from the Novo Mercado, controlling shareholders must conduct a public offering to acquire shares from minority shareholders. 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 Diario´ Oficial do Estado do Ceara´, the Ceara´ State Government official periodical, and in another newspaper of wide circulation. The first notice must be published no later than 15 days before the date of the meeting on first call, and eight days prior to the meeting on second call. The CVM may, however, under certain circumstances, require that notice on first call of a general shareholders’ meeting be published 30 days prior to the date of the respective meeting. Beginning October 6, 2004, notices of shareholders’ meetings will be published in the Diario´ Oficial do Estado do Ceara´ and in the newspapers O Povo and Valor Economicoˆ .

Location of our shareholders’ meetings Our general shareholders’ meetings are held at our headquarters, in the city of Sobral, in the state of Ceara.´ Brazilian corporation law allows for general meetings to be held outside our head offices, in the event of force majeure, provided that such meetings are held in the city of Sobral and the respective notice contains a clear indication of the place where such meeting is to occur.

Authority to convene shareholders’ meetings The chairman of the board of directors may call a general shareholders’ meeting. In his absence, a general shareholders’ meeting may be called by the vice-president of the board of directors and, in the latter’s absence, jointly by two members of such board. Shareholders’ meetings may also be called by: • any shareholder, if our directors fail to call a shareholders’ meeting within 60 days of the date on which they were required to do so under applicable law and our bylaws; • shareholders holding at least 5%of our capital stock, if our directors fail to call a meeting within eight days after receipt of a request to call the meeting containing the matters to be decided, which is duly documented; • shareholders holding at least 5%of our capital stock, 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 statutory audit committee; and • the fiscal council, if one is created, if the board of directors fails to call an annual shareholders’ meeting. The fiscal council may also call an extraordinary general meeting if it believes that there are important or urgent matters to be addressed.

Conditions of admission Shareholders attending a general shareholders’ meeting in person or by proxy must produce proof of their status as shareholders and proof that they hold the shares they intend to vote, according to our bylaws. A shareholder may be represented at general meetings by a proxy granted less than one year before, provided such attorney-in-fact proxy is another shareholder of our company, an executive officer, a lawyer, or a financial institution. An investment fund must be represented by its investment fund officer.

107 Board of directors According to our bylaws, our board of directors shall consist of a minimum of five and a maximum of seven members. The exact number of directors is set by a vote of a majority of our shares. Brazilian corporation law allows cumulative voting for directors at the request of at least 10% of our voting capital stock. Each share is assigned as many votes as there are members of the board of directors, and shareholders are entitled to aggregate their votes for a single candidate or distribute them among various candidates. If no request for cumulative voting is made, directors are elected by majority vote of those shareholders present in person or by proxy, except that shareholders who hold, individually or in the aggregate, at least 15% of our shares have the right to select one director and his or her alternate. Members of our board of directors are elected at the annual shareholders meeting, for a term of one year term, with the right of re-election. Brazilian corporation law requires that each member of the board of directors must hold at least one share. There is no mandatory retirement age for directors.

Transactions in which directors have an interest Brazilian corporation law prohibits any director from: • performing any act of generosity using corporate assets to the detriment of the company; • by virtue of his or her position as a director, receiving any type of direct or indirect personal advantage from third parties without authorization in our bylaws or from a shareholder’s meeting; and • taking part in any corporate transaction in which he or she has an interest that conflicts with an interest of the company, or in the decisions made by other directors on the matter. The global compensation of the directors is determined by the shareholders.

Allocation of net income and distribution of dividends Amounts available for distribution At each annual shareholders’ meeting, the board of directors is required to recommend how to allocate our net income for the preceding fiscal year. This allocation is subject to deliberation by our shareholders. For purposes of Brazilian corporation law, ‘‘net income’’ is defined 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. Amounts not paid in taxes due to tax benefits we receive may not be included in our results of operations and are directly accounted for in our net equity. We are required to allocate amounts not paid in taxes due to our tax benefits to a capital reserve account, which can only be used for offsetting losses or to increase our share capital. The amount in the capital reserve account will be used to fund the reduction of taxes based on the federal and state tax credits to which we are entitled. This amount may only be used to offset losses or increase our capital stock. See ‘‘Tax benefits’’. Consistent with Brazilian corporation law, our bylaws provide that an amount, equal to at least 25% of our net profits, as further reduced by amounts allocated to our profit reserves and contingency reserves (if any), and as increased by any reversals of the profit reserves (except amounts allocated to our legal reserve and statutory reserve (if any) and the contingency reserve (if any) shall be available for dividend distribution or as payment of interest on capital, in any given year. This amount represents the mandatory minimum dividend. Our calculations of net income and allocations to reserves for any

108 fiscal year are determined on the basis of unconsolidated financial statements prepared in accordance with Brazilian corporation law.

Reserve accounts Pursuant to Brazilian corporation law, we have two principal reserve accounts: profit reserves and capital reserves. Profit Reserves. Currently, our profit reserves comprises the legal reserve only. Statutory Reserve. Under 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 allocate any funds to the legal reserve in a fiscal year in which the statutory reserve, when added to our other established capital reserves, exceeds 30% of our total capital. Any net losses may be offset with the amounts allocated to the legal reserves. The amounts to be allocated in such reserve must be approved by our shareholders at a general shareholders’ meeting and may be used for the increase of our capital stock, but they are not available for the payment of dividends. On June 30, 2004, our legal reserves amounted to approximately R$27.5 million, equivalent to approximately 20% of our capital stock on that date. As of the date of this offering memorandum, the balance in the statutory reserve is zero. Capital Reserve. Our capital reserve consists of premium reserve, tax benefits and capital investment subsidies. Amounts allocated to our capital reserve are not used for purposes of paying the mandatory distributable amount (or any other dividend). On June 30, 2004, our capital reserve account amounted to approximately R$107.3 million. As of the date of this offering memorandum, the balance in the capital reserve is approximately R$43.6 million. (See ‘‘Capitalization’’).

Distribution of dividends and interest on shareholders’ equity The bylaws of a Brazilian corporation must specify a minimum percentage of the distributable profit that must be paid to shareholders as dividends, also payable as interest on capital. According to our bylaws, and as permitted by Brazilian corporation law, the mandatory distributable amount must be of at least 25% of our net profits after the adjustments provided for in section 202 of the Brazilian corporation law. See ‘‘—Amounts available for distribution’’. Brazilian corporation law allows a publicly traded company to suspend the mandatory dividend distribution if the board of directors reports to our annual shareholders’ meeting that the distribution would be inadvisable based on our financial condition, and a vote of the general shareholders’ meeting approves the suspension. The fiscal council, if established, must opine on the board of directors’ recommendation. 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 our financial condition 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 and social contribution obligations. According to our bylaws, the board of directors may decide to pay interest attributable to shareholders’ equity. Dividends. We are required by Brazilian corporation law and our bylaws to hold an annual general shareholders’ meeting within four months following 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.

109 Any holder of record of shares at the time that a dividend is declared is entitled to receive dividends. According to 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 payment date. In any event, the dividends must be paid before the end of the fiscal year during which the dividend is declared. Shareholders have three years from the publication of the notice authorizing the payment of a dividend (or interest on shareholders’ equity) to claim any such payment; after this time, the amount of the dividend (or interest on shareholders’ equity) reverts to our benefit. Our bylaws do not require that we adjust the amount of the dividend payment on account of inflation. 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 amount. Payments of interim dividends may represent an anticipatory payment of mandatory distributions relating to the net profit earned in the year in which the interim dividends were paid. Interest on shareholders’ equity. Since January 1, 1996, Brazilian companies have been permitted to pay limited interest to holders of equity securities and treat such payments as a deductible expense for purposes of calculating Brazilian income tax and, since 1998, for 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 shareholders’ equity as an alternative form of dividend payment. The rate applied in calculating interest on shareholders’ equity cannot exceed the TJLP for the applicable period. Under our bylaws, the amount distributed to shareholders as interest on shareholders’ equity, 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 shareholders’ equity, after payment of the applicable withholding tax, plus the amount of declared dividends, is at least equivalent to the mandatory dividend amount. Dividend Policy. On September 28, 2004, the board of directors resolved that, notwithstanding the right to propose the establishment of any reserves provided for by law or protocol in other documents binding on the Company, and in accordance with the Company’s best interest and financial health, the board of directors will adopt a policy for the distribution of dividends and recommend to the shareholders meeting the distribution of dividends equivalent to the net earnings remaining after establishing the aforementioned reserves. Based on this resolution, the board of directors expects dividends to be paid semi-annually, in the months of May and November, beginning in 2005.

Withdrawal and redemption rights 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 Brazilian corporation law, shareholder withdrawal rights may be exercised in the following circumstances: • a spin-off from the Company; • a reduction of mandatory dividends;

110 • a change in our corporate purpose; • our merger with another company; and • our participation in a group of companies (as defined in Brazilian corporation law). Brazilian corporation law further provides that any resolution regarding the spin-off of the Company will also entitle shareholders to withdraw from the Company if the spin-off: • causes a change in our corporate purpose, except if the equity is spun-off to a company whose primary activities are similar to our corporate purpose; • reduces our mandatory dividends; or • causes us to join a group of companies (as defined in Brazilian corporation law). In cases where we: • merge with another company in circumstances in which the Company is not the surviving entity; or • participate in a group of companies (as defined in Brazilian corporation law), our shareholders will not be entitled to withdraw if their respective shares (i) are liquid, defined as being part of the BOVESPA Index or any other traded stock exchange index (as defined by the CVM), and (ii) 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 ten 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 the par value of their 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 Brazilian corporation law, we are permitted to redeem our shares if our shareholders’ decide to do so at an extraordinary shareholders’ meeting.

Registration of our shares Our shares are held in book-entry form with Banco Itau´ S.A. Transfers of our shares are carried out by means of an entry by Banco Itau´ S.A. in its registration system, debited from the seller’s account and credited to the buyer’s account, by means of a written order of the transferor or a judicial authorization or order to effect such transfers.

Preemptive rights Except as described below, our shareholders have a general preemptive right to subscribe for shares in any capital increase, in proportion to their shareholding, except in the event of a grant or exercise of an option to acquire or subscribe for shares of our capital stock or the conversion of

111 debentures into shares. Our shareholders also have general preemptive rights to subscribe convertible debentures and to participate in any other offer of shares and convertible securities. 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 our bylaws and article 172 of Brazilian corporation law, 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 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.

Restrictions on certain transactions by controlling shareholders, directors and executive officers Our controlling shareholders, directors, executive officers and statutory audit committee members (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, reorganize, spin-off part or all of our assets; • during the 15-day period preceding the disclosure of our quarterly or annual financial statements; or • with respect only to our controlling shareholders, directors and executive officers, 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.

Restrictions on activities outside our corporate purposes Our bylaws prohibit us from engaging in activities beyond our corporate purposes; any such acts will be null and void. Such acts include, among others, extending or granting any financing or guarantees of any kind to third parties in connection with transactions that are outside the scope of our corporate purposes or contrary to our bylaws, with the exception of those already entered into.

Arbitration Any disputes or controversies relating to the Listing Rules of the Novo Mercado, our bylaws, any shareholders’ agreement registered at our headquarters, Brazilian corporation law, the laws of regulations issued by the CMN, BACEN and the CVM, the regulations of BOVESPA and other rules applicable to 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 We may become a private company if we or our controlling shareholders conduct a public offering for the acquisition of all of our outstanding shares, subject to the conditions below: • the minimum price offered for the shares must be the economic value of those shares, calculated by the methodology recognized by the CVM or based on criteria, which it may define; and • shareholders holding more than two thirds of our outstanding shares 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 whose holders have expressly agreed to our decision to become a private company or have accepted the offer.

112 According to the Novo Mercado regulations and our bylaws, the minimum price for the shares in the public offering for the acquisition of our 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 firm of recognized experience, which will be chosen at a general shareholders’ meeting from a list of at least three firms presented by our board of directors. The selection of the firm requires the affirmative vote of a majority of our outstanding shares, without counting blank votes. According to Brazilian corporation law, we may become a private company only if we or our controlling shareholders conduct a public offering for the acquisition of all of our outstanding shares in the market, for fair value, at least equal to our company’s 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, 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 evidenced. 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.

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 shares, 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 the Novo Mercado, our controlling shareholder shall conduct a public offering for the acquisition of shares within 90 days as of the delisting, 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 firm of recognized experience, which will be chosen at a general shareholders’ meeting from a list of three firms presented by our board of directors. The selection of the firm 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 general 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 controller 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, as adjusted for inflation in the period.

113 If our securities are delisted from the Novo Mercado, we will not be permitted to have securities listed on the Novo Mercado for a period of two years following the delisting date, unless there is a change in control after the delisting.

Tag-along rights According to the Listing Rules of the Novo Mercado, a sale of the controlling shares of our company, in a single or in multiple transactions, is required to include a condition whereby the acquiror must conduct, within 90 days, a public offering for the acquisition of the remaining shares from our other shareholders under the same terms and conditions granted to the selling controlling shareholder. Such a public offering is required: • when there is an assignment of share subscription rights and other securities or rights related to debentures convertible into shares, which may result in a transfer of our control; • when, if the selling controlling shareholder is a corporation, the control of such controlling shareholder is transferred; • when the controlling shareholder acquires control as a result of a private share purchase agreement. In this case, the acquiring shareholder must conduct the public offering under the same terms and conditions being offered to the selling controlling shareholders and compensate the shareholders from whom he has purchased shares in the market in the six months preceding the control sale date. The compensation amount shall be the difference between the price paid to the selling controlling shareholders and the amount paid in the market, as adjusted for inflation. If necessary, the acquiror shall, within the six months following the acquisition, take appropriate measures to ensure that a minimum of 25% of our outstanding shares are trading in the market.

Purchase by us of shares of our own capital stock Our bylaws authorize our board of directors to approve the acquisition of our own shares. The decision to acquire our shares or maintain the acquired shares in the 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 shareholders; • create, directly or indirectly, any artificial demand, supply or share price condition or use any unfair practice as a result of 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 shares on the market, 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 trading only in the over-the-counter market and cannot be made in a private 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.

114 Disclosure requirements As soon as we become a publicly held company, 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 Regulation.

Disclosure of information Law 6,385/76, the CVM rules and the regulations of the Novo Mercado determine that a publicly held company provide the CVM and the relevant stock exchanges with periodic information that includes annual financial statements, quarterly financial statements, quarterly management reports and reports of the independent auditors. Such 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 Brazilian corporation law 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; • 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 4 months after the end of the fiscal year, (i) release financial statements and consolidated financial statements in accordance with U.S. GAAP or International Financial Reporting Standards, or IFRS, in reais or U.S. dollars, which must be disclosed in its entirety, in English, 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 Brazilian GAAP, as well as the net revenue destination proposal and the independent auditors’ report, or (ii) disclose, in English, the full financial statements, management report and explanatory notes, prepared in accordance with Brazilian corporation law, accompanied by an additional explanatory note regarding the reconciliation of the year-end results and shareholders’ equity calculated in accordance with Brazilian GAAP and the international standards, U.S. GAAP or IFRS, as the case may be, which shall include the main differences between the accounting principles used by the independent auditors’ report; and • within no more than 15 days following the term established by 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 U.S. GAAP or IFRS, accompanied by the independent auditors’ report.

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 the 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 each year-end;

115 • any direct or indirect ownership interest exceeding 5%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, executive officers and the statutory audit committee within the immediately preceding 12 months; • include a cash flow statement (including a consolidated statement) in the explanatory notes; and • the number of free float shares and their respective percentage in relation to the total 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, executive officers and members of our statutory audit committee, 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 number 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 statutory audit committee Our controlling shareholders, management and statutory audit committee members and any other technical 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 controlled 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 ten days of the end of the month in those transfers occurred. Such information must include: • the 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, dated January 3, 2002, if any shareholder, or any person or entity, individually or as 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 BOVESPA and to the CVM the following information: • the name and qualification of the person providing the information; • amount, price, type, class and other characteristics of the shares or securities traded; • acquisition method (private transaction, stock exchange transaction or otherwise); • reasons for and purposes sought with the transaction; • information regarding any agreement regarding the exercise of the voting rights or the purchase and sale of our securities; and • average price in BOVESPA for the securities acquired during the 90-day period preceding the transaction.

116 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 such material development. A development is deemed material if it has the ability to impact on the price of our securities, the decision by investors to trade in our securities or the decision by 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 whenever our management believes that such disclosure would have an adverse effect.

Trading in stock exchange markets Our 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. 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 clearing house. The clearing house 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 BACEN’s Reserve Transfer System. The settlement of trades of shares is carried out in the custodial system of the CBLC. All deliveries against final payment are irrevocable.

117 BOVESPA’S DIFFERENTIATED CORPORATE GOVERNANCE PRACTICES We intend to list our shares on the Novo Mercado of the BOVESPA. In December 2000, BOVESPA started its special listing segment called Novo Mercado. This new segment’s purpose is to attract publicly registered companies wishing to supply more information to the market and their shareholders relating to their business, and who are committed to adopting certain practices of corporate governance, such as certain management practices and protection of minority shareholders. Companies entering the Novo Mercado submit, voluntarily, to certain more rigid rules, and are required, for example, to (i) issue only shares, (ii) keep at least 25% of the company’s share capital in circulation, (iii) detail and include additional information in their quarterly reports, (iv) make available annual financial statements in the English language and based on internationally accepted accounting methods, and (v) not issue beneficiary parts. In order to enter into the Novo Mercado, a company must enter into an agreement between it, its management and controlling shareholders and BOVESPA, and must adapt its bylaws to the new rules contained in the Novo Mercado Regulation. Once the contract has been signed, the company must adopt the rules and practices of the Novo Mercado. The aim of the rules imposed by the Novo Mercado are increased transparency in relation to a company’s business and financial situation, as well as to increase minority shareholders’ rights to participate in company management, among others. The main rules regarding the Novo Mercado are summarized below. Pursuant to National Monetary Council Resolution No. 2,829, dated March 30, 2001 (‘‘CMN Resolution No. 2,829/01’’), and subsequent amendments which establish new rules for the application of the resources of private pension funds, shares issued by companies that adopt the practices of corporate governance as set forth in the Level 1 and Level 2 Regulations entitled their holders to greater participation in the investment portfolio of such pension funds. Securities issued by companies that adopt these practices of corporate governance have become important and attractive investment options for private pension funds, which are major investors in the Brazilian capital market. Such benefits apply to all companies whose securities are listed on the Novo Mercado, including us. Authorization for listing on the Novo Mercado. A company that intends to list its securities on the Novo Mercado must first register as a public company with the CVM. In addition, it must sign the contract described above and must adapt its bylaws to incorporate certain clauses required by the BOVESPA. Board of directors. A company authorized to list its shares on the Novo Mercado must have a board of directors composed of at least five members elected at the general shareholders’ meeting to one-year terms, with a right of re-election. All members of the board of directors and the executive board must agree to a Term of Agreement of Management as a condition to assuming their positions. Under the terms of this agreement, members of the board of directors and executive officers are personally responsible for acting in compliance with the requirements of the Novo Mercado, with the rules of the Market Arbitration Chamber (Camaraˆ de Arbitragem do Mercado) and with the Novo Mercado Regulation. Other characteristics of the Novo Mercado. Under the Novo Mercado Regulation, companies undertake certain obligations, including: (i) to conduct public offerings of shares under certain circumstances such as delisting from the Novo Mercado; (ii) to conduct public offerings of shares that encourage broad distribution of share ownership; (iii) in the event of a change in control, to grant to the other shareholders tag-along rights under the same terms and conditions granted to the selling controlling shareholder group; (iv) to provide non-financial information for each quarter, including the number of shares held by members of management and the number of shares in circulation; (v) greater disclosure of related party transactions; and (vi) submission by all shareholders of the company to the Market Arbitration Chamber for resolution of any conflicts relating to shareholders, managers and the company. See ‘‘Description of Capital Stock’’.

118 DIVIDENDS Brazilian corporation law and our bylaws establish an annual minimum distribution of a mandatory dividend equivalent to 25% of our net revenues, adjusted in accordance with the Brazilian corporation law. In addition, under Brazilian tax legislation effective January 1, 1996, Brazilian companies are permitted to pay ‘‘interest’’ to holders of equity securities and treat such payments as a deductible expense for purposes of calculating Brazilian income tax and, since 1998, for social contribution tax. See ‘‘Description of the Capital Stock—Allocation of net income and distribution of dividends— Distribution of dividends and interest on shareholders’ equity’’. The purpose of the tax law change is to encourage the use of equity investment (as opposed to debt), to finance corporate activities. Payment of such interest may be made at the discretion of our board of directors, subject to the approval of our shareholders at a general shareholders’ meeting. Pursuant to the decree that governs the income tax benefits to which we are entitled and to our bylaws, we may not distribute the value of the tax we do not pay as a result of our state and federal tax benefits. Such an application of these funds would result in a loss of certain federal and state tax benefits to which we are entitled, an obligation to pay tax on the amount of income distributed, and other applicable penalties. Such amount shall be allocated to our capital reserves. These reserves may only be used to offset losses or to increase our capital stock. (See ‘‘Business—Tax benefits’’). The following table sets forth the dividends paid to our shareholders since 1999. We did not pay any amounts as interest on shareholders’ equity in these periods.

