Financial statements Vicunha Têxtil S.A. · Financial statements Vicunha Têxtil S.A. December 31,...

Financial statements

Vicunha Têxtil S.A. December 31, 2012 and 2011 with Independent Auditor’s Report

Vicunha Têxtil S.A.

Financial statements December 31, 2012 and 2011 Contents Independent auditor’s report on financial statements .................................................... 1 Audited financial statements Balance sheets ............................................................................................................... 4 Income statements ......................................................................................................... 6 Statements of comprehensive income ............................................................................ 7 Statements of changes in equity .................................................................................... 8 Cash flow statements - indirect method .......................................................................... 9 Statements of value added ............................................................................................ 10 Notes to financial statements .......................................................................................... 11

Vicunha Têxtil S.A.

Management report Vicunha Têxtil, Latin America’s leader in the production and sale of denim and twill fabrics, submits to the analysis of its Shareholders, Clients, Suppliers and Financial Institutions its Individual and Consolidated Financial Statements for the year ended December 31, 2012, and Independent Auditor’s Report. Management comments 2012 was a year marked by worldwide economic instability, especially as a result of the financial crisis in Europe, the growth slowdown in China and the timid recovery of the United States. In Brazil, the performance of the manufacture segment was negatively impacted by the low levels of investments and the higher offer of imported products. Despite the measures taken for increasing consumption and the fall in interest rates, the Brazilian economy faced a decrease in growth rate and in 2012 the estimated Gross Domestic Product (GDP) was under 1.0%, below the 2.7% recorded in 2011. In this context, Vicunha Têxtil proved to be well-prepared for turning challenges into opportunities, and presented a good performance level in 2012, a year when the results of Brazilian textile industry were impacted by the international downturn and the competition of imported manufactured products. In 2012, the Company had an increase by 15% in gross sales and registered a net income record of R$126 million. The sales increase and growth in profitability consolidated management’s successful strategy implemented over the past years, which was mainly focused on Company most significant activities (denim and twill fabrics), globalization and revamping of all its manufacturing units. Worth stressing, in 2012, the Company was recognized as the fifth largest company in the State of Ceará, according to the Delmiro Gouveia Award, which evaluates financial, social and environmental aspects, as well as transparency over disclosure of financial information to the market. This public recognition is a reason for pride of the Company’s employees and management. Comments on performance The Company’s focus on continuous development, innovation and presence in the international market resulted in a significant improvement in its financial indexes in 2012, among which we highlight:

Consolidated net revenue reached R$1,170 million, a 13% increase as compared to 2011 (R$1,036 million);

Consolidated gross profit reached R$305 million, which represents a 11% increase as compared to the prior year, when said profit totaled R$275 million;

Consolidated EBITDA totaled R$167 million (a 14% margin), which allowed the Company to maintain own cash generation as its major source of investment funds. The 2012 EBITDA margin was impacted by the increase in the allowance for doubtful accounts by R$ 15 million as compared to 2011. This is explained by prior years’ sales arrangements. Should this amount be considered nonrecurring, the Company would present a R$ 182 million EBITDA (16% margin);

Record net income in 2012 totaled R$126 million (R$80 million in 2011), which represents 11% of consolidated net revenue and 15% of return on consolidated equity.

Debt Consolidated net debt totaled R$356 million in 2012, which is 2.1 times the EBITDA for the period (in 2011, net debt amounted to R$463 million, up 2.7 times the EBITDA). In 2012, as a debt reduction strategy, the Company implemented several actions for decreasing the working capital used in its operations, especially as concerns inventories, and aims at maintaining working capital at the lowest level possible. Investments The Company has been making significant investments in the past few years, among which we highlight:

Brazil: a project for modernizing the units located in the Northeast, with total investments estimated at R$430 million, R$257 million of which were invested in the last three years and R$148 million of which will be invested in 2013;

Ecuador: a project for doubling the denim production capacity, with total investments of US$ 45 million, completed in 2011;

Argentina: acquisition of Ullum Group manufacturing plants and a project for modernizing and expanding denim production, with investments estimated at US$ 60 million and completion planned for 2013/2014.