Six months ended Year ended December 31, June 30, 1999 2000 2001 2002 2003 2004(1) (in millions of R$) Dividends declared and distributed ...... 11.1 12.9 81.5 18.5 17.1 69.3

(1) Dividends distributed to shareholders in 2004 derived from accumulated earnings from previous fiscal years. On September 28, 2004, our shareholders approved a capital increase, through the capitalization of reserves, totaling R$483,103,393.93. The distribution of dividends and the capital increase affected the ‘‘Retained Earnings’’ account, which as a result totalled R$24.2 million. Following acquisition of the shares, shareholders will be entitled to dividends in relation to the year beginning January 1, 2004, for all dividends declared after the Closing Date. Such shareholders will not be entitled to receive the dividends mentioned in the above paragraph, since such dividends correspond to retained earnings from previous years. On September 28, 2004, the members of our board of directors resolved that, notwithstanding the right to propose the establishment of any reserves provided for by law, protocol, or other binding documents, and consistent with the our best interest and financial health, our board of directors will adopt a policy for distributing dividends and recommend to the shareholders meeting that dividends be distributed equivalent to the net earnings remaining after establishment of the reserves mentioned above. Based on that resolution, the our board of directors expects dividends to be paid semi-annually, in the months of May and November, beginning as of the 2005 fiscal year.

119 TAX CONSIDERATIONS The following discussion addresses the material Brazilian and United States federal income tax consequences of acquiring, holding and disposing of our shares. This discussion is not a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase our shares and is not applicable to all categories of investors, some of which may be subject to special rules, and does not specifically address all of the Brazilian and United States federal income tax considerations applicable to any particular holder. It is based upon the tax laws of Brazil and the United States as in effect on the date of this offering memorandum, which are subject to change, possibly with retroactive effect, and to differing interpretations. Each prospective purchaser is urged to consult its own tax advisor about the particular Brazilian and United States federal income tax consequences to it of an investment in our shares. Although there is presently no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. We cannot assure you, however, as to whether or when a treaty will enter into force or how it will affect holders of our shares.

United States This summary describes the principal U.S. federal income tax considerations of the purchase, ownership and disposition of the shares, and it does not purport to be a comprehensive description of all the tax consequences that may be relevant to a U.S. Holder of the shares. The statements set forth herein are based on U.S. tax law, including the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), its legislative history, existing and proposed U.S. Treasury regulations, court decisions and administrative rulings, all as in effect on the date of this offering memorandum, and changes to or differing interpretations of that law subsequent to the date of this offering memorandum, which may be retroactive, may affect the tax consequences described herein. This summary applies only to purchasers of shares who will hold the shares as capital assets for U.S. federal income tax purposes (generally, property held for investment) and does not apply to special classes of holders, such as dealers in securities or currencies, U.S. Holders as defined below with a functional currency other than the U.S. dollar, holders of 10% or more by vote or value of our shares (whether held directly, indirectly, constructively or through a depositary arrangement), holders liable for the alternative minimum tax, certain former citizens or residents of the United States, partnerships or other pass-through entities for U.S. federal income tax purposes, tax-exempt organizations, insurance companies, regulated investment companies, financial institutions, holders accounting for their investment in shares on a mark-to-market basis and persons holding shares in a hedging transaction or as part of a straddle or conversion transaction. In addition, this discussion does not address the ‘‘foreign personal holding company’’ rules. Each holder should consult its own tax adviser concerning the overall tax consequences to it, including the consequences arising under U.S. federal state, local and foreign laws of purchasing, holding and disposing of our shares. In this discussion, references to a ‘‘U.S. Holder’’ are to a beneficial owner of shares that is: • a citizen or individual resident of the United States for U.S. federal income tax purposes, • a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia, • an estate the income of which is subject to U.S. federal income taxation regardless of its source, or

120 • a trust if a court in the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust, or if the trust has made a valid election under U.S. Treasury regulations to be treated as a United States person. If an entity treated as a partnership for U.S. federal income tax purposes holds shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A prospective investor who is a partner of a partnership holding our shares should consult their own tax advisor. ‘‘Non-U.S. Holder’’ means a beneficial owner of shares that is not a U.S. Holder.

Taxation of distributions Subject to the passive foreign investment company rules discussed below, a U.S. Holder will recognize ordinary dividend income for U.S. federal income tax purposes in an amount equal to the gross amount of any cash (including any payment of interest on equity) and the value of any property distributed by us (without reduction for Brazilian withholding tax, if any) with respect to the shares, to the extent that such a distribution is paid out of our current or accumulated earnings and profits (as calculated under U.S. federal income tax principles). To the extent that such distributions exceed the amount of current and accumulated earnings and profits (as calculated under U.S. federal income tax principles), the distributions will cause a reduction in the U.S. Holder’s tax basis in such shares, until the U.S. Holder’s basis is reduced to zero, and then will be treated as gain from the sale or exchange of shares (treated as described below under ‘‘Taxation of capital gains’’). Nevertheless, because we do not anticipate calculating our earnings and profits under U.S. federal income tax principles, U.S. Holders should generally assume that any such distribution will be ordinary dividend income for U.S. federal income tax purposes. The amount of any dividend paid in reais will be measured by reference to the exchange rate for converting reais into U.S. dollars on the day they are actually or constructively received by the U.S. Holder, whether or not the dividend is converted into U.S. dollars. In addition, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includable in income of the U.S. Holder to the date such payment is converted into U.S. dollars will be foreign currency gain or loss and will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any reais received that are converted into U.S. dollars on a date subsequent to receipt. Dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. In addition, dividends will not qualify for preferential rates of U.S. federal income tax applicable to certain dividends paid to non-corporate shareholders. Dividends generally will constitute foreign source ‘‘passive income’’ for U.S. foreign tax credit purposes. Brazilian tax withheld from dividend distributions, if any, will be treated as a foreign income tax that, subject to generally applicable limitations under U.S. tax law, is eligible for credit against a U.S. Holder’s U.S. federal income tax liability or, at the U.S. Holder’s election, may be deducted in computing taxable income. In certain circumstances, a U.S. Holder may be unable to claim foreign tax credits (and may instead be allowed deductions) for foreign taxes imposed on a dividend if the U.S. Holder has not held the Shares for at least 16 days in the 30-day period beginning 15 days before the ex dividend date. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in shares or in respect of certain arrangements in which a U.S. Holder’s expected economic profit, after non-U.S. taxes, is insubstantial. U.S. Holders should consult their own advisers concerning the implications of these rules and the availability of the foreign tax credit in light of their particular circumstances.

121 Taxation of capital gains Subject to the passive foreign investment company rules discussed below, gain or loss realized by a U.S. Holder on the sale or other disposition of shares will generally be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized on the disposition and the U.S. Holder’s tax basis in the shares. Such gain or loss realized by a U.S. Holder generally will be a long-term capital gain or loss if, at the time of the sale or other disposition, the shares have been held for more than one year. Long-term capital gain realized by a non-corporate U.S. Holder including an individual, generally is subject to a maximum U.S. federal income tax rate of 15%. Capital losses may be deducted from taxable income, subject to certain limitations. Gain or loss realized by a U.S. Holder on the sale or other disposition of our shares generally will be treated as U.S. source gain or loss. Consequently, if Brazilian tax is imposed on such gain, the U.S. Holder will not be able to use the corresponding foreign tax credit, unless the U.S. Holder has other foreign source income of the appropriate type in respect of which the foreign tax credit may be used. If a U.S. Holder receives reais upon a sale or other disposition of shares, gain or loss, if any, recognized on the subsequent sale or other disposition of such reais will be ordinary income or loss and will generally be U.S. source income or loss for foreign tax credit limitation purposes. However, if such reais are converted into U.S. dollars on the date received by the U.S. Holder, the U.S. Holder generally would not recognize any gain or loss on such conversion.

Exchange of reais A U.S. Holder will have a tax basis in reais received as a distribution with respect to or on the sale or other disposition of our shares equal to the U.S. dollar value of such reais, determined at the time the distribution is received or at the time of the sale or other disposition. Any gain or loss realized by a U.S. Holder on a sale or other disposition of reais generally will be treated as U.S. source ordinary income or loss.

Passive Foreign Investment Company rules Based upon an analysis of our current assets and income and the manner in which we intend to operate our business in future years, we do not believe that we are or will be treated as a passive foreign investment company (a ‘‘PFIC’’) for U.S. federal income tax purposes. Our possible status as a PFIC must be determined annually and therefore may be subject to change. A non-U.S. company is a PFIC in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average value of its assets is attributable to assets that produce or are held to produce passive income. For purposes of the above tests, if a non-U.S. company owns (directly or indirectly) at least 25% of the stock of another corporation, it will be treated as if it held its proportionate share of the assets of such other corporation, and received directly its proportionate share of the income of such other corporation. If we were treated as a PFIC at any time during the period a U.S. Holder held the shares, the U.S. Holder would be subject to certain adverse U.S. federal tax consequences, including the possible characterization as ordinary income of gain from the sale or other disposition of the shares and an interest charge on such gain at the time of such sale or disposition. U.S. Holders should consult their own tax advisers regarding our potential status as a PFIC and the U.S. federal income tax consequences of an investment in a PFIC (including any applicable reporting requirements).

Non-U.S. holders In general, subject to the discussion below of backup withholding, distributions to non-U.S. Holders in respect of the shares and any gain realized by a non-U.S. Holder on the sale or other

122 disposition of the shares will not be subject to U.S. federal income tax or withholding tax, provided that such non-U.S. Holder is not: • engaged in a U.S. trade or business, • a former citizen or long-term resident of the United States, • a ‘‘controlled foreign corporation’’, • a ‘‘foreign personal holding company’’, • a corporation that accumulates earnings to avoid U.S. federal income tax, or • an individual who is present in the United States for 183 days or more during a taxable year and certain other conditions are met.

Backup withholding and information reporting Dividends paid on, and proceeds from the sale or other disposition of our shares paid to, a U.S. Holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number or otherwise establishes an exemption. The amount of any backup withholding collected from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is furnished to the Internal Revenue Service in a timely manner. A non-U.S. Holder generally will be exempt from these information reporting requirements and backup withholding tax but may be required to comply with certain certification and identification procedures in order to establish its eligibility for that exemption.

Brazil The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of shares by a holder that is not domiciled in Brazil and that has registered the investment as a U.S. dollar investment with BACEN (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 shares in general, and, therefore, it does not specifically address all of the Brazilian tax considerations applicable to any particular non-resident holder, and each non-resident holder should consult its own tax adviser concerning the Brazilian tax consequences of an investment in shares. The tax consequences described below do not take into account tax treaties or reciprocity of tax treatment entered into by Brazil and other countries. Brazil has not yet entered into any tax treaty with the United States.

Income tax Dividends. Dividends paid by a Brazilian corporation, such as we are, including stock dividends and other dividends paid to a non-resident holder of 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. Prior profits are subject to withholding income tax at rates varying from 8% to 35%, depending on the case. Interest on Net Equity. Law No. 9,249, dated December 26, 1995, as amended, permits a Brazilian corporation, such as us, to make distributions to shareholders of interest on net equity. 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:

123 • 50% of net income (before taxes, 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% where the non-resident holder is domiciled in a tax haven (i.e., a country that does not impose any income tax, a country where the maximum income tax rate is lower than 20%, or a country that restricts the disclosure of shareholder composition or the ownership of investments). These payments may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on net equity 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, is at least equal to the mandatory dividend. Gains. As a general rule, pursuant to Law No. 10,833, enacted on December 29, 2003, the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident may be subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. Gains realized as a result of a transaction carried out on a Brazilian stock exchange are the positive difference between the amount in reais realized on the sale or exchange of a security and its average acquisition cost measured in reais. The acquisition cost of a security registered as an investment with BACEN is calculated on the basis of the foreign currency amount so registered, translated into reais at the commercial market rate on the date of such sale or exchange. Pursuant to Law No. 10,833/03, non-resident holders may benefit from tax benefits set forth in special regime for taxation in the stock exchange. For purposes of taxation of gains earned in Brazil, two categories of non-resident holders should be considered either as benefiting from the special regime or not, as follows: • Gains earned by CMN Resolution No. 2,689/00 registered investors are not subject to withholding income tax (unless the sale takes place outside a Brazilian stock exchange, in which case the gains are subject to a 15% withholding income tax or up to 25% if earned by tax haven residents). • Gains earned by non-registered investors—that is, non-resident holders who invest in Brazil through any means other than under Resolution No. 2,689 (‘‘non-registered investors’’)—are subject to withholding income tax at the rate of 20% or 15% if such gains are earned as of January 1, 2005 (unless the sale takes place outside a Brazilian stock exchange, in which case the gains are subject to a 15% withholding income tax) or 25% if earned by tax haven residents. In the case of redemption of securities or capital reduction by a Brazilian corporation, such as us, the positive difference between the amount effectively received by the non-resident and the foreign currency investment amount registered with BACEN, translated into reais at the commercial market rate of the date of the redemption or liquidating distribution, is treated as capital gain derived from sale or exchange of shares not carried out on a Brazilian stock exchange market, being therefore subject to income tax at the rate of 15% or 25% in cases non-residents are domiciled in tax havens.

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, due 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

124 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. Tax on Transactions Involving Bonds and Securities. Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or IOF/Bonds Tax, 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 the such rate at any time up to 1.5% per day, but only in respect to 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%. According to Constitutional Amendment no. 42, dated December 19, 2003, the 0.38% CPMF rate will be applicable until December 31, 2007. Transactions carried out on Brazilian stock exchanges, including those made by CMN Resolution No. 2,689/00 registered investors, and related remittance of funds abroad are not subject to the CPMF tax. Therefore, 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.

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.

125 CLEARANCE AND SETTLEMENT Trading on the Brazilian stock exchanges Our shares are expected to trade on the Novo Mercado segment of the 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 our securities may be suspended on the initiative of BOVESPA or the CVM based, among other reasons, on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or BOVESPA. The shares of all companies listed on BOVESPA, including those listed on the Novo Mercado segment, 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 exchange on the second business day following the trade date. The clearing house for BOVESPA is the Companhia Brasileira de Liquida¸cao˜ e Custodia´ (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 whenever the indices of BOVESPA fall below the limits of 10.0% in relation to the index registered in 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. 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 public trading, 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 the shares by non-residents of Brazil.’’ Trading in securities listed on BOVESPA, including those listed on the Novo Mercado segment, may be effected off the exchanges in the unorganized over-the-counter market in certain circumstances. 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.

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; BACEN, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions; and by the rules issued by the stock exchanges, including BOVESPA. These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, restrictions on insider trading and price manipulation, and various types of protections of minority shareholders, including limitations on certain actions by the controlling

126 shareholder and on the acquisition of shares by the issuer or the controlling shareholder that could reduce the liquidity of float shares. Under Brazilian corporation law, a corporation is either public, such as we are, or closely held. All public companies, including us, are registered with the CVM and are subject to reporting requirements.

Investment in the shares by non-residents of Brazil Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including our shares, on the Brazilian stock exchange, provided that they comply with the registration requirements set forth in Resolution No. 2,689 of the National Monetary Council (‘‘CMN Resolution No. 2,689/00’’) and CVM Instruction No. 325/00. With certain limited exceptions, CMN Resolution No. 2,689/00 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 the shares are made through the commercial rate exchange market. In order to become a CMN Resolution No. 2,689/00 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 BACEN and the CVM; and • through its representative, register itself as a foreign investor with the CVM and the investment with BACEN. Please refer to ‘‘Tax Considerations—Brazil’’ for a description of the tax consequences for an investor residing outside Brazil of investing in shares in Brazil.

127 NOTICE TO INVESTORS The following information relates to the form and transfer of the shares. Because of the following restrictions, purchasers of shares offered in the United States in reliance on an exemption from the Securities Act are advised to consult legal counsel prior to making any offer, resale, pledge or transfer of the shares. The shares have not been registered under the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons except in accordance with an applicable exemption from the registration requirements thereof. Accordingly, the shares are being offered and sold only (1) to QIBs in compliance with an exemption from the registration requirements of the Securities Act, or (2) outside the United States to non-U.S. persons in reliance upon Regulation S. Each purchaser of shares offered hereby, by its acceptance of delivery of this offering memorandum, will be deemed to have acknowledged, represented to and agreed with us, the selling shareholders, the underwriters and the international placement agents as follows: 1. It understands and acknowledges that the shares have not been registered under the Securities Act or any other applicable securities law, and are being offered for resale in transactions not requiring registration under the Securities Act or any other securities laws, and, unless so registered, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act, or any other applicable securities law, pursuant to an exemption from registration or in a transaction not subject to registration. No representation can be made as to the availability of the exemption provided by Rule 144 for resales of the shares. 2. It is not an affiliate (as defined in Rule 144 under the Securities Act) of us or acting on behalf of us and it is either: (a) a QIB and is aware that any sale of the shares to it will be made in reliance on an exemption from the registration requirements of the Securities Act. Such acquisition will be for its own account or for the account of another QIB; or (b) a person who, at the time the buy order for the 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. 3. If it is a purchaser in a sale that occurs outside the United States within the meaning of Regulation S under the Securities Act, it agrees that until the expiration of a 40-day ‘‘distribution compliance period’’ within the meaning of Rule 903 of Regulation S under the Securities Act, no offer or sale of the shares shall be made by it to a U.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902(k) of the Securities Act except to a QIB and in compliance with the applicable selling restrictions. 4. Pursuant to CMN Resolution No. 2,689/00, transfers of shares, including by or between residents of jurisdictions outside Brazil, may be effected only in Brazil. See ‘‘Clearance and Settlement— Investment in the shares by non-residents of Brazil.’’ 5. It acknowledges that neither we, the selling shareholders, the underwriters nor the international underwriters or any person representing us, the selling shareholders, the underwriters or the international underwriters have made any representation to it with respect to us or the offering or sale of any shares, other than the information contained in this offering memorandum, which has been delivered to it and upon which it is relying in making its investment decision with respect to the shares. It acknowledges that no representation or warranty is made by the underwriters or the international underwriters as to the accuracy or completeness of such materials. It has had access to such financial and other information concerning us and the shares as it has deemed necessary in

128 connection with its decision to purchase the shares, including an opportunity to ask questions of and request information from us, the selling shareholders, the underwriters or the international underwriters. 6. It acknowledges that we, the selling shareholders, the underwriters and the international underwriters will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that, if any of the acknowledgments, representations or warranties deemed to have been made by its purchase of shares are no longer accurate, it shall promptly notify us, the selling shareholders, the underwriters and the international underwriters. If it is acquiring any shares as a fiduciary or agent for one or more investor accounts, it represents that is has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account. 7. It agrees not to deposit the shares into an unrestricted depositary receipt facility for so long as such shares are ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act. 8. It represents and agrees that: (a) it has not offered or sold and will not offer or sell any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in 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; (b) it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any shares in circumstances in which section 21(1) of the FSMA does not apply to us; and (c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom. Prospective purchasers are hereby notified that sellers of the shares may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.

129 UNDERWRITING Under an underwriting agreement dated October 28, 2004, Banco Pactual S.A., as underwriter, has agreed to place 17,304,348 shares of the Company. Banco Pactual S.A. will act as sole global coordinator and bookrunner, and Pactual Capital Corporation, Santander Investment Securities, Inc. and Credit Suisse First Boston LLC will, pursuant to a placement facilitation and agency agreement dated October 28, 2004, act as international placement agents on behalf of Banco Pactual S.A., Banco Santander Brasil S.A. and Banco de Investimentos Credit Suisse First Boston S.A., respectively, for shares sold to investors outside Brazil. Banco de Investimentos Credit Suisse First Boston S.A., Banco Santander Brasil S.A., Banco Bradesco S.A. and BB—Banco de Investimento S.A. will act as co-managers (institui¸coes˜ subcontratadas) in connection with the placement of the shares in this offering in Brazil. The underwriting agreement provides that the obligation of the underwriter to place the shares is subject to, among other conditions, the delivery of certain legal opinions by our and its legal counsel and comfort letters from our auditors. The underwriting agreement also provides that the underwriter is obligated to purchase a specified number of shares on a firm commitment basis on the Closing Date, subject to certain conditions and exceptions. The shares will initially be offered by the Brazilian underwriters and the international placement agents at the price indicated on the cover page of this offering memorandum. After the initial offering of the shares, the offering price and other selling terms may from time to time be varied by the underwriter. The selling shareholders have also entered into a placement facilitation and agency agreement with our company, the underwriter, certain of the Brazilian underwriters and the international placement agents relating to the offering of our shares outside Brazil. Certain selling shareholders have granted to the underwriter an option exercisable within 30 days after the date of announcement in Brazil of the commencement of this offering (anuncio´ de inicio) to place up to an aggregate of 2,595,652 additional shares to cover overallotments. The option, if exercised, will be at the price per 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 will indemnify Banco Pactual S.A., Banco Santander Brasil S.A. and Banco de Investimentos Credit Suisse First Boston S.A. and the international placement agents against certain liabilities, including liabilities under the Securities Act, and will contribute to payments such Brazilian underwriters and the international placement agents may be required to make in respect thereof. We and the selling shareholders have also been advised by the underwriter that the underwriter proposes that shares will initially be placed to persons in the United States whom the international placement agents reasonably believe to be ‘‘qualified institutional buyers’’ in 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 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 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.

130 The following table shows the per share offering price, underwriting discount to be paid by us to the underwriter, and proceeds, before expenses, to the selling shareholders. This information is presented assuming either no exercise or exercise in full of the overallotment option.

Without With overallotment overallotment (in R$) Per share option option Offering price ...... 31.00 31.00 31.00 Underwriting discount ...... 0.9588 0.9588 0.9589 Net Proceeds ...... 30.0412 30.0412 30.0411 The expenses for this offering, exclusive of the underwriting discount, are estimated at approximately R$4 million. We have applied to list our shares on the Novo Mercado segment of BOVESPA under the symbol ‘‘GRND3’’. The price at which the shares will be offered will be based primarily on the demand the underwriter and the Brazilian undewriters have encountered at various price levels in the course of the bookbuilding process. The underwriting agreement requires the underwriter to offer priority to investors in this offering that are non-institutional investors as defined in the underwriting agreement for a period of 12 days beginning on October 15, 2004 and ending on October 26, 2004, inclusive up to 20% of the shares have been reserved for placement to non-institutional investors. Non-institutional investors who are members of management of our company and their relatives and certain other non-institutional investors must submit any such reserve requests between October 15, 2004 and October 18, 2004. Furthermore, up to 1% of the shares have been reserved for placement to our employees in Brazil. In connection with this offering, Banco Pactual S.A., acting through Pactual Corretora de T´ıtulos e Valores Mobiliarios´ S.A. may engage in transactions that stabilize, maintain or otherwise affect the price of the shares, and the underwriter has agreed to engage in stabilization activity for a period of up to 30 days after the date of the announcement in Brazil of the commencement of this offering (anuncio´ de in´ıcio). Specifically, the underwriter’s representative may over-allot in connection with the offering, creating a short position. In addition, the underwriter’s representative may bid for, and purchase, shares in the open market to cover short positions or stabilize the price of the shares. Any of these activities may stabilize or maintain the market price of the shares above independent market levels or may retard a decline in the market price of the shares. The underwriter is 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. The underwriter, the Brazilian underwriters, the international placement 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 currently own quotas of a Brazilian investment fund administered by Pactual Asset Management S.A.—DTVM. Furthermore, Oswaldo de Assis Filho, a member of our board of directors (conselho de administra¸cao˜ ), is a partner of Banco Pactual S.A. In addition, we engage in ordinary course banking transactions with each of Banco Bradesco S.A., Banco Santander Brasil S.A., Banco Credit Suisse First Boston S.A. and Banco do Brasil S.A. (each of which is affiliated with the Brazilian undewriters), including bank accounts, exchange operations and payment services. The 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 business or otherwise in circumstances which have not resulted and

131 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 shares in circumstances in which section 21(1) of the Financial Services and Markets Act 2000 does not apply to us. The 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 shares on the Novo Mercado, no action has been or will be taken in any country or jurisdiction by us or the underwriter that would permit a public offering of the 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 underwriter and the international placement agents to comply with all applicable laws and regulations in each country or jurisdiction in or from which they purchase, offer, sell or deliver 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 and each of our other directors and officers have agreed with certain Brazilian underwriters and the international placement agents, for a period of 180 days following the date of announcement in Brazil of the commencement of the offering (anuncio´ de in´ıcio), not to sell, contract to sell, pledge, loan or otherwise dispose of, or grant any rights, in all cases with respect to, any shares or any options or warrants to purchase any shares, or any securities convertible into, or exchangeable for, or that represent the right to receive shares except for the additional shares issued in connection with the overallotment option. 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 underwriter, such consent not to be unreasonably withheld: • to members of the selling shareholders’ family or to a trustee (agente fiduciario´ ); or • to any entity controlled by Grendene or the selling shareholders. In either case, 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. Under Novo Mercado regulations, we, the selling shareholders and our directors and executive officers may not sell or offer to sell shares of our company, or derivatives linked to those shares, during the first six months after the shares begin trading on the Novo Mercado. After this initial period of six months, we, the selling shareholders and our directors and executive officers may not sell or offer to sell more than 40% of the shares that we or they hold, or derivatives linked to those shares, for an additional six months. We cannot assure you that the underwriter, on behalf of the Brazilian underwriters and the international placement agents, or the Novo Mercado,will not waive these lock-up obligations, in which case these shares would become eligible for sale earlier. We cannot predict the effect, if any, that future sales of the shares, or the availability of such shares for future sale, will have on the market price of the shares prevailing from time to time or on our ability to raise capital in the future. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of the shares and our ability to sell shares in the future at a time and at a price that we deem appropriate.

132 LEGAL MATTERS Clifford Chance US LLP has advised us and the selling shareholders on certain U.S. securities law matters in connection with the offering. Machado, Meyer, Sendacz e Opice have advised us and the selling shareholders on certain Brazilian matters in connection with the offering. Certain legal matters will be passed upon for the underwriter, the Brazilian underwriters and the international placement agents by Linklaters, their U.S. counsel, and by Barbosa, Mussnich¨ & Aragao,˜ their Brazilian counsel.

133 INDEPENDENT ACCOUNTANTS Our consolidated financial statements for each of the years ended December 31, 2001, 2002 and 2003 and for the six-month period ended June 30, 2004 included in this offering memorandum have been audited by Ernst & Young, which have issued their reports containing a qualification of their opinion as a result of one of our subsidiaries having been audited by another independent auditor, as stated in their report included elsewhere in this offering memorandum.

134 SUMMARY OF DIFFERENCES BETWEEN U.S. GAAP AND BRAZILIAN GAAP The financial statements prepared in accordance with Brazilian GAAP are based on the Brazilian Corporation Law (Law No. 6,404/76, as amended), the rules and regulations of the CVM, and the accounting standards issued by the Instituto dos Auditores Independentes do Brasil (the Brazilian Institute of Independent Accountants, or IBRACON). In addition, publicly listed companies trading shares or debt within the Brazilian stock markets are required to follow the rules and regulations of the CVM, and financial institutions are required to follow the rules and regulations of BACEN. A summary of the current accounting policies that differ significantly from U.S. GAAP is described below. Consolidation and Proportional Consolidation Under Brazilian GAAP, as per CVM Instruction No. 247 of March 27, 1996, as amended by CVM Instructions Nos. 269/97 and 25/98, for fiscal years ending after December 1, 1996, inclusive, financial statements should consolidate the following entities: (a) entities in which the company has voting rights that provide it with the ability to have the majority on social decisions and to elect the majority of the members of the Board; (b) overseas branches; and (c) companies under common control or controlled by stockholders’ agreements irrespective of the participation in voting stock joint ventures (including investees in which the company exerts significant influence through its participation in a stockholders’ agreement in which such group controls the investee) are to be accounted for under the proportional consolidation method. There are no specific pronouncements addressing criteria for consolidation of variable interest entities such as, among others, special purpose entities. Non-public companies are not required to follow the CVM instructions and therefore may choose to present unconsolidated financial statements under the equity method, irrespective of their interest ownership percentage. Non-public companies are not required to follow the CVM Instructions, and, therefore, may choose to present unconsolidated financial statements under the equity method (below), irrespective of their interest ownership percentage, including whether the investments are in less than 50% investments or in subsidiaries. Under U.S. GAAP, the usual condition for consolidation is the ownership of a majority voting interest. Therefore, as a general rule, the condition for consolidation is the ownership by one company, directly or indirectly, of over 50% of the outstanding voting shares of another company. Joint ventures are usually accounted for following the equity method of accounting. Proportional consolidation generally is not allowed under U.S. GAAP. In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 46, ‘‘Consolidation of Variable Interest Entities—An Interpretation of APB No. 51.’’ FIN No. 46 requires consolidation of ‘‘variable interest entities.’’ Variable interest entities are entities with the following characteristics: (a) the equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; and (b) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (i) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; (ii) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; or (iii) the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses. Under Brazilian GAAP, a majority shareholder normally recognizes a provision for the unsecured liabilities (negative working capital) of its investee. Under U.S. GAAP, a provision for unsecured liabilities is only recognized if a majority shareholder has a formal agreement with the investee’s creditors. Equity Method of Accounting Under the equity method of accounting, a company is required to record an original investment in the equity of another entity at cost, which is thereafter periodically adjusted to recognize the investor’s

135 share of the investee’s earnings, losses and dividend payments after the date of original investment. A Brazilian parent company is required to use the equity method of accounting to record investments on its stand-alone financial statements in its subsidiaries (companies that are controlled by the parent company) and its affiliates (companies in which the parent company owns at least 10% of the issued share capital without controlling it) over whose management it exerts influence or in which it owns 20% or more of the capital, if the aggregate book value of all such investments is equal to or greater than 15% of the net worth of the parent company or if the book value of an investment in any single subsidiary or affiliate is equal to or greater than 10% of the net worth of the parent company. If the parent company is registered with the CVM, the subsidiary companies must be consolidated if their aggregate book values exceed 30% of shareholders’ equity of the parent company, or if the parent company has control over management decisions of any single affiliate or if the investee is financially dependent on the parent company. In the case of financial institutions, investments in subsidiaries are required to be recorded using the equity method of accounting regardless of their significance. Under U.S. GAAP, the equity method of accounting is applicable only to those investments in which the parent company’s participation through common voting shares is greater than 20% and less than 50% of the share capital of the subsidiary or affiliate and where the parent company does not have control. Foreign Currency Translation Under Brazilian GAAP, the financial statements of subsidiaries operating in strong currency environments are translated using the current exchange rate. Financial statements presented in weak currencies are adjusted for the effects of inflation prior to translation. Translation gains and losses are taken to the income statement. Under U.S. GAAP, SFAS 52 requires the translation of foreign currency financial statements be made using the current exchange rate, except for enterprises operating in highly inflationary environments (a cumulative inflation rate of approximately 100% or more over a three-year period); in this case the functional currency is considered to be the reporting currency. Translation gains and losses are reported as a separate component of shareholders’ equity, except those relating to financial statements of enterprises operating in highly inflationary environments, which are taken to the income statement. Cash and Cash Equivalents Cash equivalents is not defined under Brazilian GAAP. Under U.S. GAAP, SFAS No. 95, ‘‘Statement of Cash Flows,’’ defines cash equivalents as short-term highly liquid investments that are both (i) readily convertible to known amounts of cash and (ii) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Impairment of Investments Under Brazilian GAAP, an investment is written down to market value when events and circumstances indicate permanent impairment. Under U.S. GAAP, APB Opinion No. 18, ‘‘The Equity Method of Accounting for Investment in Common Stock,’’ requires an investment to be written down to market values when the investment is traded in a public stock exchange and has over the previous year traded at values consistently below carrying values. In this case the impairment is considered to be other than temporary and the investment is written down to fair value. Investments in Debt and Equity Securities Under Brazilian GAAP, marketable debt and equity securities are generally stated at the lower of cost or market value less interest or dividends received. Gains and losses are reflected in earnings.

136 Certain specialized industries state such securities at market value with gains and losses recognized in income. Additionally, certain specific investments, such as mutual fund investments, may be carried at market value. Under U.S. GAAP, in accordance with SFAS 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities,’’ for enterprises in industries not having specialized accounting practices, the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities are as follows: (i) debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity. Advances to Suppliers Under Brazilian GAAP, funds advanced to suppliers are included in the appropriate asset account (i.e., inventory, property, plant and equipment, etc.) to which the advance relates. Under U.S. GAAP, these funds are treated as a deposit until the actual property or equipment procured by such funds has been purchased and specifically identified. Accordingly, such funds are generally classified as ‘‘Other assets’’ or separately disclosed as advances to suppliers. Inventories Under Brazilian GAAP, inventories are valued at the lower of average cost of purchase or production and replacement or realizable values. However, the Company values its inventories of finished products and work in progress at the tax criterion (a criteria allowed by tax legislation) which determines that finished products should be stated at 70% of the cash sales price at the balance sheet date, whereas work in progress should be stated at 80% of the finished product’s value, as previously computed. In order to adjust these inventories to their probable average production cost, a provision for devaluation is recorded. Under U.S. GAAP, inventories are valued at the lower of cost and market. Additionally, written-down inventories must be charged against cost of sales. Property, Plant and Equipment—Impairment Analysis Under Brazilian GAAP, companies are required to determine if operating income is sufficient to absorb the depreciation or amortization of long-lived assets, within the context of the balance sheet as a whole, in order to assess potential asset impairment. In the event that such operating income is insufficient, within the context of the fixed asset group, to recover the depreciation due to permanent impairment of assets, the assets, or groups of assets, are written down to recoverable values, preferably, based on the projected discounted cash flows of future operations. Under U.S. GAAP, SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-lived Assets,’’ requires companies to periodically evaluate the carrying value of long-lived assets to be held and used and for long-lived assets to be disposed of, when events and circumstances require such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from identified asset groups, representing the lowest level for which identifiable cash flows are largely independent of the cash flows of other group of assets and liabilities, is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets or discounted cash flows generated by the assets.

137 Revaluation of Property, Plant and Equipment Companies may opt to carry property, plant and equipment at cost, monetarily adjusted up to December 31, 1995, or at appraised values, in which case the revaluations must be performed at least every four years and should not result in an amount higher than the value expected to be recovered through future operations. Deferred taxes must be recognized on revaluation increments as from July 1, 1995. Amortization of the asset revaluation increments are charged to income, and an offsetting portion is relieved from the revaluation reserve in shareholders’ equity and transferred to retained earnings as the related assets are depreciated or upon disposal. Under U.S. GAAP, property, plant and equipment are reported at their historical cost less accumulated depreciation. Revaluations are not permitted, except in the case of the reappraisal of property, plant and equipment acquired in business combinations. Organizational and Pre-operating Costs Under Brazilian GAAP, pre-operating expenses incurred in the construction or expansion of a new facility may be deferred until the facility begins commercial operations. Subsequently all costs related to the organization and start-up of a new business may be capitalized to the extent that they are considered recoverable. The deferred charges are amortized over a period of five to ten years. Under U.S. GAAP, the rules are generally more restrictive as to the costs that can be capitalized and the periods over which such costs are amortized. Under U.S. GAAP, these expenses are normally charged to operations. However, in certain specific situations, identified pre-operating costs may be deferred, but amortized over relatively short periods. Capitalization of Finance Costs During Construction or Production Under Brazilian GAAP, the CVM requires capitalization of interest costs during the construction or acquisition period of the qualified assets to be depreciated over the respective useful lives of the productive assets. Capitalization normally includes foreign exchange losses. Under U.S. GAAP, interest cost incurred during the period that assets are under construction must be included in the cost of such assets, though the basis of calculation differs. SFAS No. 34, ‘‘Capitalization of Interest Cost,’’ states that interest cost should be included as a component of the historical cost of (1) facilities for a company’s own use and (2) assets intended for sale or lease that are constructed as separate projects and discrete projects. Foreign exchange losses are not subject to capitalization. Capitalized interest should be amortized over the life of the facilities or included in cost of sales when the inventories are sold. Software for Internal Use Under Brazilian GAAP, external computer development costs are capitalized at cost. Under U.S. GAAP, Statement of Position, or SOP, 98-1, requires identified costs related to the development and installation of software for internal use to be capitalized as fixed assets, including design of the chosen path, software configuration, software interfaces, coding, installation of hardware and testing. Costs incurred for conceptualization and formulation of alternatives, training and application maintenance should be expensed as incurred. Leasing Transactions (Leases) Under Brazilian GAAP, leases normally are treated for accounting purposes as operating leases and the expense is recognized at the time that each lease installment falls due. Disclosure regarding leases is more limited than under U.S. GAAP. Under U.S. GAAP, leases which transfer substantially all the benefits and risks of ownership related to the leased property from lessor to the lessee are treated as capital leases and the corresponding assets or liabilities are recognized, as appropriate, and the effects of depreciation and interest expense are recognized in income. All other leases are classified as operating leases and the lease payments charged to income as they fall due.

138 Non-interest Bearing Debt Instruments Under Brazilian GAAP, non-interest bearing debt instruments are not generally presented with an imputed rate of interest in order to recognize the economic substance of the underlying transaction. Under U.S. GAAP, APB No. 21, ‘‘Interest on Receivables and Payables,’’ requires the imputation of a reasonable, market-based, rate of interest for non-interest bearing debt instruments over the maturity period of the note. In addition, the carrying value of the debt instrument is reported net of any resulting discount or premium.

Income Taxes Under Brazilian GAAP, the methods adopted for the recording of income taxes are similar to U.S. GAAP, but their practical application may lead to different results in certain circumstances. Under Brazilian GAAP, the deferred income tax asset represents the probable estimated amount to be recovered. Deferred income taxes are presented as gross rather than being netted. Pursuant to CVM Deliberation No. 273/98 and Instruction No. 371/02, management is required to present its best estimate of expected realization of tax assets arising from income tax and social contribution tax loss carryforwards based on a discounted cash flow model approved by a meeting of the board of directors and limit recognition of the tax assets that will be realized within a ten-year period. Under U.S. GAAP, the liability method is used to calculate the income tax provision, as specified in SFAS No. 109, ‘‘Accounting for Income Taxes.’’ Under the liability method, deferred tax assets or liabilities are recognized with a corresponding charge or credit to income for differences between the financial and tax basis of assets and liabilities to each year/period end. Deferred taxes are computed based on the enacted tax rate of income taxes. Net operating loss carryforwards arising from tax losses that are recognized as assets. A valuation allowance is recognized as a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred income tax assets and liabilities are netted rather than presented gross.

Provision for Dividends Under Brazilian GAAP, at each balance sheet date the directors are required to propose a dividend distribution from earnings and accrue the dividends in the financial statements. Under U.S. GAAP, since this proposal may be ratified or modified at the annual stockholders’ meeting, such dividends would not be considered as declared at the balance sheet date and would therefore not be accrued.

Contingent Liabilities Under Brazilian GAAP, the accounting and disclosure requirements are generally not as comprehensive as found under U.S. GAAP.

Stock Issue Costs Under Brazilian GAAP, stock issue costs can either be immediately expensed or capitalized as a deferred charge and amortized over a five- to ten-year period. Under U.S. GAAP, stock issue costs are considered a reduction of the related proceeds from the issue and deferring the expense would only be appropriate in certain business combinations.

139 Tax Incentive Investments Under Brazilian GAAP, these investments, which are approved by the government in economic development regions of Brazil or in specific projects and are available without additional cost in lieu of the partial payment of certain taxes, are recorded at the lower of cost or fair value, as an asset, with a corresponding credit to a reserve in shareholders’ equity. Under U.S. GAAP, the credit would be made to income.

Prior Period Adjustments Under Brazilian GAAP, prior period adjustments encompass corrections of errors in previously issued financial statements and the effects of changes in accounting principles. Brazilian GAAP does not permit restatement of previous financial statements to provide consistency in reporting, which is required under U.S. GAAP in certain circumstances. The CVM has required that such prior period adjustments arising from accounting errors be recorded in the results of operations of the current year. Under U.S. GAAP, prior period adjustments are effectively limited to corrections of errors which are effected by adjusting current and prior periods’ financial statements and appropriate footnote disclosure regarding the effects of the errors on current and prior periods.