The investments made in Brazil reinforce the important role played by the Company in the Brazilian market of denim and twill fabric production. Internationally, with the strengthening of the operations of the Ecuador subsidiary and the recent acquisition in Argentina, the Company is preparing to consolidate its production and presence in Latin America. Payment of dividends In 2012, management recorded a provision in the amount of R$20 million as mandatory minimum dividends, corresponding to R$0.42668 for each registered common share and R$0.51201 for each registered preferred share, to be paid in 2013.

Expectations Vicunha Têxtil will continue increasing its activity both in the countries where it already operates and internationally, by maintaining its leading position and supporting the development of its clients. Additionally, the Company will maintain its policies as concerns investments and employee development, which, in conjunction with more favorable market conditions and the improvement in the international economic environment, allow us to forecast a positive year for business. Relationship with independent external auditor In compliance with Brazilian SEC (CVM) Ruling No. 381/2003, Company and subsidiaries did not retain non-audit services. The Company’s policy is to comply with and meet the regulations which define the restrictions to the services provided by independent auditors. Management representation EBITDA represents earnings (loss) before interest income/(expenses), income and social contribution taxes and depreciation and amortization. EBITDA should not be considered an alternative for net income (loss), an indicator of the Company’s operating performance, or an alternative for cash flow as a liquidity indicator. Management is of the opinion that EBITDA is a practical measure for determining the Company’s operating performance and to allow comparing its performance with that of other companies. However, it should be noted that EBITDA is a non-BRGAAP measure and may be defined and calculated in a different manner by other companies. In accordance with the provisions set out in CVM Rulings, Company Executive Board represents that it has discussed, revised and agreed with the opinions expressed in the independent auditor’s report on the financial statements for the years ended December 31, 2012 and 2011, authorizing their disclosure. Acknowledgements We wish to thank our shareholders, clients, suppliers, financial institutions and other entities for their trust, preference, support and encouragement. Also, we thank Company Executive Board and employees for their involvement, integrity and commitment, factors which make Vicunha Têxtil a leading company, nationally and internationally recognized for innovation, quality, client service, and for its social and environmental responsibility. Maracanaú, March 27, 2013. The Management

1 Uma empresa-membro da Ernst & Young Global Limited

Condomínio São Luiz Av. Pres. Juscelino Kubitschek, 1830 Torre I - 8º Andar - Itaim Bibi 04543-900 - São Paulo, SP, Brasil Tel: (5511) 2573-3000 Fax: (5511) 2573-5780 www.ey.com.br

A free translation from Portuguese into English of Independent Auditor's Report on individual financial statements prepared in accordance with accounting practices adopted in Brazil and on consolidated financial statements prepared in accordance with IFRS and also with accounting practices adopted in Brazil

Independent auditor’s report on Financial Statements The Shareholders, Board of Directors and Officers

Vicunha Têxtil S.A. We have audited the accompanying individual and consolidated financial statements of Vicunha Têxtil S.A. (Company), identified as Company and Consolidated, respectively, which comprise the balance sheet as at December 31, 2012 and the related income statements, statements of comprehensive income, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting practices and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of the individual financial statements in accordance with accounting practices adopted in Brazil and for the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and in accordance with accounting practices adopted in Brazil, and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

2

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the Company’s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. An audit also includes evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on individual financial statements In our opinion, the aforesaid individual financial statements present fairly, in all material respects, the equity and financial position of Vicunha Têxtil S.A. at December 31, 2012, its operating performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil. Opinion on consolidated financial statements In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vicunha Têxtil S.A. as at December 31, 2012, its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil. Emphasis of a matter As mentioned in Note 2, the individual financial statements were prepared in accordance with accounting practices adopted in Brazil. In the case of Vicunha Têxtil S.A., these practices differ from IFRS applicable to separate financial statements solely with respect to the measurement of investments in subsidiaries, affiliates and jointly-controlled subsidiaries under the equity method, while such investments would be measured at cost or fair value for IFRS purposes. Our opinion is not qualified in respect of this matter.