Dividends and Interest on Own Capital Under Brazilian GAAP, at each year-end, management is required to propose a dividend distribution from earnings and accrue for this in the financial statements. Under Brazilian GAAP, at each balance sheet date the directors are required to propose a dividend distribution from earnings, subject to ratification by the shareholders’ meeting, and accrue for this in the financial statements. Under Brazilian GAAP, companies are permitted to distribute or capitalize an amount of interest, subject to certain limitations, calculated based on a government interest rate, on shareholders’ equity. Such amounts are deductible for tax purposes and are presented as a deduction from shareholders’ equity. Under U.S. GAAP, since proposed dividends may be ratified or modified at the annual Shareholders’ Meeting, such dividends would not be considered as declared at the balance sheet date and would therefore not be accrued. However, interim dividends paid or interest credited to shareholders as capital remuneration under Brazilian legislation would be considered as declared for U.S. GAAP purposes.

Financial Derivatives Instruments Under Brazilian GAAP, there is no requirement for financial derivative instruments accounting. Under U.S. GAAP, prior to the effective date of SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ financial derivative instruments were generally designated at inception as either a trading or a hedging position. Trading derivatives were carried at market value with unrealized gains and losses recognized in income. Derivatives qualifying as hedges require that gains and losses on the hedging instruments be recognized in income at the same time the effects of the related changes in the hedged item are recognized. In order for financial derivatives instruments to qualify for hedge accounting treatment, the following two criteria must be met: (1) the item to be hedged exposes the entity to price or interest rate risk; and (2) the hedging instrument effectively reduces that exposure and is formally designated as a hedge. Foreign exchange derivative contracts are generally carried at market value, with unrealized gains and losses recognized in income. Gains or losses on trading forward foreign exchange contracts were calculated based on the forward rate available for the remaining maturity of the contracts. Gains or losses on forward foreign exchange contracts qualifying for ‘‘hedge accounting’’ under SFAS No. 52 are based on the daily spot rate. The

140 discount or premium on a forward foreign exchange contract based on the difference between the forward contract rate and the spot rate at the date of contract is accounted for separately from the gain or loss on the contract and is recognized in income over the life of the contract. SFAS No. 133, as amended and interpreted, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Such statement requires that a company recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as: • a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; • a hedge of the exposure to variable cash flows of a forecasted transaction; • a hedge of the foreign currency exposure of a net investment in a foreign operation; • an unrecognized firm commitment; • available-for-sale security; or • a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. Certain robust conditions must be met in order to designate a derivative as a hedge. If the derivative is a hedge, depending on the nature of the hedge, the effective portion of the hedge’s change in fair value is either (1) offset against the change in fair value of the hedged asset, liability or firm commitment through income or (2) held in equity until the hedged item is recognized in income. The ineffective portion of a hedge’s change in fair value is immediately recognized in income. If the hedge criteria are no longer met, the derivative instrument would then be accounted for as a trading instrument. If a derivative instrument designated as a hedge is terminated, the gain or loss is deferred and amortized over the shorter of the remaining contractual life of the terminated risk management instrument or the maturity of the designated asset or liability.

Accounting for Guarantees by a Guarantor Under Brazilian GAAP, guarantees granted to third parties are recorded in memorandum accounts. When fees are charged for issuing guarantees, the fee is recognized in income over the period of the guarantee. When the guaranteed party has not honored its commitments and the guarantor should assume a liability, a credit is recognized against the guaranteed party representing the right to seek reimbursement for such party with recognition of the related allowance for losses when considered appropriate. Under U.S. GAAP, FIN No. 45, ‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,’’ is effective for guarantees issued or modified after December 31, 2002. FIN No. 45 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. Specific disclosures of guarantees granted are also required under FIN No. 45.

Earnings Per Share Under Brazilian GAAP, disclosure of earnings per share is normally computed based on the number of shares outstanding at the end of the year, although a weighted-average basis is acceptable.

141 Under U.S. GAAP, in accordance with SFAS No. 128, ‘‘Earnings per Share,’’ the presentation of earnings per share is required for public companies, including earnings per share from continuing operations and net income per share on the face of the income statement, and the per share effect of changes in accounting principles, discontinued operations and extraordinary items either on the face of the income statement or in a note. A dual presentation is required: basic and diluted. Computations of basic and diluted earnings per share data should be based on the weighted average number of shares outstanding during the period and all dilutive potential shares outstanding during each period presented, respectively.

142 INDEX TO FINANCIAL STATEMENTS

A. Financial Statements of Grendene S.A. and subsidiaries Six months ended June 30, 2004 and year ended December 31, 2003 with Report of Independent Auditors B. Financial Statements of Grendene S.A. and subsidiaries Years ended December 31, 2003 and 2002 with Report of Independent Auditors C. Financial Statements of Grendene S.A. and subsidiaries Years ended December 31, 2002 and 2001 with Report of Independent Auditors

A-1 Financial Statements

Grendene S.A. and Subsidiaries

Six months ended June 30, 2004 and year ended December 31, 2003 with Report of Independent Auditors

F-1 GRENDENE S.A. AND SUBSIDIARIES FINANCIAL STATEMENTS June 30, 2004 and December 31, 2003

Contents

Report of Independent Auditors ...... F-3 Audited Financial Statements Balance Sheets ...... F-4 Statements of Income ...... F-5 Statements of Shareholders’ Equity ...... F-6 Statements of Changes in Financial Position ...... F-7 Notes to Financial Statements ...... F-8

F-2 A free translation from Portuguese into English of Report of Independent Auditors on financial statements prepared in accordance with the accounting practices adopted in Brazil

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders Grendene S.A. 1. We have audited the balance sheet of Grendene S.A. and the consolidated balance sheet of Grendene S.A. and subsidiaries as of June 30, 2004, and the related statements of income, shareholders’ equity and changes in financial position for the six months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements. The audit of the financial statements of the indirect subsidiary Grendha Shoes Corp. for the six months ended June 30, 2004 was conducted by other independent auditors. Our opinion insofar as it relates to the amount of this investment amounting to R$22,815 thousand (R$17,055 thousand at December 31, 2003) and the equity pickup arising therefrom during the six month period, amounting to R$5,760 thousand (R$11,115 thousand in the year ended December 31, 2003), is based solely on the reports issued by these independent auditors. 2. Our audit was conducted in accordance with generally accepted auditing standards in Brazil, which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company; (b) the examination, on a test basis, of documentary evidence and accounting records supporting the amounts and disclosures in the financial statements; and (c) an assessment of the accounting practices used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation. 3. In our opinion, based on our examinations and on the opinion issued by other independent auditors, as mentioned in paragraph one above, the financial statements referred to above present fairly, in all material respects, the financial position of Grendene S.A. and the consolidated financial position of Grendene S.A. and subsidiaries at June 30, 2004, the results of their operations, changes in their shareholders’ equity and changes in their financial position for the six months then ended, in accordance with the accounting practices adopted in Brazil. 4. The financial statements for the year ended December 31, 2003, presented for comparison purposes, were audited by us and our opinion thereon dated March 10, 2004, was issued with a qualification related to the scope limitation resulting from lack of audited by independent auditors of the financial statements of Reebok Chile S.A., in which the investment totaled R$1,065 thousand and which generated negative equity pickup result of R$2 thousand. As mentioned in Note 9, on June 30, 2004, this investment was sold.

Porto Alegre, July 30, 2004.

ERNST & YOUNG Auditores Independentes S.S. CRC-2 SP 15.199/O-6/S/RS

Marcos Antonioˆ Quintanilha Americo´ F. Ferreira Neto Accountant CRC1SP132776/O-3/T-SC/S-CE Accountant CRC1SP192685/O-9/S-CE

F-3 A free translation from Portuguese into English of financial statements prepared in accordance with the accounting practices adopted in Brazil

GRENDENE S.A. AND SUBSIDIARIES BALANCE SHEETS June 30, 2004 and December 31, 2003 (In thousands of reais) Company Consolidated 2004 2003 2004 2003 ASSETS Current assets Cash and cash equivalents ...... 12,053 11,469 13,722 29,310 Short term investments ...... 313,341 189,711 333,393 198,295 Accounts receivable ...... 240,613 312,560 237,680 302,188 Inventories ...... 118,615 146,234 132,388 165,152 Recoverable taxes ...... 6,513 12,971 8,058 14,157 Notes receivables ...... 8,207 7,557 27,011 25,797 Intercompany receivables ...... — — 1,595 293 Other receivables ...... 5,149 6,588 5,839 6,924 Deferred income and social contribution taxes ...... 9,059 — 9,784 306 Deferred expenses ...... 936 1,017 936 1,017 Total current assets ...... 714,486 688,107 770,406 743,439 Noncurrent assets Dividends receivable ...... — 1,972 — 1,972 Judicial deposits ...... 478 494 478 494 Notes receivable ...... 1,037 — 1,037 — Recoverable taxes ...... 1,522 — 1,522 — Other receivables ...... 178 172 178 172 3,215 2,638 3,215 2,638 Permanent assets Investments ...... 58,060 50,523 1,764 3,029 Fixed assets ...... 164,393 172,141 165,614 173,292 222,453 222,664 167,378 176,321 Total assets ...... 940,154 913,409 940,999 922,398 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Financial institutions ...... 30 887 30 887 ICMS tax related loans ...... 15,282 13,881 15,282 13,881 Trade accounts payable ...... 17,038 25,525 17,665 25,525 Provision for commissions ...... 10,974 18,444 11,041 18,513 Taxes, fees and contributions ...... 6,796 4,773 9,565 11,643 Salaries and charges payable ...... 34,908 28,325 35,104 28,384 Provision for freight expense ...... 3,396 6,271 3,396 6,271 Provision for contingencies ...... 450 — 450 — Deferred income tax ...... — — 283 292 Other debts ...... 3,292 5,130 3,802 6,829 Total current liabilities ...... 92,166 103,236 96,618 112,225 Noncurrent liabilities Financial institutions ...... 55,524 55,524 55,524 55,524 ICMS tax related loans ...... 67,835 61,923 67,835 61,923 123,359 117,447 123,359 117,447 Shareholders’ Equity Paid-in capital ...... 137,477 137,477 137,477 137,477 Revaluation reserve ...... — 2,815 — 2,815 Capital reserve ...... 107,280 63,707 107,280 63,707 Profit reserve ...... 27,495 27,495 27,495 27,495 Retained earnings ...... 452,377 461,232 448,770 461,232 724,629 692,726 721,022 692,726 Total liabilities and shareholders’ equity ...... 940,154 913,409 940,999 922,398 See accompanying notes.

F-4 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF INCOME Six months ended June 30, 2004 and year ended December 31, 2003 (In thousands of reais, except per share information)

Company Consolidated 2004 2003 2004 2003 Gross sales revenue ...... 581,515 688,000 604,981 1,276,365 Sales deductions ...... (115,924) (114,070) (118,088) (215,272) Net sales revenue ...... 465,591 573,930 486,893 1,061,093 Cost of products sold ...... (302,454) (294,986) (313,247) (542,978) Gross profit ...... 163,137 278,944 173,646 518,115 Operating income (expenses) Selling expenses ...... (97,579) (120,052) (101,840) (217,310) General and administrative expenses ...... (26,208) (29,033) (29,704) (61,561) Financial expenses ...... (48,198) (48,296) (48,865) (126,917) Financial income ...... 31,370 41,199 35,610 84,351 Equity pickup ...... 7,632 102,574 — 45,071 Management fees ...... (120) (114) (120) (240) Other operating income ...... 10,542 8,743 10,542 23,413 Other operating expenses ...... (5,474) (451) (5,583) (3,051) (128,035) (45,430) (139,960) (256,244) Operating result ...... 35,102 233,514 33,686 261,871 Nonoperating result ...... 22 (455) 157 (203) Income before income taxes and minority interest ...... 35,124 233,059 33,843 261,668 Income and social contribution taxes: Current ...... (16,328) (29,928) (19,082) (57,840) Deferred ...... 9,059 — 9,487 14 Minority interest ...... — — — (621) Net income for the six months/year ...... 27,855 203,131 24,248 203,221 Earnings per share (in reais) ...... 0.80 5.84

See accompanying notes.

F-5 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF SHAREHOLDERS’ EQUITY Six months ended June 30, 2004 and year ended December 31, 2003 (In thousands of reais)

Revaluation Capital Revenue reserve reserve reserve Paid-in Own Tax Legal Retained capital assets incentive reserve earnings Total Balance at December 31, 2002 ...... 131,600 2,979 — 26,320 276,214 437,113 Prior year adjustments ...... — 19 —— — 19 Realization of revaluation reserve ...... — (183) ——183 — Capital increase ...... 5,877 ————5,877 Dividends distributed ...... —— ——(17,121) (17,121) Tax incentive investments: ICMS...... ——42,994 ——42,994 Income tax ...... ——20,713 ——20,713 Net income for the year ...... —— ——203,131 203,131 Appropriation of net income: Legal reserve ...... —— —1,175 (1,175) — Balance at December 31, 2003 ...... 137,477 2,815 63,707 27,495 461,232 692,726 Prior year adjustments ...... — 4 —— — 4 Realization of revaluation reserve ...... — (60) —— 60 — Reversal of revaluation reserve ...... — (2,759) —— —(2,759) Dividends distributed ...... —— ——(36,770) (36,770) Tax incentive investments: ICMS...... ——38,471 ——38,471 Income tax ...... ——5,102 ——5,102 Net income for the period ...... —— ——27,855 27,855 Balance at June 30, 2004 ...... 137,477 — 107,280 27,495 452,377 724,629

See accompanying notes.

F-6 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF CHANGES IN FINANCIAL POSITION Six months ended June 30, 2004 and year ended December 31, 2003 (In thousands of reais)

Company Consolidated 2004 2003 2004 2003 Sources of working capital: From operations: Net income for the period/year ...... 27,855 203,131 24,248 203,221 Items not affecting working capital: Investment disposals ...... 95 500,112 1,265 — Property, plant and equipment disposals ...... 326 654 326 654 Result of equity pickup ...... (7,632) (102,574) — (45,071) Depreciations ...... 13,488 99,683 14,378 21,960 34,132 701,006 40,217 180,764 From shareholders and third parties: Income tax and ICMS (VAT) tax incentives ...... 43,573 63,707 43,573 108,780 Prior year adjustments ...... 4 19 4 19 Decrease in noncurrent assets ...... — 4,233 — 4,233 Increase in noncurrent liabilities (by merger) ...... — 76,326 — — Increase in noncurrent liabilities ...... 5,912 41,121 5,912 64,349 Capital increase ...... — 5,877 — 5,877 Dividends from subsidiaries ...... — 21,744 — — 49,489 213,027 49,489 183,258 Total sources of working capital ...... 83,621 914,033 89,706 364,022 Uses of working capital: Minority interest ...... — — — 4,982 Increase in noncurrent assets ...... 577 — 577 — In investments ...... — — — 105 In permanent assets (by merger) ...... — 138,089 — — In property, plant and equipment ...... 8,825 113,396 9,785 57,938 Dividends distributed ...... 36,770 17,121 36,770 17,121 Total use of working capital ...... 46,172 268,606 47,132 80,146 Increase in working capital ...... 37,449 645,427 42,574 283,876 Variation in working capital: Current assets At end of the six months/year ...... 714,486 688,107 770,406 743,439 At beginning of the six months/year ...... 688,107 6,779 743,439 578,898 26,379 681,328 26,967 164,541 Current liabilities At end of the period/year ...... 92,166 103,236 96,618 112,225 At beginning of the period/year ...... 103,236 67,335 112,225 231,560 (11,070) 35,901 (15,607) (119,335) Increase in working capital ...... 37,449 645,427 42,574 283,876

See accompanying notes.

F-7 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS June 30, 2004 and December 31, 2003 (In thousands of reais)

1. Operations Grendene S.A. was founded in 1971 with the following operating objective: a) management of own assets and investing in other companies (civil or commercial, national or foreign, as shareholder or partner); b) the planning, organization and handling of business in general; c) rendering administrative advisory and consulting services to companies in which it participates as partner, quotaholder or shareholder, directly or indirectly; and d) manufacturing and selling shoes and materials for use in the shoe industry, both locally and abroad. As resolved in the General Shareholders’ Meeting held on August 1, 2003, the Board of Directors approved absorption (by merger) of Grendene Cal¸cados S.A. Approval of merger was based on evidence that same would entail savings in administrative and operating activities, thus ensuring financial and tax benefits. Merged amounts are as follows:

Current assets ...... 534,434 Investments ...... 875 Property, plant and equipment ...... 137,214 Current liabilities ...... (90,208) Noncurrent liabilities ...... (76,326) Net assets merged ...... 505,989

Net assets merged include the result verified on the period from January 1 to July 31, 2003 and are as follows:

Net sales revenue ...... 455,632 Cost of services ...... (261,808) Operating expenses ...... (136,146) Other nonoperating revenues (expenses), net ...... 162 Income and social contribution tax ...... (20,397) Net income for the period ...... 37,443

2. Basis for Preparation and Presentation of the Financial Statements

a) Comparability of the Financial Statements Due to the merger mentioned in Note 1 and the difference existing between the periods that are being presented, comparability of the Company’s financial statements is impaired. Certain amounts in the 2003 financial statements, presented for comparison purposes, have been reclassified due to the accounting allocation of the respective transactions at June 30, 2004. Furthermore, when preparing the financial statements as of and for the year ended December 31, 2003, some provisions amounting to R$29,166 (R$20,948 net of tax effects) were not recorded. These amounts, relate mainly to the provision for discounts on payments made on due date (R$10,880),

F-8 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

2. Basis for Preparation and Presentation of the Financial Statements (Continued) provision for adjustment of inventories (R$14,110) and supplementary allowance for doubtful accounts (R$1,463), among others (R$2,713). These amounts were recorded by the Company during the six-month period ended June 30, 2004, which affected each relevant account of the income statement, in accordance with the accounting practices adopted in Brazil and the guidelines of the Securities and Exchange Commission of Brazil. The following table summarizes income for the year ended December 31, 2003 and for the six-month period ended June 30, 2004 and sets out the allocation of the above mentioned adjustments to each income statement account:

Balances atEffect of 2003 Balances at 12/31/2003 6/30/2004 adjustments 12/31/2003 6/30/2004 as reported as reported recorded in2004 (pro forma) (pro forma) Net sales ...... 1,061,093 486,893 — 1,061,093 486,893 Cost of products and services sold .... (542,978) (313,247) (14,110) (557,088) (299,137) Gross profit ...... 518,115 173,646 (14,110) 504,005 187,756 Operating income (expense): Selling ...... (217,310) (101,840) (1,463) (218,773) (100,377) General and administrative ...... (61,561) (29,704) — (61,561) (29,704) Interest expense ...... (126,917) (48,865) (10,880) (137,797) (37,985) Interest income ...... 84,351 35,610 — 84,351 35,610 Equity pickup ...... 45,071 ——45,071 — Directors’ fees ...... (240) (120) — (240) (120) Other operating income ...... 23,413 10,542 — 23,413 10,542 Other operating expense ...... (3,051) (5,583) (2,713) (5,764) (2,870) Operating income (expense) ...... 261,871 33,686 (29,166) 232,705 62,852 Non-operating income ...... (203) 157 — (203) 157 Pretax income ...... 261,668 33,843 (29,166) 232,502 63,009 Income and social contribution taxes Current ...... (57,840) (19,082) — (57,840) (19,082) Deferred ...... 14 9,487 8,218 8,232 1,269 Minority interest ...... (621) ——(621) — Adjusted net income ...... 203,221 24,248 (20,948) 182,273 45,196

b) Consolidated Financial Statements The financial statements were prepared in conformity with the provisions in Brazil’s Corporation Law. The consolidated financial statements were prepared in conformity with the consolidation principles provided for Brazil’s Corporation Law and norms established by the CVM—Brazilian Securities Commission, including the financial statements of Company Grendene S.A. and the subsidiaries mentioned in Note 9.

F-9 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

2. Basis for Preparation and Presentation of the Financial Statements (Continued) During the process of consolidation of the financial statements, all balances linked to operations involving assets and liabilities, income and expenses, deriving from business transactions between the consolidated companies, were eliminated as well as the subsidiary investment against the shareholders’ equity of the subsidiaries. The reconciliation of the subsidiary’s operating result and shareholders’ equity, and the consolidated balances, comprise the following:

Net icome Shareholders’ equity 2004 2003 2004 2003 Company ...... 27,855 203,131 724,629 692,726 Unrealized profit from property, plant and equipment sale .... — 90 — — Unrealized profit from inventories ...... (3,607) — (3,607) — Consolidated ...... 24,248 203,221 721,022 692,726

3. Summary of Main Accounting Practices

a) Operating result Revenues and expenses are recorded on the accrual basis. b) Short-term investments Short-term investments are stated at investment value plus earnings to the balance sheet date, not exceeding market value. c) Allowance for doubtful accounts Constituted up to the limit considered sufficient to cover possible losses resulting from the realization of accounts receivable and other credits. d) Provision for discounts granted for payments made on the due date Constituted at discount amounts that are estimated to be granted in relation to trade accounts receivable, for the payments made within the respective due dates. e) Inventories Inventories of finished products and work in process are valued at the tax criterion which determines that finished products should be stated at 70% of the cash sales price at the balance sheet date, whereas work in process should be stated at 80% of the finished products value, as previously computed. In order to adjust these inventories to their probable average production cost, a provision for devaluation is recorded as mentioned in Note 6. Inventories of raw materials, packaging materials, reselling goods and other inventories are stated at average acquisition cost. In both cases the cost should not exceed market value.

F-10 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

3. Summary of Main Accounting Practices (Continued)

f) Investments Investments in subsidiaries are stated by the equity pickup method, based on the shareholders’ equity of subsidiaries computed as of the same base date as that of the Company. The remaining investments are stated at acquisition cost and adjusted to market value, whenever applicable. The financial statements of direct and indirect subsidiaries abroad were prepared in their respective local currencies, converted into U.S. dollars and subsequently converted into reais at the official exchange rate on the balance sheet date, as follows: R$3.1067 / US$1.00 at June 30, 2004 (R$ 2.884 / US$ 1.00 at December 31, 2003). g) Property, plant and equipment Stated at acquisition or construction and revaluation cost, adjusted by accumulated depreciation and calculated by the straight-line method at rates that take into consideration the estimated useful life of assets, as mentioned in Note 10. h) Financial institutions Loans and financing are monetarily corrected by the incurred monetary and exchange variations, according to the rates contracted with financial institutions plus interest calculated on a daily pro rata basis to the balance sheet date. Monetary and exchange variations and interest are charged to financial expenses in the operating result. i) ICMS tax related loans Represented by loan installments granted to the Company for purposes of settling ICMS tax debts, not entitled to incentives and which should be paid on different due dates. The loan installments subject to incentives (see Note 12) are directly recorded as credit in the shareholders’ equity account, under tax the incentives sub-account, at the time the referred loans (which are considered investment grants) are obtained. j) Income and social contribution taxes Income and social contribution taxes are calculated according to the current legislation for each base period. Grendene S.A. receives income tax incentives due to its establishment in the northeastern region of the country. These incentives are granted via exemption or reduction of the tax amount due, calculated based on the result of the activities subject to these incentives. The referred tax amounts are recorded as if normally due and subsequently deducted from liabilities against the account ‘‘tax incentives reserve’ in shareholders’ equity. The tax exemption Rule will expire during calendar year 2012. Deferred income and social contribution taxes are calculated on temporary differences. k) Other assets and liabilities These are recorded at known or estimated amounts, including restatement to balance sheet date, when applicable.

F-11 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

4. Short-term Investments These mainly represent variable interest investments remunerated, on average, by 100% of the CDI variation. Investments are maintained with first-rate banks, have several maturities and may be redeemed at any one time.

5. Accounts Receivable

Company Consolidated 2004 2003 2004 2003 Falling due ...... 244,978 335,503 236,137 321,302 Overdue up to 30 days ...... 3,458 4,600 6,648 5,136 Overdue from 31 to 60 days ...... 400 1,994 1,777 2,936 Overdue from 61 to 90 days ...... 335 678 1,245 1,062 Overdue from 91 to 180 days ...... 2,324 393 2,755 2,360 251,495 343,168 248,562 332,796 Exchange advances ...... — (30,608) — (30,608) Allowance for doubtful accounts ...... (2,243) — (2,243) — Provision for discounts on payments made on due date ...... (8,639) — (8,639) — 240,613 312,560 237,680 302,188

6. Inventories

Company Consolidated 2004 2003 2004 2003 Finished products ...... 15,950 15,595 28,966 34,513 Work in process ...... 21,674 29,341 21,674 29,341 (-) Provision for adjustment to probable production cost ..... (8,626) — (8,626) — 28,998 44,936 42,014 63,854 Raw material ...... 33,907 42,244 33,907 42,244 Packaging material ...... 8,881 11,377 8,881 11,377 Intermediate materials and others ...... 36,117 36,011 36,874 36,011 Advances to suppliers ...... 10,132 9,163 10,132 9,163 Imports in transit ...... 3,943 2,503 3,943 2,503 (-) Provision for adjustment to obsolete inventories ...... (3,363) — (3,363) — 118,615 146,234 132,388 165,152

F-12 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS June 30, 2004 and December 31, 2003 (In thousands of reais)

7. Recoverable Taxes

Company Consolidated 2004 2003 2004 2003 Income and social contribution tax prepayment ...... 1,098 2,813 2,643 3,999 Federal VAT (IPI) recoverable ...... 2,129 806 2,129 806 State VAT (ICMS) recoverable ...... 1,801 3,490 1,801 3,490 Social Integration Tax (PIS) recoverable ...... — 5,862 — 5,862 Social Contribution on Corporate Revenue (COFINS) ...... 1,485 — 1,485 — 6,513 12,971 8,058 14,157

Income and social contribution tax prepayment This corresponds to withholding income tax on financial investments, and income and social contribution tax prepayments offset against Federal taxes and contributions.

ICMS and IPI recoverable Balances came from commercial operations and may be offset against the same type of taxes. Management estimates that realization of these tax credit rights will occur substantially by year-end and will not entail any losses.

COFINS Credits computed on the purchase of inputs for industrial processing and opening inventories, pursuant to Law No. 10833 dated February 2004.

8. Credits Receivable This account records receivables from third parties whose amounts are restated at various indexes according to contractual covenants. R$18,804 of the amount recorded in consolidated comprises credits receivable by subsidiary Saddle Corporation from third parties fully settled on July 30, 2004.

9. Investments At June 30, 2004 and December 31, 2003, Company investments were as follows:

Company Consolidated 2004 2003 2004 2003 Subsidiaries ...... 56,296 48,664 — 1,170 Eletrobras´ credit rights ...... 894 894 894 894 Properties on sale ...... 870 887 870 887 Other interests ...... — 78 — 78 58,060 50,523 1,764 3,029

F-13 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

9. Investments (Continued) Investments in subsidiaries comprise the following: a) Direct subsidiaries 2004 2003 Income for the Shareholders’ six-month Ownership Capital equity period interest Equity pickup Investment Equity pickup Investment Consolidated Grendene Cal¸cados S.A.(1) ...... —— —— — —97,881 — Saddle Corporation S.A. 31,378 56,296 3,954 100.00% 7,632 56,296 4,693 48,664 Total ...... 7,632 56,296 102,574 48,664

(1) Company merged on August 1, 2003 (see Note 1). Equity pickup in the subsidiary at June 30, 2004 includes a positive amount of R$3,678 (negative amount of R$ 8,018 in 2003) concerning effects from exchange variation caused by converting into reais the subsidiary’s financial statements originally prepared in U.S. dollars. The effect of the foreign exchange variation on investments shown in the consolidated P&L statement is recorded under financial income (expenses). In 2003, equity pickup for Grendene Cal¸cados S.A. was based on the R$37,443 result that had been calculated during the period from January 1, 2003 through July 31, 2003; on shareholders’ equity increase flowing from ICMS incentive amounts of R$35,283 and from income tax amounting to R$9,790; and on reversals of the adjustments made in 2002 amounting to R$15,987 due to unaccounted provisions, as commented on below. b) Indirect subsidiaries Through subsidiary Saddle Corporation S.A., Company also holds the following indirect investments: 2004 2003 Paid-in Six- capital months’ Ownership monetarily Shareholders’ operating interest Equity Invest- Equity Invest- adjusted equity result % pickup ment pickup ment Consolidated Grendha Shoes Corporation ...... 1,554 22,815 4,471 100.00% 5,760 22,815 11,115 17,055 Saddle Calzados S/A(a) ...... 210 (637) (872) 100.00% (235) — 83 95 Subtotal ...... 5,525 22,815 11,198 17,150 Not consolidated Reebok Chile S.A.(b) ...... ——————(2) 1,065 VDA Calzados A.D.(b) ...... ——————— 106 Subtotal ...... ——(2) 1,171 Total ...... 5,525 22,815 11,196 18,321 a) The provision for capital deficiency amounting to R$637 was set up by parent company Saddle Corporation S.A. b) Investment sold at June 2004.

F-14 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

9. Investments (Continued) Equity pickup in subsidiary Grendha Shoes Corp. includes a positive amount of R$1,289 (negative amount of R$1,221 in 2003) concerning effects from foreign exchange variation caused by translating into reais the financial statements of that subsidiary originally prepared in U.S. dollars. Foreign exchange gains on investments are recorded in financial income. The investments account movement comprises the following:

Company Consolidated 2004 2003 2004 2003 Balances at beginning of period/year ...... 50,523 468,930 3,029 2,926 Investment additions ...... — 875 — 105 Investment write-offs/appropriation ...... (95) (500,112) (1,265) — Equity pickup ...... 7,632 102,574 — 45,071 Income and social contribution tax incentives ...... — — — (45,073) Dividends received ...... — (21,744) — — Balances at the end of the period/year ...... 58,060 50,523 1,764 3,029

In addition to equity pickup negative R$2 calculated for unconsolidated indirect subsidiaries, the ‘‘equity pickup’’ account also includes R$45,073 stemming from shareholders’ equity increase caused by income tax incentives and a decrease in ICMS tax related loans (Note 12). These amounts are also considered equity pickup gains in the consolidated income statements for 2003.

10 Property, Plant and Equipment

Company Annual 2004 2003 depreciation Accumulated Accumulated rates Cost depreciation Net Cost depreciation Net Land...... — 2,291 — 2,291 3,384 — 3,384 Buildings ...... 4% 120,694 (35,439) 85,255 125,200 (35,637) 89,563 Machines and equipment ...... 20% 105,153 (70,425) 34,728 103,611 (62,714) 40,897 Installations ...... 10% 20,104 (5,863) 14,241 19,011 (4,909) 14,102 Furniture and fixtures ...... 10% 3,904 (1,646) 2,258 3,586 (1,488) 2,098 Tools ...... 20 871 (595) 276 830 (540) 290 Vehicles ...... 20% 450 (242) 208 478 (242) 236 Data processing equipment ..... 20% 18,497 (9,416) 9,081 17,492 (8,021) 9,471 Other fixed assets ...... 10% 12,570 (2,224) 10,346 11,931 (1,640) 10,291 Fixed assets in progress ...... — 4,802 — 4,802 918 — 918 Imports in process ...... — 366 — 366 327 — 327 Advances to suppliers ...... — 541 — 541 564 — 564 290,243 (125,850) 164,393 287,332 (115,191) 172,141

F-15 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

10 Property, Plant and Equipment (Continued)

Consolidated Annual 2004 2003 depreciation Accumulated Accumulated rates Cost depreciation Net Cost depreciation Net Land...... — 2,291 — 2,291 3,384 — 3,384 Buildings ...... 4% 120,694 (35,439) 85,255 125,200 (35,637) 89,563 Machines and equipment ...... 20% 105,153 (70,425) 34,728 103,611 (62,714) 40,897 Installations ...... 10% 20,104 (5,863) 14,241 19,011 (4,909) 14,102 Furniture and fixtures ...... 10% 4,588 (1,833) 2,755 4,183 (1,625) 2,558 Tools ...... 20% 871 (595) 276 830 (540) 290 Vehicles ...... 20% 450 (242) 208 478 (242) 236 Data processing equipment ..... 20% 19,897 (10,118) 9,779 18,678 (8,538) 10,140 Other fixed assets ...... 10% 12,596 (2,224) 10,372 11,953 (1,640) 10,313 Fixed assets in progress ...... — 4,802 — 4,802 918 — 918 Imports in process ...... — 366 — 366 327 — 327 Advances to suppliers ...... — 541 — 541 564 — 564 292,353 (126,739) 165,614 289,137 (115,845) 173,292

In prior years, Company’s property, plant and equipment assets were revalued based on appraisal reports issued by qualified appraisers. The balances related to these revaluations are summarized as follows:

Company and Consolidated 2004 2003 Land...... 664 1,757 Buildings and improvements ...... 9,769 13,894 10,433 15,651 (-)Accumulated depreciation ...... (4,805) (7,013) 5,628 8,638

In June 2004 the Company reversed to revaluation reserve in shareholders’ equity the residual amount of the revaluation reserve amounting to R$2,759, based on a specialized study that detected that the provision then recorded needed to be adjusted.

F-16 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

11. Financial Institutions

Company Consolidated Interest rates Index (p.a.) 2004 2003 2004 2003 Short term: Fixed assets Banco do Nordeste S.A...... Pre-fixed 10.50% 30 887 30 887 Total short term ...... 30 887 30 887 Long-term: Fixed assets Banco do Nordeste S.A...... Pre-fixed 10.50% 55,524 55,524 55,524 55,524 Total long term ...... 55,524 55,524 55,524 55,524 55,554 56,411 55,554 56,411

The guarantees linked to loans and financing are as follows: a) statutory lien over purchased machinery and equipment; b) land; and c) personal security provided by Company directors. Long-term installments are classified as per the maturity year:

Maturity R$ 2005 ...... 4,627 2006 ...... 9,254 2007 ...... 9,254 2008 ...... 9,254 2009 ...... 9,254 2010 ...... 9,254 2011 ...... 4,627 55,524

During the six-month period the Company recorded R$1,975 (R$7,371 in 2003) as administrative expenses corresponding to the installments of an aircraft leasing contract entered into on January 9, 1997.

12. ICMS Tax Related Loans Company is entitled to tax incentives granted by the State Government of Ceara´ up to 2019 due to the activities carried out in that Brazilian state through loans obtained from Banco do Estado do Ceara´ S.A. These loans are based on the ICMS (State VAT) tax due and partly on the tax on exports, as computed monthly. Loans must be settled within a period ranging from 36 to 60 months after granting and, according to the respective granting clauses, amounts due will be reduced by 75% to 99% in relation to the total borrowed, depending on the contract terms. Management believes that recording the benefit at the time the loans are obtained reflects the accrual method of accounting for the year more adequately, as the cost derived from ICMS tax on the operations subject to incentives is also being concomitantly recorded with the benefits.

F-17 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

12. ICMS Tax Related Loans (Continued) During the six-month period ended June 30, 2004, the Company recorded an equity increase due to the tax incentive portion of these financings amounting to R$38,471. For the year ended December 31, 2003 equity increase from these tax incentive portion amounted to R$78,277, and R$35,283 was recorded in shareholders’ equity of subsidiary Grendene Cal¸cados S.A., merged on August 1, 2003, and R$42,994 in shareholders’ equity of Grendene S.A. The amounts recorded in subsidiary Grendene Cal¸cados S.A. between January 1 and July 31, 2003 were recognized in parent company as equity pickup. At June 30, 2004 the non-incentive amounts of these financings amounting to R$15,282 (R$13,881 in 2003) and R$67,835 (R$61,923 in 2003), respectively, are recorded in current and noncurrent liabilities.

13. Provision for Contingencies Company has been involved as Defendant in several labor claims. Based on counsel’s opinion, who consider the chances of unfavorable outcome as probable, Company recorded a provision to cover possible losses deriving from these cases. In 2003, Company secured a favorable decision with the Taxpayers’ Board with regard to a R$9,300 suit concerning a delinquency notice served for undue offsetting of Social Contribution on Corporate Revenues (COFINS). The R$9,300 that had been deposited into a court account until then (December 15, 2003) were drawn by Company. The difference between the amount returned to Company and the original amounts under which the deposits had been recorded in accounting (R$3,540) was recognized in the ‘‘financial income’’ account in the income statement for 2003.

14. Shareholders’ Equity a) Capital By way of a Special Meeting held on August 1, 2003, approval was given to a capital increase in the amount of R$5,877, to be effected through the issue of 383,101 common registered shares in the amount of R$15.34 each. At June 30, 2004, capital fully owned by shareholders domiciled in Brazil comprised 34,811,411 common shares at par value of R$3.95 each. Capital shares are of a sole class regarding the nature of the respective owners’ rights and are all voting, observing the legal conditions. b) Dividends As per Company’s bylaws, minimum compulsory dividends are computed based on 25% of the remaining net income for the year, once reserves required by law have been set up. For the six-month period ended June 30, 2004 the Company has distributed dividends in the amount of R$36,770 out of net income for the year ended December 31, 2003. Interim dividends amounting to R$17,121 were distributed out of net income for the year ended December 31, 2003.

F-18 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

14. Shareholders’ Equity (Continued) c) Retained earnings Company management is proposing ad referendum of approval from the Extraordinary Shareholders’ Meeting the retention of the remaining balance of retained earnings to maintain the Company’s working capital through capitalization.

15. Income and Social Contribution Taxes Current income and social contribution taxes

Income and social contribution tax payable are recorded in current liabilities under the heading taxes, charges and contributions, net of offsets made in the period and tax incentives, as set out below:

2004 Company Consolidated Social Social Income tax Contribution Income tax Contribution Amount due ...... 11,925 4,403 14,679 4,403 Tax incentives ...... (5,102) — (5,102) — Offsets ...... (6,053) (3,601) (6,053) (3,601) 770 802 3,524 802

2003 Company Consolidated Social Social Income tax Contribution Income tax Contribution Amount due ...... 21,946 7,982 44,360 13,480 Tax incentives ...... (20,713) — (20,713) — Offsets ...... (1,233) (7,982) (16,203) (13,480) ——7,444 —

F-19 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

15. Income and Social Contribution Taxes (Continued) Deferred income and social contribution taxes Deferred income and social contribution taxes are as follows: Company Consolidated 2004 2003 2004 2003 Deferred charges: Income tax Allowance for doubtful accounts ...... 561 — 561 — Provision for discounts on payments made on due date ...... 2,160 — 2,160 — Provision for adjustment to probable production cost ...... 2,157 — 2,157 — Provision for adjustment of obsolete inventory ...... 841 — 841 — Other ...... 936 — 1,661 306 6,655 — 7,380 306 Social contribution tax Allowance for doubtful accounts ...... 202 — 202 — Provision for discounts on payments made on the due date ...... 778 — 778 — Provision for adjustment to probable production cost ...... 776 — 776 — Provision for adjustment of obsolete inventory ...... 303 — 303 — Other ...... 345 — 345 — 2404 — 2404 — 9,059 — 9,784 306 Deferred liabilities Income tax ...... — — 283 292 — — 283 292

Reconciliation of Tax Expenses with Official Rates Income and social contribution taxes calculated according to official rates have been reconciled with the amounts recorded as income and social contribution tax expenses, as follows: 2004 Company Consolidated Social Social Income contribution Income contribution tax tax tax tax Net income before taxes ...... 35,124 35,124 33,843 33,843 Income and social contribution taxes (25% and 9%) ...... (8,781) (3,161) (8,461) (3,046) Positive equity pickup ...... 1,908 686 1,908 686 Permanent additions ...... (246) (89) (246) (89) IRPJ tax incentives ...... 282 ——— Others ...... 1,567 565 (797) 450 Amount recorded in the operating result ...... (5,270) (1,999) (7,596) (1,999)

F-20 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2004 and December 31, 2003 (In thousands of reais)

15. Income and Social Contribution Taxes (Continued)

2003 Company Consolidated Social Social Income contribution Income contribution tax tax tax tax Net income before taxes ...... 233,059 233,059 261,668 261,668 (-) Social contribution tax for the year ...... (7,983) — (13,480) — 225,076 233,059 248,188 261,668 Income and social contribution taxes (25% and 9%) ..... (56,269) (20,975) (62,047) (23,550) Positive equity pickup ...... 25,643 9,231 11,267 8,668 Permanent additions ...... (5,094) (1,116) (775) (280) Offsetting against taxes paid overseas by subsidiaries .... 4,997 1,799 —— Offsetting against income (IRPJ) and social contribution (CSLL) tax losses ...... 6,092 2,358 —— IRPJ tax incentives ...... 663 — 5,178 — Others ...... 2,023 720 2,031 1,682 Amount recorded in the operating result ...... (21,945) (7,983) (44,346) (13,480)

16. Financial Result

Company Consolidated 2004 2003 2004 2003 Financial expenses Discounts granted on costumers ...... (23,327) (22,866) (23,327) (43,399) Financing expenses ...... (8,874) (6,364) (8,874) (15,451) Exchange variation expenses ...... (3,167) (11,455) (3,167) (54,792) Setup of provision for discount for payment on due date .... (8,639) — (8,639) — Other financial expenses ...... (4,191) (7,611) (4,858) (13,275) (48,198) (48,296) (48,865) 126,917 Financial income Income from investments ...... 15,074 6,423 15,074 20,153 Interest received from customers ...... 1,407 697 1,407 2,117 Exchange variation income ...... 13,370 20,879 17,048 46,689 Other financial income ...... 1,519 13,200 2,081 15,392 31,370 41,199 35,610 84,351 Net financial result ...... (16,828) (7,097) (13,255) (42,566)

F-21 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS June 30, 2004 and December 31, 2003 (In thousands of reais) (Continued)

17. Financial Instruments Company has certain operations that may be directly construed as ‘‘Financial Instruments,’’ as recorded in assets and liabilities. The Company’s policy does not address engaging swap operations or others that may be featured as derivatives. Only a few contracts of this nature the Company entered into involve hedges in immaterial amounts (approximately US$6,500 thousand at June 30, 2004) whose changes, if any, are recognized by the accrual method of accounting. Up to June 30, 2004 the Company recorded R$3,535 gains on such operations, net of costs. Company’s financial instruments and criteria for assessing their fair market value are as follows: • Cash and cash equivalents—amounts stated in the balance sheet are formed by amounts available in the current account at the date of the balance sheet and they are thus posted at their fair market value. • Accounts receivable and payable—amounts stated in the balance sheet are close to their fair market value, when considering the allowances set up, and the lack of monetary adjustment for the portion of accounts receivable that has already become due. • Short-term investments—short-term operations that do not contemplate the possibility of losses for the Company. Interest rates used are similar to those in similar operations. • Loans and Financing—as shown in Note 11, charges are recognized on a pro rata die basis up to the balance sheet date. These operations do not pose additional risk to the Company. • Other accounts—Management is unaware of any other account that might translate into material differences between the amounts recorded and fair market value at June 30, 2004. To date management is also unaware of any material fact or subsequent event that might significantly impact on amounts recorded.

18. Related Party Transactions

Company Consolidated 2004 2003 2004 2003 Current assets Sales receivable Grendha Shoes Corp...... 9,050 17,267 — - Saddle Calzados S.A...... 1,829 5,858 — - Vulcabras´ do Nordeste S.A...... 64 — 64 — 10,943 23,125 64 — Other receivables Kevlin Corp. S.A...... — — 1,274 — Grending S.A...... — — 321 293 — — 1,595 293 Total assets ...... 10,943 23,125 1,659 293

F-22 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS June 30, 2004 and December 31, 2003 (In thousands of reais) (Continued)

18. Related Party Transactions (Continued)

Company Consolidated 2004 2003 2004 2003 Current liabilities Purchases payable Tela Sul S.A...... 200 — 200 — Vulcabras´ do Nordeste S.A. 7 — 7 — 207 — 207 — Total liabilities ...... 207 — 207 — Statement of income Sales and service provision Grendha Shoes Corp...... 6,218 46,553 — — Saddle Calzados S.A...... 1,827 5,883 — — Vulcabras´ do Nordeste S.A...... 1,964 — — — Telasul S.A...... 217 — — — 10,226 52,436 — —

Related party purchases and sales are carried out at the same prices and deadlines as those with third parties. The Company is the guarantor of some loan agreements entered into by Vulcabras´ do Nordeste S.A., which is controlled by a shareholder of Grendene S.A. The agreements expire between 2005 and 2011 and amount to R$74,643 at June 30, 2004.

19. Insurance The Company’s policy consists of taking out insurance in amounts deemed sufficient to cover disasters in its industrial plants, if any.

F-23 Financial Statements

Grendene S.A. and Subsidiaries

Years ended December 31, 2003 and 2002 with Report of Independent Auditors

F-24 GRENDENE S.A. AND SUBSIDIARIES FINANCIAL STATEMENTS December 31, 2003 and 2002

Contents

Report of Independent Auditors ...... F-26 Audited Financial Statements Balance Sheets ...... F-27 Statements of Income ...... F-29 Statements of Shareholders’ Equity ...... F-30 Statements of Changes in Financial Position ...... F-31 Notes to Financial Statements ...... F-32

F-25 A free translation from Portuguese into English of Report of Independent Auditors on financial statements in accordance with the accounting practices adopted in Brazil

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders Grendene S.A. 1. We have audited the accompanying balance sheets of Grendene S.A. and the consolidated balance sheets of Grendene S.A. and subsidiaries as of the years ended December 31, 2003 and 2002 and the related statements of income, shareholders’ equity and changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements. The audits of the financial statements of the indirect subsidiary Grendha Shoes Corp. for the years ended December 31, 2003 and 2002 were conducted by other independent auditors. Our opinion, insofar as it relates to the amount of this investment amounting to R$17,055 thousand (R$5,940 thousand in 2002) and the equity pickup arising therefrom amounting to R$11,115 thousand (R$1,797 thousand in 2002), is based solely on the reports issued by those independent auditors. 2. Except for the matter mentioned in paragraph three below, our audits were conducted in accordance with generally accepted auditing standards in Brazil, which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company; (b) the examination, on a test basis, of documentary evidence and accounting records supporting the amounts and disclosures in the financial statements; and (c) an assessment of the accounting practices used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation. 3. The financial statements of the indirect subsidiary Reebok Chile S.A., as mentioned in Note 7 to the financial statements, whose investment amounts to R$1,065 thousand (R$1,067 in 2002) and negative equity pickup amounts to R$2 thousand (R$102 thousand negative in 2002), were not examined by independent auditors. As a consequence, we could not express an opinion on the fairness of the amount of such investment on those dates and of the related results recorded for the years ended December 31, 2003 and 2002 based on the amount of shareholders’ equity of that Company. 4. In our opinion, based on our examinations and on the opinion issued by other independent auditors, and except for the adjustments that might arise from the examination of the investments mentioned in paragraph three, the financial statements referred to in paragraph one present fairly, in all material respects, the financial position of Grendene S.A. and the consolidated financial position of Grendene S.A. and subsidiaries at December 31, 2003 and 2002, the results of its operations, changes in its shareholders’ equity and changes in its financial position for the years then ended, in accordance with the accounting practices adopted in Brazil.

Porto Alegre (Brazil), March 10, 2004.

ERNST & YOUNG Auditores Independentes S.S. CRC-2 SP 15.199/O-6/S/RS

Marcos A. Quintanilha Americo´ F. Ferreira Neto Accountant CRC1SP132776/O-3/T-SC/S-CE Accountant CRC1SP192685/O-9/S-CE

F-26 A free translation from Portuguese into English of financial statements in accordance with the accounting practices adopted in Brazil

GRENDENE S.A. AND SUBSIDIARIES BALANCE SHEETS December 31, 2003 and 2002 (In thousands of reais)

Company Consolidated 2003 2002 2003 2002 ASSETS Current assets Cash and cash equivalents ...... 11,469 196 29,310 18,916 Short term investments ...... 189,711 — 216,828 192,633 Accounts receivable ...... 312,560 — 302,188 230,253 Inventories ...... 146,234 — 165,152 116,755 Recoverable taxes ...... 12,971 3,259 14,157 10,641 Notes receivables ...... 7,557 2,748 7,557 3,784 Other receivables ...... 6,588 166 7,230 5,050 Deferred expenses ...... 1,017 410 1,017 866 Total current assets ...... 688,107 6,779 743,439 578,898 Noncurrent assets Shareholder receivables ...... 1,972 — 1,972 — Judicial deposits ...... 494 6,231 494 6,231 Other receivables ...... 172 640 172 640 2,638 6,871 2,638 6,871 Permanent assets Investments ...... 50,523 468,930 3,029 2,926 Fixed assets ...... 172,141 21,868 173,292 137,968 222,664 490,798 176,321 140,894 Total assets ...... 913,409 504,448 922,398 726,663

F-27 A free translation from Portuguese into English of financial statements in accordance with the accounting practices adopted in Brazil

GRENDENE S.A. AND SUBSIDIARIES BALANCE SHEETS (Continued) December 31, 2003 and 2002 (In thousands of reais)

Company Consolidated 2003 2002 2003 2002 LIABILITIES Current liabilities Financial institutions ...... 887 66,706 887 151,473 ICMS tax related loans ...... 13,881 — 13,881 6,395 Trade accounts payable ...... 25,525 363 25,525 25,551 Provision for commissions ...... 18,444 — 18,513 12,584 Taxes, fees and contributions ...... 4,773 6 11,643 6,910 Salaries and charges payable ...... 28,325 — 28,384 19,546 Provision for freight expense ...... 6,271 — 6,271 2,734 Other debts ...... 5,130 260 7,121 6,367 Total current liabilities ...... 103,236 67,335 112,225 231,560 Noncurrent liabilities Financial institutions ...... 55,524 — 55,524 744 ICMS tax related loans ...... 61,923 — 61,923 52,354 117,447 — 117,447 53,098 Minority interest ...... — — — 4,982 Shareholders’ Equity Paid-in capital ...... 137,477 131,600 137,477 131,600 Revaluation reserve ...... 2,815 2,979 2,815 2,979 Capital reserve ...... 63,707 — 63,707 — Profit reserve ...... 27,495 26,320 27,495 26,320 Retained earnings ...... 461,232 276,214 461,232 276,124 692,726 437,113 692,726 437,023 Total liabilities ...... 913,409 504,448 922,398 726,663

See accompanying notes.

F-28 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF INCOME Years ended December 31, 2003 and 2002 (In thousands of reais, except per share information)

Company Consolidated 2003 2002 2003 2002 Gross sales revenue ...... 688,000 — 1,276,365 906,978 Sales deductions ...... (114,070) — (215,272) (151,792) Net sales revenue ...... 573,930 — 1,061,093 755,186 Cost of products sold ...... (294,986) — (542,978) (421,979) Gross profit ...... 278,944 — 518,115 333,207 Operating income (expenses) Selling expenses ...... (120,052) (168) (217,310) (171,587) General and administrative expenses ...... (29,033) (10,611) (61,561) (46,017) Financial expenses ...... (48,296) (45,628) (126,917) (142,387) Financial income ...... 41,199 17,084 84,351 95,411 Equity pickup ...... 102,574 154,013 45,071 76,424 Management fees ...... (114) (24) (240) (240) Other operating income ...... 8,743 2,157 23,413 10,652 Other operating expenses ...... (451) (511) (3,051) (2,258) (45,430) 116,312 (256,244) (180,002) Operating result ...... 233,514 116,312 261,871 153,205 Nonoperating result ...... (455) 2 (203) 525 Income before income taxes and minority interest ...... 233,059 116,314 261,668 153,730 Provision for income tax ...... (21,945) — (44,346) (26,442) Provision for social contribution tax ...... (7,983) — (13,480) (9,409) Minority interest ...... — — (621) (717) Net income ...... 203,131 116,314 203,221 117,162 Earnings per share (in reais) ...... 5.84 3.37

See accompanying notes.

F-29 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF SHAREHOLDERS’ EQUITY Years ended December 31, 2003 and 2002 (In thousands of reais)

Revaluation Revenue reserve Capital reserve reserve Paid-in Own Tax Legal Retained capital assets incentive reserve earnings Total Balance at December 31, 2001 ...... 131,600 3,143 — 20,654 183,881 339,278 Prior year adjustments ...... — 22 ———22 Realization of revaluation reserve ...... — (186) ——186 — Dividends distributed ...... —— — —(18,501) (18,501) Net income for the year ...... —— — —116,314 116,314 Appropriation of net income: Legal reserve ...... —— —5,666 (5,666) — Balance at December 31, 2002 ...... 131,600 2,979 — 26,320 276,214 437,113 Prior year adjustments ...... — 19 ———19 Realization of revaluation reserve ...... — (183) ——183 — Capital increase ...... 5,877 ————5,877 Dividends distributed ...... —— — —(17,121) (17,121) Investment grant: ICMS...... ——42,994 ——42,994 Income tax ...... ——20,713 ——20,713 Net income for the year ...... —— — —203,131 203,131 Appropriation of net income: Legal reserve ...... —— —1,175 (1,175) — Balance at December 31, 2003 ...... 137,477 2,815 63,707 27,495 461,232 692,726

See accompanying notes.

F-30 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 2003 and 2002 (In thousands of reais)

Company Consolidated 2003 2002 2003 2002 Sources of working capital: From operations: Net income for the year ...... 203,131 — 203,221 117,162 Items not affecting net working capital: Investment disposals ...... 500,112 — — — Property, plant and equipment disposals ...... 654 — 654 986 Result of equity pickup ...... (102,574) — (45,071) (76,424) Depreciation ...... 99,683 — 21,960 20,013 701,006 — 180,764 61,737 From shareholders and third parties: Increase in minority interest ...... — — — 1,211 Income tax and ICMS (Vat) tax incentives ...... 63,707 — 108,780 76,402 Prior year adjustments ...... 19 22 19 22 Decrease in noncurrent assets ...... 4,233 — 4,233 434 Increase in noncurrent liabilities (by merger) ...... 76,326 — — — Increase in noncurrent liabilities ...... 41,121 — 64,349 — Capital increase ...... 5,877 — 5,877 — Dividends from subsidiaries ...... 21,744 33,535 — — 213,027 33,557 183,258 78,069 Total sources of working capital ...... 914,033 33,557 364,022 139,806 Uses of working capital: In operations: Net income for the year ...... — (116,314) — — Items not affecting net working capital Property, plant and equipment disposals ...... — (138) — — Equity pickup ...... — 154,013 — — Depreciation ...... — (489) — — — 37,072 — — Minority interest ...... — — 4,982 — Increase in noncurrent assets ...... — 187 — — Decrease in noncurrent liabilities ...... — 41,767 — 27,883 In investments ...... — — 105 401 In permanent assets (by merger) ...... 138,089 — — — In property, plant and equipment ...... 113,396 867 57,938 20,777 Dividends distributed ...... 17,121 18,501 17,121 18,501 Total use of working capital ...... 268,606 98,394 80,146 67,562 Increase (decrease) in net working capital ...... 645,427 (64,837) 283,876 72,244 Variation in working capital: Current assets At the end of year ...... 688,107 6,779 743,439 578,898 At the beginning of year ...... 6,779 6,416 578,898 347,880 681,328 363 164,541 231,018 Current liabilities At the end of year ...... 103,236 67,335 112,225 231,560 At the beginning of year ...... 67,335 2,135 231,560 72,786 35,901 65,200 (119,335) 158,774 Increase (decrease) in net working capital ...... 645,427 (64,837) 283,876 72,244

See accompanying notes.

F-31 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS December 31, 2003 and 2002 (In thousands of reais)

Net assets merged include the result verified on the period from January 1 to July 31, 2003 and are as follows: Net sales revenue ...... 455,632 Cost of services ...... (261,808) Operating expenses ...... (136,146) Other nonoperating revenues (expenses), net ...... 162 Income and social contribution tax ...... (20,397) Net income for the period ...... 37,443

According to the above-mentioned merger, comparison of the Company’s financial statements has been rendered inaccurate and is now only possible through the consolidated financial statements.

2. Basis for Preparation and Presentation of the Financial Statements The financial statements are prepared in accordance with the provisions of Brazil’s Corporation Law. The consolidated financial statements were prepared in conformity with the consolidation principles provided for Brazil’s Corporation Law and norms established by the CVM—Brazilian Securities Commission, including the financial statements of Company Grendene S.A. and the subsidiaries mentioned in Note 7. During the process of consolidation of the financial statements, all balances linked to operations involving assets and liabilities, income and expenses, deriving from business transactions between the

F-32 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

2. Basis for Preparation and Presentation of the Financial Statements (Continued) consolidated companies, were eliminated as well as the subsidiary investment against the shareholders’ equity of the subsidiaries. The reconciliation of the subsidiary’s operating result and shareholders’ equity, and the consolidated balances, comprise the following:

Shareholders’ Net income equity 2003 2002 2003 2002 Company ...... 203,131 116,314 692,726 437,113 Unrealized profit from property, plant and equipment sale . . . 90 848 — (90) Consolidated ...... 203,221 117,162 692,726 437,023

3. Summary of Main Accounting Practices a) Operating result

Revenues and expenses are recorded on the accrual basis.

b) Short-term investments

Short-term investments are stated at investment value plus earnings to the balance sheet date, not exceeding market value.

c) Allowance for doubtful accounts

Constituted up to the limit considered sufficient to cover possible losses resulting from the realization of accounts receivable and other credits.

d) Provision for discounts granted for payments made on the due date

Constituted at discount amounts that are estimated to be granted in relation to trade accounts receivable, for the payments made within the respective due dates.

e) Inventories

Inventories of finished products and work in process are valued at the tax criterion which determines that finished products should be stated at 70% of the cash sales price at the balance sheet date, whereas work in process should be stated at 80% of the finished products value, as previously computed. In order to adjust these inventories to their probable average production cost, a provision for devaluation is recorded as mentioned in Note 5. Inventories of raw materials, packaging materials, reselling goods and other inventories are stated at average acquisition cost.

F-33 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

3. Summary of Main Accounting Practices (Continued) In both cases the cost should not exceed market value.

f) Investments

Investments in subsidiaries are stated by the equity pickup method, based on the shareholders’ equity of subsidiaries computed as of the same base date as that of the Company. The remaining investments are stated at acquisition cost and adjusted to market value, whenever applicable. The financial statements of direct and indirect subsidiaries abroad were prepared in their respective local currencies, converted into U.S. dollars and subsequently converted into reais at the official exchange rate on the balance sheet date, as follows: R$2.8884 / US$1.00 at December 31, 2003 (R$ 3.5325 / US$ 1.00 at December 31, 2002).

g) Property, plant and equipment

Stated at acquisition or construction and revaluation cost, adjusted by accumulated depreciation and calculated by the straight-line method at rates that take into consideration the estimated useful life of assets, as mentioned in Note 8.

h) Financial institutions

Loans and financing are monetarily corrected by the incurred monetary and exchange variations, according to the rates contracted with financial institutions plus interest calculated on a daily pro rata basis to the balance sheet date. Monetary and exchange variations and interest are charged to financial expenses in the operating result.

i) ICMS tax related loans

Represented by loan installments granted to the Company for purposes of settling ICMS tax debts, not entitled to incentives and which should be paid on different due dates. The loan installments subject to incentives (see Note 10) are directly recorded as credit in the shareholders’ equity account, under tax the incentives sub-account, at the time the referred loans (which are considered investment grants) are obtained.

j) Income and social contribution tax

Income and social contribution taxes are calculated according to the current legislation for each base period. Grendene S.A. receives income tax incentives due to its establishment in the northeastern region of the country. These incentives are granted via exemption or reduction of the tax amount due, calculated based on the result of the activities subject to these incentives. The referred tax amounts are recorded as if normally due and subsequently deducted from liabilities against the account ‘‘tax

F-34 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

3. Summary of Main Accounting Practices (Continued) incentives reserve’ in shareholders’ equity. The tax exemption Rule will expire during calendar year 2012.

k) Other assets and liabilities

Recorded at known or estimated nominal amounts, monetarily restated to the balance sheet date, whenever applicable.

4. Accounts Receivable

Company Consolidated 2003 2002 2003 2002 Customer invoices ...... 343,168 — 332,796 253,982 Exchange advances ...... (30,608) — (30,608) (13,906) Allowance for doubtful accounts ...... — — — (1,396) Provision for discounts on payments made on the due date ...... — — — (8,427) 312,560 — 302,188 230,253

5. Inventories

Company Consolidated 2003 2002 2003 2002 Finished products ...... 15,595 — 34,513 11,536 Work in process ...... 29,341 — 29,341 11,976 (-)Provision for adjustment to production cost ...... — — — (6,164) Sub-total ...... 44,936 — 63,854 17,348 Raw material ...... 42,244 — 42,244 53,982 Packaging material ...... 11,377 — 11,377 7,117 Intermediate materials and others ...... 36,011 — 36,011 28,895 Advances to suppliers ...... 9,163 — 9,163 8,448 Imports in process ...... 2,503 — 2,503 965 146,234 — 165,152 116,755

F-35 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

6. Recoverable Taxes

Company Consolidated 2003 2002 2003 2002 Income and social contribution tax prepayment ...... 2,813 1,643 3,999 4,219 Recoverable Federal VAT (IPI) ...... 806 — 806 2,013 Recoverable State VAT (ICMS) ...... 3,490 — 3,490 2,168 Recoverable Social Integration Tax (PIS) ...... 5,862 1,616 5,862 2,241 12,971 3,259 14,157 10,641

Recoverable PIS In 2003, the Company posted R$11,621 as operating revenue to the statement of income. This amount stems from a tax lawsuit filed against the Federal Government with a view to recovering PIS amounts paid in excess. As at December 31 2003, R$5,759 had been offset against this type of taxes.

Recoverable ICMS and IPI Balances came from commercial operations and may be offset against the same type of taxes. Management estimates that realization of these tax credit rights will occur substantially during the next fiscal year, and will not entail any losses.

7. Investments At December 31, 2003 and 2002, Company investments were as follows:

Company Consolidated 2003 2002 2003 2002 Subsidiaries ...... 48,664 467,947 1,170 1,067 Eletrobras´ credit rights ...... 894 883 894 894 Property on sale ...... 887 22 887 887 Other interests ...... 78 78 78 78 50,523 468,930 3,029 2,926

F-36 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

7. Investments (Continued) Investments in subsidiaries comprise the following: a) Direct subsidiaries

2003 2002 Shareholders’ Year’s Ownership Equity Invest- Equity Invest- Capital Equity Income interest % pickup ment pickup ment Consolidated Grendene Cal¸cados S.A.(1) ...... ————97,881 — 137,476 423,976 Saddle Corporation ...... 29,173 48,664 12,711 100.00% 4,693 48,664 16,537 43,971 Total ...... 102,574 48,664 154,013 467,947

(1) Company merged on August 1, 2003 (see Note 1). In 2003, equity pickup for Grendene Cal¸cados S.A. was based on the R$37,443 result that had been calculated during the period from January 1, 2003 through July 31, 2003 on shareholders’ equity increase flowing from ICMS and Income Tax incentives (R$45,073) and on reversal of the adjustments made in 2002 (R$15,987). The latter stem from unaccounted provisions, as commented below. In 2002, the investment in Grendene Cal¸cados S.A. was determined based on shareholders’ equity (duly adjusted by R$15,987—relating to provisions unaccounted by parent company but made when calculating equity pickup with a view to adjusting the same to Company’s own accounting principles). Equity pickup in Saddle Corporation at December 31, 2003 includes a negative amount of R$8,018 (R$14,344 in 2002) concerning effects from exchange variation caused by converting Saddle Corporation’s financial statements into reais (statements had originally been prepared in US$). b) Indirect subsidiaries Through subsidiary Saddle Corporation S.A., Company also holds the following indirect investments:

2003 2002 Paid-in capital Year’s monetarily Shareholders’ operating Ownership Equity Invest- Equity Invest- adjusted equity result interest % pickup ment pickup ment Consolidated Grendha Shoes Corporation ...... 1,445 17,055 12,336 100,00%11,115 17,055 1,797 5,940 Saddle Calzados S/A ...... 12 95 83 100,00% 83 95 —— Sub-total ...... 11,198 17,150 1,797 5,940 Not Consolidated Reebok Chile S.A...... 5,468 5,754 286 18,50% (2) 1,065 (102) 1,067 VDA Calzados A.D. S/A ...... 2,093 2,122 — 5,00% — 106 —— Sub total ...... (2) 1,171 (102) 1,067 Total ...... 11,196 18,321 1,695 7,007

F-37 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

7. Investments (Continued) Equity pickup in Grendha Shoes Corp includes a negative amount of R$1,221 concerning effects from exchange variation caused by translating Grendha Shoes Corp’s financial statements into reais (statements had originally been prepared in US$). The investments account movement comprises the following:

Company Consolidated 2003 2002 2003 2002 Balances at beginning of year ...... 468,930 348,452 2,926 3,062 Investment additions ...... 875 — 105 401 Investment write-offs ...... (500,112) — — (559) Equity pickup ...... 102,574 154,013 45,071 76,424 Income tax and ICMS tax (VAT) incentives in subsidiaries . . . — — (45,073) (76,402) Dividends received ...... (21,744) (33,535) — — Balances at the end of year ...... 50,523 468,930 3,029 2,926

In addition to equity pickup negative R$2 (R$102 in 2002), calculated for unconsolidated indirect subsidiaries, the ‘‘equity pickup’’ account shown in the consolidated December 31, 2003 income statement includes R$45,073 (R$76,402 in 2002) stemming from shareholders’ equity increase caused by income tax incentives and a decrease in ICMS tax related loans (Note 10). These amounts are also considered equity pickup gains in the consolidated income statements.

8. Property, plant and equipment

Annual depreciation Company Consolidated rates 2003 2002 2003 2002 Land...... — 3,384 3,007 3,384 3,744 Buildings ...... 4% 125,200 30,574 125,200 104,431 Machines and equipment ...... 20% 103,611 — 103,611 82,846 Installations ...... 10% 19,011 — 19,011 7,650 Furniture and fixtures ...... 10 to 20% 3,586 — 4,183 3,229 Vehicles ...... 20% 478 — 478 443 Data processing equipment ...... 20% 17,492 — 18,678 13,356 Other fixed assets ...... 10 to 20% 12,761 4,041 12,783 5,711 Fixed assets in process ...... 918 — 918 8,916 Imports in process ...... 327 — 327 23 Advances to suppliers ...... 564 — 564 1,750 287,332 37,622 289,137 232,099 (-)Accumulated depreciation ...... (115,191) (15,754) (115,845) (94,131) 172,141 21,868 173,292 137,968

F-38 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

8. Property, plant and equipment (Continued) In prior years, Company’s property, plant and equipment assets were revaluated based on appraisal reports issued by qualified appraisers. The balances related to these revaluations are summarized as follows:

Company and Consolidated 2003 2002 Land...... 1,757 2,148 Buildings and improvements ...... 13,894 13,894 15,651 16,042 (-)Accumulated depreciation ...... (7,013) (6,673) 8,638 9,369

The depreciation expenses relating to the revaluated items and recorded in the year’s operating result amounted to R$340 at December 31, 2003 (R$186 at December 31, 2002).

9. Financial Institutions

Interest rates Company Consolidated Type of loans Index (p.a.) 2003 2002 2003 2002 Short-term: Exchange advances ...... US$ 7.05% to 8.00% — — — 81,859 Fixed assets ...... Pre-fixed 10.50% 887 66,706 887 69,614 Total short-term ...... 887 66,706 887 151,473 Long-term: Fixed assets ...... Pre-fixed 10.50% 55,524 — 55,524 744 Total long-term ...... 55,524 — 55,524 744 56,411 66,706 56,411 152,217

The guarantees linked to loans and financing are as follows: a) statutory lien over property, plant and equipment acquired; b) land; and c) personal security provided by Company directors. Long-term installments are classified as per the maturity year:

Maturity year R$ 2005 ...... 4,627 2006 ...... 9,254 2007 ...... 9,254 after 2007 ...... 32,389 55,524

F-39 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

9. Financial Institutions (Continued) During 2003, Company recorded as administrative expenses the amount of R$7,371 (R$6,451 in 2002) in connection with the installments corresponding to the leasing contract installments for an aircraft (contract was entered into on January 9, 1997).

10. ICMS tax related loans Company is entitled to tax incentives granted by the State Government of Ceara´ up to 2019 through loans obtained from Banco do Estado do Ceara´ S.A. These loans are based on the ICMS (State VAT) tax due and partly on the tax on exports, as computed monthly. Loans must be settled within a period ranging from 36 to 60 months after granting and, according to the respective granting clauses, amounts due will be reduced by 75% to 99% in relation to the total borrowed, depending on the contract terms. Management believes that recording the benefit at the time the loans are obtained reflects the accrual method of accounting for the year more adequately, as the cost derived from ICMS tax on the operations subject to incentives is also being concomitantly recorded with the benefits. In 2003, an equity increase was recorded in the Company and in subsidiary Grendene Cal¸cados S.A. (until July 31, 2003) in relation to the loan installments subject to tax incentives in the amount of R$42,994 and R$35,283 (R$52,564 in 2002), respectively. Amounts recorded in subsidiary Grendene Cal¸cados S.A. were recognized at the Company by the equity pickup result. At December 31, 2003, the loan installments not subject to tax incentives were recorded in consolidated current and noncurrent liabilities as R$13,881 (R$6,395 in 2002) and R$61,923 (R$52,354 in 2002), respectively.

11. Contingencies Company has been involved as Defendant in several labor claims. Based on counsel’s opinion, who consider the chances of unfavorable outcome as remote, Company has not recorded a provision to cover possible losses deriving from these cases. In 2003, Company secured a favorable decision with the Taxpayers’ Board with regard to a R$9,300 suit concerning a tax assessment for undue offsetting of Contribution for Financing of Social Security (COFINS). The R$9,300 that had been deposited into a court account until then (December 15, 2003) were drawn by Company. The difference between the amount returned to Company and the original amounts under which the deposits had been recorded in accounting (R$3,540) was recognized in the ‘‘financial income’’ account in the income statement.

12. Shareholders’ Equity

a) Capital By way of a Special Meeting held on August 1, 2003, approval was given to a capital increase in the amount of R$5,877, to be effected through the issue of 383,101 common registered shares in the amount of R$15,34. At December 31, 2003 and 2002, capital is fully owned by shareholders domiciled in the country and represented by 34,811,411 (34,428,310) common shares at the par value of R$3.95 (R$3.82 in 2002)

F-40 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

12. Shareholders’ Equity (Continued) each. The shares representing capital are of a sole class regarding the nature of the respective owners’ rights and all have the same voting rights within the existing legal conditions. b) Dividends As per Company’s bylaws, minimum compulsory dividends are computed based on 25% of the remaining net income for the year, once reserves required by law have been set up. Company has distributed advance dividends in the amount of R$17,121 out of net income for the year ended December 31, 2003. To date, no proposal for additional distribution of dividends based on profits for the year ended December 31, 2003 has been made, but the matter should be deliberated at the General Shareholders’ Meeting.

13. Reconciliation of Tax Expenses with Official Rates Income and social contribution taxes calculated according to official rates have been reconciled with the amounts recorded as income and social contribution tax expenses, as follows: 2003 Company Consolidated IRPJ CSLL IRPJ CSLL Net income before taxes ...... 233,059 233,059 261,668 261,668 (-) Social contribution tax (CSLL) for the year ...... (7,983) — (13,480) — 225,076 233,059 248,188 261,668 Income and social contribution taxes (25% and 9%) ...... (56,269) (20,975) (62,047) (23,550) Positive equity pickup ...... 25,643 9,231 11,267 8,668 Permanent additions ...... (5,094) (1,116) (775) (280) Offsetting against taxes paid overseas by subsidiaries ...... 4,997 1,799 —— Offsetting against tax and social contribution (CSLL) losses . . . 6,092 2,358 —— IRPJ Tax incentives ...... 663 — 5,178 — Other ...... 2,023 720 2,031 1,682 Amount recorded in the operating result ...... (21,945) (7,983) (44,346) (13,480)

2002 Company Consolidated IRPJ CSLL IRPJ CSLL Net income before taxes ...... 116,314 116,314 153,730 153,730 (-) Social contribution tax for the year ...... ——(9,409) — 116,314 116,314 144,321 153,730 Income and social contribution taxes (25% and 9%) ...... (29,078) (10,468) (36,080) (13,836) Positive equity pickup ...... 34,369 12,373 19,106 6,878 Permanent additions ...... (2,574) (909) (5,064) (955) IRPJ Tax incentives ...... ——627 — Other ...... (2,717) (996) (5,031) (1,496) Amounts recorded in the operating result ...... ——(26,442) (9,409)

F-41 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2003 and 2002 (In thousands of reais)

14. Financial Result

Company Consolidated 2003 2002 2003 2002 Financial expenses Discounts granted on costumers ...... (22,866) — (43,399) (34,366) Financial expenses ...... (6,364) — (15,451) (15,164) Expenses related to loan contracts with related parties . . . — — — (2) Exchange variation expenses ...... (11,455) (39,413) (54,792) (77,803) Other financial expenses ...... (7,611) (6,215) (13,275) (15,052) (48,296) (45,628) (126,917) (142,387) Financial income Income from investments ...... 6,423 — 20,153 14,548 Interest received from customers ...... 697 3 2,117 1,279 Exchange variation income ...... 20,879 16,189 46,689 76,695 Other financial income ...... 13,200 892 15,392 2,889 41,199 17,084 84,351 95,411 Net financial result ...... (7,097) (28,544) (42,566) (46,976)

15. Financial Instruments Company has certain operations that may be directly construed as ‘‘Financial Instruments,’’ as recorded in assets and liabilities. Company’s financial instruments and criteria for assessing their fair market value are as follows: • Cash and cash equivalents—amounts stated in the balance sheet are formed by amounts available in the current account at the date of the balance sheet and they are thus posted at their fair market value. • Accounts receivable and payable—amounts stated in the balance sheet are close to their fair market value, when considering the allowances set up, and the lack of monetary adjustment for the portion of accounts receivable that has already become due. • Short-term investments—these are short-term operations that do not contemplate the possibility of losses for the Company. Interest rates used are similar to those used in similar operations. • Loans and Financing—as shown in Note 9, charges are recognized on a pro rata basis up to the balance sheet date. These operations do not pose additional risk to the Company. • Other accounts—Management is unaware of any other account that might translate into material differences between the amounts recorded and fair market value at December 31, 2003. Management is also unaware of any material fact or subsequent event that might significantly impact on amounts recorded.

F-42 Financial Statements

Grendene S.A. and Subsidiaries

Years Ended December 31, 2002 and 2001 with Report of Independent Auditors

F-43 GRENDENE S.A. AND SUBSIDIARIES FINANCIAL STATEMENTS December 31, 2002 and 2001

Contents

Report of Independent Auditors ...... F-45 Financial Statements: Balance Sheets ...... F-46 Statements of Income ...... F-47 Statements of Shareholders’ Equity ...... F-48 Statements of Changes in Financial Position ...... F-49 Notes to Financial Statements ...... F-50

F-44 A free translation from Portuguese into English of Report of Independent Auditors on financial statements prepared in Brazilian currency in accordance with the accounting practices adopted in Brazil

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders Grendene S.A. 1. We have audited the accompanying balance sheets of Grendene S.A. and the consolidated balance sheets of Grendene S.A. and subsidiaries as of the years ended December 31, 2002 and 2001 and the related statements of income, shareholders’ equity and changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements. The audits of the financial statements of the indirect subsidiary Grendha Shoes Corp. for the years ended December 31, 2002 and 2001 were conducted by other independent auditors. Our opinion, insofar as it relates to the amount of this investment amounting to R$ 5,940 thousand (R$ 2,720 thousand in 2001) and the equity pickup arising therefrom amounting to R$ 1,797 thousand (R$ 45 thousand negative equity pickup in 2001), is based solely on the reports issued by those independent auditors. 2. Except for the matter mentioned in paragraph three below, our audits were conducted in accordance with generally accepted auditing standards in Brazil which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company; (b) the examination, on a test basis, of documentary evidence and accounting records supporting the amounts and disclosures in the financial statements; and (c) an assessment of the accounting practices used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation. 3. The financial statements of the indirect subsidiary Reebok Chile S.A., as mentioned in Note 7 to the financial statements, whose investment amounts to R$1,067 thousand (R$768 in 2001) and negative equity pickup amounts to R$ 102 thousand (R$870 thousand in 2001), were not examined by independent auditors. As a consequence, we could not express an opinion on the fairness of the amount of such investment on those dates and of the related results recorded for the years ended December 31, 2002 and 2001 based on the amount of shareholders’ equity of that Company. 4. In our opinion, based on our examinations and on the opinion issued by other independent auditors, and except for the adjustments that might arise from the examination of the investments mentioned in paragraph three, the financial statements referred to in paragraph one present fairly, in all material respects, the financial position of Grendene S.A. and the consolidated financial position of Grendene S.A. and subsidiaries at December 31, 2002 and 2001, the results of its operations, changes in its shareholders’ equity and changes in its financial position for the years then ended, in accordance with the accounting practices adopted in Brazil. Fortaleza, March 28, 2003

7OCT200418101408 Auditores Independentes S/C CRC-2 SP 15.199/O-6/S/RS

Paulo Sergio Dortas Accountant CRC-BA-015250-O-8-S

F-45 A free translation from Portuguese into English of financial statements prepared in Brazilian currency in accordance with the accounting practices adopted in Brazil

GRENDENE S.A. AND SUBSIDIARIES BALANCE SHEETS December 31, 2002 and 2001 (In thousands of reais)

Company Consolidated 2002 2001 2002 2001 ASSETS Current Cash and banks ...... 196 1,767 18,916 13,664 Short-term investments ...... — — 192,633 70,680 Accounts receivable ...... — 20 230,253 149,492 Inventories ...... — — 116,755 84,796 Taxes recoverable ...... 3,259 1,460 10,641 11,434 Notes receivable ...... 2,748 2,797 3,784 11,213 Other receivables ...... 166 162 5,050 5,796 Deferred expenses ...... 410 210 866 805 Total current assets ...... 6,779 6,416 578,898 347,880 Noncurrent assets Judicial deposits ...... 6,231 6,207 6,231 6,207 Other credits ...... 640 477 640 1,098 6,871 6,684 6,871 7,305 Permanent assets Investments ...... 468,930 348,452 2,926 3,062 Fixed assets ...... 21,868 21,628 137,968 137,631 490,798 370,080 140,894 140,693 Total assets ...... 504,448 383,180 726,663 495,878

Company Consolidated 2002 2001 2002 2001 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Financial institutions ...... 66,706 2,001 151,473 20,802 ICMS tax related loans ...... — — 6,395 120 Trade accounts payable ...... 363 103 25,551 18,405 Provision for commissions ...... — — 12,584 8,976 Taxes, rates and contributions ...... 6 31 6,910 3,243 Salaries and charges payable ...... — — 19,546 16,867 Other debits ...... 260 — 9,101 4,373 Total current liabilities ...... 67,335 2,135 231,560 72,786 Noncurrent liabilities: Financial institutions ...... — 41,767 744 45,358 ICMS tax related loans ...... — — 52,354 35,623 — 41,767 53,098 80,981 Minority interest ...... — — 4,982 3,771 — — 4,982 3,771 Shareholders’ equity Paid-in capital ...... 131,600 131,600 131,600 131,600 Revaluation reserve ...... 2,979 3,143 2,979 3,143 Income reserve ...... 26,320 20,654 26,320 20,654 Retained earnings ...... 276,214 183,881 276,124 182,943 437,113 339,278 437,023 338,340 Total liabilities and shareholders’ equity ...... 504,448 383,180 726,663 495,878

See accompanying notes.

F-46 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF INCOME Years ended December 31, 2002 and 2001 (In thousands of Reais, except per share information)

Company Consolidated 2002 2001 2002 2001 Gross sales revenue ...... — — 906,978 697,161 Sales deductions ...... — — (151,792) (119,928) Net sales revenue ...... — — 755,186 577,233 Cost of products sold ...... — — (421,979) (338,640) Gross profit ...... — — 333,207 238,593 Operating income (expenses) Selling expenses ...... (168) (74) (171,587) (123,649) General and administrative expenses ...... (10,611) (7,020) (46,017) (33,500) Financial expenses ...... (45,628) (8,219) (142,387) (62,456) Financial Income ...... 17,084 9,499 95,411 39,335 Equity pickup ...... 154,013 99,120 76,424 58,185 Management fees ...... (24) (24) (240) (240) Other operating income ...... 2,157 2,882 10,652 5,746 Other operating expenses ...... (511) (1,836) (2,258) (2,790) 116,312 94,328 (180,002) (119,369) Operating result ...... 116,312 94,328 153,205 119,224 Nonoperating result ...... 2 206 525 (2,576) Income before income taxes and minority interest 116,314 94,534 153,730 116,648 Provision for income tax ...... — — (26,442) (14,880) Provision for social contribution tax ...... — — (9,409) (5,506) Minority interest ...... — — (717) (458) Net income ...... 116,314 94,534 117,162 95,804 Net income per share (in reais) ...... 3.37 2.75

See accompanying notes.

F-47 GRENDENE S. A. AND SUBSIDIARIES STATEMENTS OF SHAREHOLDERS’ EQUITY Years ended December 31, 2002 and 2001 (In thousands of reais)

Revaluation Income reserve reserve Paid-in Own Legal Retained capital assets reserve earnings Total Balances at December 31, 2000 ...... 131,600 3,313 15,928 175,371 326,212 Prior year adjustments ...... — 23 ——23 Realization of revaluation reserve ...... — (193) — 193 — Net income for 2001 ...... —— —94,534 94,534 Appropriation of net income: Legal reserve ...... ——4,726 (4,726) — Dividends distributed in advance ...... —— —(81,491) (81,491) Balances at December 31, 2001 ...... 131,600 3,143 20,654 183,881 339,278 Prior year adjustments ...... — 22 ——22 Realization of reserve revaluation ...... — (186) — 186 — Net income for 2002 ...... —— —116,314 116,314 Dividends distributed ...... —— —(18,501) (18,501) Appropriation of net income: Legal reserve ...... ——5,666 (5,666) — Balances at December 31, 2002 ...... 131,600 2,979 26,320 276,214 437,113 See accompanying notes.

F-48 GRENDENE S.A. AND SUBSIDIARIES STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended December 31, 2002 and 2001 (In thousands of reais) Company Consolidated 2002 2001 2002 2001 Sources of working capital From operations: Net income for the year ...... — — 117,162 95,804 Items not affecting the net working capital: Investment disposals ...... — — 559 7,596 Property, plant and equipment disposals ...... — — 427 3,958 Equity pickup ...... — — (76,424) (58,185) Depreciation ...... — — 20,013 17,124 — — 61,737 66,297 From shareholders and third parties: Increase in minority interest ...... — — 1,211 596 IR and ICMS tax incentives in subsidiaries ...... — — 76,402 58,112 Prior year adjustments ...... 22 23 22 23 Decrease in noncurrent assets ...... — — — — Increase in noncurrent liabilities ...... — 41,767 — 39,295 Dividends from subsidiaries ...... 33,535 46,038 — 73 33,557 87,828 77,635 98,099 Total sources of working capital ...... 33,557 87,828 139,372 164,396 Applications of working capital In operations: Net income for the year ...... (116,314) (94,534) — — Items not affecting the net working capital: Investment disposals ...... — (416) — — Property, plant and equipment disposals ...... (138) (1,816) — — Equity pickup ...... 154,013 99,120 — — Depreciation ...... (489) (397) — — 37,072 1,957 — — Increase (decrease) in noncurrent assets ...... 187 (219) (434) 368 Decrease in noncurrent liabilities ...... 41,767 — 27,883 — In investments ...... — — 401 — In property, plant and equipment ...... 867 3,837 20,777 35,386 Dividends distributed ...... 18,501 81,491 18,501 81,491 Total applications of working capital ...... 98,394 87,066 67,128 117,245 Increase (decrease) in net working capital ...... (64,837) 762 72,244 47,151 Variation in working capital: Current assets At the end of year ...... 6,779 6,416 578,898 347,880 At the beginning of year ...... 6,416 3,828 347,880 300,475 363 2,588 231,018 47,405 Current liabilities At the end of year ...... 67,335 2,135 231,560 72,786 At the beginning of year ...... 2,135 309 72,786 72,532 65,200 1,826 158,774 254 Increase (decrease) in net working capital ...... (64,837) 762 72,244 47,151

See accompanying notes.

F-49 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS December 31, 2002 and 2001 (In thousands of reais)

2. Basis of Preparation and Presentation of the Financial Statements The financial statements are prepared in accordance with the provisions of Brazil’s Corporation Law. The consolidated financial statements were prepared in conformity with the consolidation principles provided for Brazil’s Corporation Law and norms established by the CVM—Brazilian Securities Commission, including the financial statements of the subsidiaries Grendene Cal¸cados S.A., Sadle Corp. S.A., and Grendha Shoes Inc. During the process of consolidation of the financial statements, all balances linked to operations involving assets and liabilities, income and expenses, deriving from business transactions between the consolidated companies, were eliminated as well as the subsidiary investment against the shareholders’ equity of the subsidiaries. The reconciliation of the subsidiary’s operating result and shareholders’ equity, and the consolidated balances, comprise the following:

Net income Shareholders’ equity 2002 2001 2002 2001 Subsidiary ...... 116,314 94,534 437,113 339,278 Unearned income from property, plant and equipment sale ...... 848 1,270 (90) (938) Consolidated ...... 117,162 95,804 437,023 338,340

3. Summary of Main Accounting Practices a. Operating result Income and expenses are recorded on the accrual basis. b. Short-term investments Short-term investments are stated at investment value plus earnings to the balance sheet date, not exceeding market value. c. Allowance for doubtful accounts Constituted up to the limit considered sufficient to cover possible losses resulting from the realization of accounts receivable and other credits.

F-50 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

3. Summary of Main Accounting Practices (Continued) d. Provision for discounts granted for payments made on the due date Constituted at discount amounts that are estimated to be granted in relation to trade accounts receivable, for the payments made within the respective due dates. e. Inventories The inventories of finished products and work in process are valued at the subsidiary Grendene Cal¸cados S.A. according to the tax criterion which determines that finished products should be stated at 70% of the cash sales price at the balance sheet date, whereas work in process should be stated at 80% of the finished products value, as previously computed. In order to adjust these inventories to their probable average production cost, a provision for devaluation is recorded as mentioned in Note 5. The inventories of raw materials, packaging materials, reselling goods and other inventories are stated at average acquisition cost. In both cases the cost should not exceed market value. f. Investments Investments in subsidiaries are stated by the equity pickup method, based on the shareholders’ equity of subsidiaries computed as of the same base date as that of the Company. The remaining investments are stated at acquisition cost and adjusted to market value, whenever applicable. The financial statements of direct and indirect subsidiaries abroad were prepared in the respective local currencies, converted into U.S. dollars and subsequently converted into reais at the official exchange rate on the balance sheet date, as follows: R$ 3.5325 /US$ 1.00 at December 31, 2002 (R$ 2.3196 /US$ 1.00 at December 31, 2001). g. Property, plant and equipment Stated at acquisition or construction and revaluation cost, adjusted by accumulated depreciation and calculated by the straight-line method at rates that take into consideration the estimated useful life of assets, as mentioned in Note 8. h. Financial institutions Loans and financing are monetarily corrected by the incurred monetary and exchange variations, according to the rates contracted with financial institutions plus interest calculated on a daily ‘‘pro-rata’’ basis to the balance sheet date. Monetary and exchange variations, and interest, are charged to financial expenses in the operating result. i. ICMS tax related loans Represented by loan installments granted to the subsidiary company for purposes of settling ICMS tax debts, not entitled to incentives and which should be paid on different due dates. The loan installments subject to incentives (see Note 10), are directly recorded as credit in the subsidiary’s shareholders’ equity account, under tax incentives sub-account, at the time the referred loans are obtained, which are considered by the subsidiary as investment subsidy.

F-51 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

3. Summary of Main Accounting Practices (Continued) j. Income and social contribution taxes Income and social contribution taxes are calculated according to the current legislation for each base period. The subsidiary Grendene Cal¸cados S.A. receives income tax incentives due to its establishment in the Northwest region of the country. These incentives are granted via exemption or reduction of the tax amount due, calculated based on the result of the activities subject to these incentives. The referred tax amounts are recorded as if normally due and subsequently deducted from liabilities against the account ‘‘tax incentives reserve’ in the shareholders’ equity of the company in question. These financial increases are recorded in the Company’s operating result through the equity pickup. The administrative ruling for income tax exemption to which the subsidiary is entitled is valid up to the calendar year 2012. k. Other assets and liabilities Recorded at known or estimated nominal amounts, monetarily corrected to the balance sheet date, whenever applicable.

4. Accounts Receivable

Company Consolidated 2002 2001 2002 2001 Customer invoices ...... — 20 253,982 173,570 Exchange contracts ...... — — (13,906) (17,561) Allowance for doubtful accounts ...... — — (1,396) (1,051) Provision for discounts on payments made on the due date ...... — — (8,427) (5,466) — 20 230,253 149,492

F-52 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

5. Inventories

Consolidated 2002 2001 Finished products ...... 11,536 11,136 Work in process ...... 11,976 22,448 (-)Provision for adjustment to production cost ...... (6,164) (3,067) Sub-total ...... 17,348 30,517 Raw materials ...... 53,982 35,315 Packaging materials ...... 7,117 6,091 Intermediate materials and others ...... 28,895 5,964 Advances to suppliers ...... 8,448 5,336 Imports in process ...... 965 1,573 116,755 84,796

6. Recoverable Taxes

Company Consolidated 2002 2001 2002 2001 Income tax prepayment ...... 274 233 315 687 Social contribution tax prepayment ...... 83 71 83 347 Withholding tax ...... 1,286 1,149 3,821 2,804 IPI—Federal VAT ...... — — 2,013 5,887 Others ...... 1,616 7 4,409 1,709 3,259 1,460 10,641 11,434

The income and social contribution tax prepayments are monetarily corrected over the SELIC (Clearing House Interest Rate). The other taxes are stated at their original value by which they are recovered.

F-53 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

7. Investments At December 31, 2002 and 2001, the Company investments present the following composition:

Company Consolidated 2002 2001 2002 2001 Subsidiaries ...... 467,947 347,469 1,067 768 Eletrobras´ credits ...... 883 883 894 883 Property for sale ...... 22 22 887 1,322 Sundry investments ...... 78 78 78 89 468,930 348,452 2,926 3,062

The investments in subsidiaries comprise the following: a) Direct subsidiaries

2002 2001 Paid-in capital Year’s Shareholding monetarily Shareholders’ operating participation Equity Equity adjusted equity result % pickup Investment pickup Investment Consolidated Grendene Cal¸cados S.A...... 292,611 444,945 68,774 98.8386% 137,476 423,976 98,062 320,036 Saddle Corporation. . 35,678 43,971 2,193 100.00% 16,537 43,971 1,058 27,433 Total ...... 154,013 467,947 99,120 347,469

The investment in Grendene Cal¸cados S.A. at December 31, 2002 and 2001 was determined based on the respective shareholders’ equity, duly adjusted by the amount of R$15,987 (R$9,585 in 2001), relating to the unrecorded provisions thereof. However, these provisions were recorded by the Company according to the equity pickup calculation for purposes of keeping a consistency with its own accounting practices. The equity pickup at the subsidiary Saddle Corporation includes the amount of R$14,344 (R$ 4,925 in 2001) relating to the exchange variation effects deriving from the conversion of its financial statements into reais, which were originally prepared in U.S. dollars.

F-54 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

7. Investments (Continued) b) Indirect subsidiaries Through subsidiary Saddle Corporation S.A., the following indirect investments are also held by the Company:

2002 2001 Paid-in and Year’s Shareholding adjusted Shareholders’ operating participation capital equity result % Equity pickup Investment Equity pickup Investment Consolidated Grendha Shoes Corporation . 1,767 5,940 1,797 100.0000% 1,797 5,940 (45) 2,720 Grendene Indl. de Cal¸cados Ltda...... ———99.7367% ——18 41,785 Ind. De Cal¸cados Grendene Ltda...... ———99.9979% ——8,387 37,695 Sub-total ..... 1,797 5,940 8,360 82,200 Not consolidated Reebok Chile S.A...... 5,564 5,770 (552) 18.50% (102) 1,067 (212) 768 Fitalse S.A. . . . ——— ——(658) — Sub-total ..... ——— (102) 1,067 (870) 768 Total ...... 1,695 7,007 7,490 82,968

The account ‘‘equity pickup’ presented in the consolidated statement of operations, apart from the negative equity computed at the indirect subsidiaries not consolidated amounting to R$102 at December 31, 2002 (R$870 in 2001), there is also the amount of R$76,402 at December 31, 2002 (R$58,112 in 2001) relating to an increase in equity derived from income tax incentives and reduction of ICMS tax related loans (Note 10), plus the amount of R$ 124 (R$943 in 2001) linked to exchange variation and other investments in related parties not included in consolidation. These amounts are considered as equity pickup gains, also in the operating results of the consolidated financial statements.

F-55 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

7. Investments (Continued) The investments account movement comprises the following:

Company Consolidated 2002 2001 2002 2001 Balances at beginning of year ...... 348,452 295,786 3,062 10,658 Investment additions ...... — — 401 — Investment write-offs ...... — (416) (559) (7,596) Equity pickup ...... 154,013 99,120 76,424 58,185 IR and ICMS tax incentives in subsidiaries ...... — — (76,402) (58,112) Dividends received ...... (33,535) (46,038) — (73) Balances at the end of year ...... 468,930 348,452 2,926 3,062

In 2001, the indirect subsidiary Saddle Corporation sold its shareholding participation in Fitalse S.A., generating a total negative result of R$ 3,777 recorded in the consolidated statement of operations under ‘nonoperating result’.

8. Property, plant and equipment

Company Consolidated Annual depreciation rates 2002 2001 2002 2001 Land...... — 3,007 3,123 3,744 3,861 Buildings ...... 4% 30,574 28,689 104,431 95,373 Machinery and equipment ...... 20% — — 82,846 74,638 Installations ...... 20% — — 7,650 4,640 Furniture and fixtures ...... 10 to 20% — — 3,229 3,246 Vehicles ...... 20% — — 443 1,106 Data processing equipment ...... 20% — — 13,356 8,847 Other assets ...... 10 to 20% 4,041 3,196 5,711 4,187 Construction in progress ...... — 1,885 8,916 16,827 Imports in process ...... — — 23 33 Advances to suppliers ...... — — 1,750 154 37,622 36,893 232,099 212,912 (-)Accumulated depreciation ...... (15,754) (15,265) (94,131) (75,281) 21,868 21,628 137,968 137,631

F-56 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

8. Property, plant and equipment (Continued) In prior years, the Company’s property, plant and equipment assets were revaluated based on appraisal reports issued by qualified appraisers. The balances related to these revaluations are summarized as follows: Company and Consolidated 2002 2001 Land...... 2,148 2,263 Buildings and improvements ...... 13,894 13,894 16,042 16,157 (-)Accumulated depreciation ...... (6,673) (6,487) 9,369 9,670 The depreciation expenses relating to the revaluated items and recorded in the year’s operating result amounted to R$186 at December 31, 2002 (R$193 at December 31, 2001). During 2001 sales at market value were made in the amount of R$ 1,866 of machinery and equipment, furniture and fixtures, to subsidiaries resulting in a gain of R$260 which has been recorded as nonoperating result at the subsidiary company. In 2001, this same amount was excluded from shareholders’ equity and the operating result for purposes of the consolidated financial statements.

9. Financial Institutions

Company Consolidated Interest rates Type of loans Index (p.a.) 2002 2001 2002 2001 Short-term: Working capital ...... 11.20% — 2,001 — 2,001 Advance on export contracts .... US$ 7.05% to 8.00% — — 81,859 — Property, plant and equipment . . TJLP/US$ 5.10% to 11.20% 66,706 — 69,614 18,801 Total short-term ...... 66,706 2,001 151,473 20,802 Long-term: Working capital ...... 11.20% — 41,767 — 41,767 Property, plant and equipment . . TJLP/US$ 5.10% — — 744 3,591 Total long-term ...... — 41,767 744 45,358 66,706 43,768 152,217 66,160 The guarantees linked to loans and financing are as follows: a) statutory lien over property, plant and equipment acquired; b) land at the book value of R$ 44; and c) personal security provided by Company directors. The consolidated long-term installments will be fully liquidated in 2004. During 2002, the Company recorded as administrative expenses the amount of R$6,451 (R$5,113 in 2001) in connection with the installments corresponding to the leasing contract considerations for an aircraft, contract which was entered into on January 9, 1997. The remaining installments will be paid on a six-month basis up to July 2003 at the monetarily corrected amount of R$4,240 (R$2,790 in 2001) each.

F-57 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

10. ICMS tax related loans The subsidiary Grendene Cal¸cados S.A., located in the State of Ceara,´ is entitled to tax incentives granted by the respective State Government up to 2015 through loans obtained from Banco do Estado do Ceara´ S.A. These loans are based on the ICMS (State VAT) tax due and partly on the FOB (Tax on Financial Operations) tax on exports, monthly computed. The loans should be liquidated within a period ranging from 36 to 60 months after release and according to the respective granting clauses, the tax amounts due will be reduced by 75% to 99% in relation to the total borrowed depending on the contract terms thereof. The loan installments subject to incentives are directly recorded as credit in the shareholders’ equity of subsidiaries, under a tax incentives sub-account, at the time the loans are received. Company management understands that the recording of the benefit at the time the loans are obtained more adequately reflects the accrual method of accounting for the year as the cost derived from ICMS tax on the operations subject to incentives is also been concomitantly recorded with the benefits. In 2002, an equity increase was recorded in relation to the loan installments subject to tax incentives in the amount of R$ 52,564 (R$44,249 in 2001), and recognized at the Company by the equity pickup result. At December 31, 2002 the loan installments not subject to tax incentives were recorded in the consolidated current and noncurrent liabilities in the amounts of R$6,395 (R$120 in 2001) and R$52,354 (R$35,623 in 2001), respectively.

11. Contingencies The Company has been involved as Defendant in several labor processes. Based on the lawyers’ opinion who consider the chances of unfavorable outcome as remote, the Company has not recorded a provision to cover possible losses deriving from these processes. A tax assessment was filed against the Company in 1995 by the Internal Revenue Service due to the administrative compensation of COFINS (Social Security Funding Tax). According to the unfavorable decision handed by the Internal Revenue Service Officer of the Stated of Rio Grande do Sul, on February 8, 2001 the Company was required to settle the remaining tax assessment amount. Thus, the Company made an appeal judicial deposit corresponding to 30% of the total Tax Assessment amount corresponding to R$ 5,734 in order to continue the legal discussions thereof. Based on the lawyers’ opinion that the chances of unfavorable outcome are remote, management believes that the constitution of any provision at this moment is unnecessary.

12. Income and Social Contribution Taxes Considering that the Company presents accumulated income tax loss carryforwards to be compensated as well as social contribution tax loss carryforwards, and a substantial portion of the income computed derives from the positive equity pickup not subject to taxation, at December 31, 2002 and 2001 no income tax obligations were computed. At December 31, 2002 the Company presents accumulated income tax carryforwards amounting to R$ 24,681 (R$21,538 in 2001), as well as social contribution tax loss carryforwards in the amount of R$ 26,513 (R$ 23,177 in 2001). There are no limits for compensating the amounts in question with other taxable income in terms of period, however this compensation is limited to 30% of the taxable income

F-58 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

12. Income and Social Contribution Taxes (Continued) computed at each year. Considering that the income computed by the Company substantially derives from equity pickup results not subject to taxation, Company management decided not to constitute deferred tax credits on income and social contribution tax loss carryforwards as the realization of these credits would depend upon the generation of future taxable income.

13. Shareholders’ equity

a. Capital At December 31, 2002 and 2001, capital is fully owned by shareholders domiciled in the country and represented by 34,428,310 nominal common shares at the par value of R$3.82 each. The shares representing the capital are of a sole class regarding the nature of the respective owners’ rights and all have the same voting rights within the existing legal conditions.

b. Dividends According to the Company’s bylaws, minimum compulsory dividends are computed based on 25% of the remaining net income for the year after recording the provisions required by law. In the current year there was distribution of dividends in the amount of R$18,501 in relation to the net income for the year ended December 31, 2001.

14. Reconciliation of Tax Expenses with Official Rates—Consolidated The income and social contribution taxes calculated according to official rates have been reconciled with the amounts recorded as income and social contribution tax expenses, as follows:

2002 IRPJ CSLL Net income before taxes ...... 153,730 153,730 (-) Social contribution tax (CSLL) for the year ...... (9,409) — 144,321 153,730 Income and social contribution taxes (25% and 9%) ...... (36,080) (13,836) Permanent additions ...... (5,064) (955) Positive equity pickup ...... 19,106 6,878 IRPJ (Corporate Income Tax) incentives ...... 627 — Others ...... (5,031) (1,496) Amounts recorded in the operating result ...... (26,442) (9,409)

F-59 GRENDENE S.A. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2002 and 2001 (In thousands of reais)

14. Reconciliation of Tax Expenses with Official Rates—Consolidated (Continued)

2001 IRPJ CSLL Net income before taxes ...... 116,648 116,648 (-) Social contribution tax for the year ...... (5,506) — 111,142 116,648 Income and social contribution taxes (25% and 9%) ...... (27,786) (10,498) Permanent additions ...... (3,152) (626) Positive equity pickup ...... 14,546 5,237 IRPJ tax incentives ...... 352 — Others ...... 1,160 381 Amounts recorded in the operating result ...... (14,880) (5,506)

15. Financial Result Company Consolidated 2002 2001 2002 2001 Financial expenses Discounts granted to customers ...... — (1) (34,366) (28,601) Financial expenses ...... — (7) (15,164) (9,821) Expenses related to loan contracts with related parties ...... — — (2) — Exchange variation expenses ...... (39,413) (5,830) (77,803) (15,892) Other financial expenses ...... (6,215) (2,381) (15,052) (8,142) (45,628) (8,219) (142,387) (62,456) Financial income Income from investments ...... — — 14,548 11,805 Interest received from customers ...... 3 13 1,279 1,585 Exchange variation income ...... 16,189 8,794 76,695 22,430 Other financial income ...... 892 692 2,889 3,515 17,084 9,499 95,411 39,335 Net financial result ...... (28,544) 1,280 (46,976) (23,121)

16. Financial Instruments The CVM (Brazilian Securities Commission), through Instruction No. 235 of March 23, 1997 established mechanisms for publishing, through an explanatory note, the market value and contract conditions for financial instruments, recorded or not in the accounts. The Company’s financial instruments (linked to short-term investments and loans) are recorded based on the contracted charges, compatible with market rates.

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