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Other matters

Statements of value added We have also audited the individual and consolidated statements of value added (SVA), for the year ended December 31, 2012, whose presentation is required by Brazilian corporation law for publicly-held companies and as supplementary information under IFRS, which do not require SVA presentation. These statements were submitted to the same audit procedures previously described and, in our opinion, are fairly presented in all material respects, in relation to the overall financial statements. São Paulo, March 27, 2013. ERNST & YOUNG TERCO Auditores Independentes S.S. CRC-2SP015199/O-6

Waldyr Passetto Junior Accountant CRC-1SP173518/O-8 S-CE

4

A free translation from Portuguese into English of individual financial statements prepared in accordance with accounting practices adopted in Brazil and of consolidated financial statements prepared in accordance with IFRS and also with accounting practices adopted in Brazil

Vicunha Têxtil S.A. Balance sheets December 31, 2012 and 2011 (In thousands of reais)

Company Consolidated

Note 12/31/12 12/31/11 12/31/12 12/31/11

Assets Current

Cash and cash equivalents 4 60,123 7,384 96,255 22.010

Short-term investments 5 231,521 104,391 234,351 111.516

Trade accounts receivable 6 316,281 322,521 351,916 330.981

Inventories 7 171,874 237,973 238,554 311.671

Dividends receivable 10 1,909 1,606 - -

Taxes recoverable 8 38,355 25,552 56,563 39.035

Receivables 9 12,710 30,287 6,771 30.287

Operations with derivatives 21 16,682 8,394 16,682 8.394

Other accounts receivable

7,427 5,698 12,722 10.166

Total current assets

856.882 743,806 1,013,814 864,060

Noncurrent

Short-term investments 5 4,574 491 4,574 491

Taxes recoverable 8 6,279 5,778 10,403 7.968

Deferred taxes, net 18 - - 954 789

Judicial deposits

15,165 14,410 15,485 14.410

Related parties 10 - 186 - 186

Receivables 9 64,712 128,748 45,384 128.748

Operations with derivatives

- 2,136 - 2.136

Other accounts receivable

16,870 9,070 17,858 9.891

Investments 14 373,172 347,375 18,842 22.630

Investment properties 11 7,577 7,577 7,688 7.577

Property, plant and equipment 12 494,648 450,998 858,843 770.530

Intangible assets 13 7,119 8,244 8,728 9.844

Total noncurrent assets

990.116 975,013 988,759 975,200

Total assets

1.846.998 1,718,819 2,002,573 1,839,260

See accompanying notes.

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Company

Consolidated

Liabilities

Note

12/31/12 12/31/11

12/31/12 12/31/11

Current

Trade accounts payable

15

30,032 41,522

44.274 49.111

Loans and financing

16

220,460 264,819

248.811 273.317

Salaries, provisions and social contributions

17,235 18,433

21.458 21.775

Taxes payable

5,023 3,295

6.092 5.208

Dividends payable

20

19,902 4,632

19.902 4.846

Taxes in installments

19

55,135 51,669

55.135 51.669

Sundry provisions

10,850 12,186

13.786 14.120

Other liabilities

22,441 19,976

26.990 26.850

Total current liabilities

381.078 416.532

436,448 446,896

Noncurrent


15

2,504 3,616

2.504 3.616

Loans and financing

16

379,291 264,939

459.195 334.595

Taxes payable

8,183 7,998

8.308 7.998

Taxes in installments

17

53,863 57,465

53.863 57.465

Deferred income and social contribution taxes, net

18

20,947 66,751

22.262 70.625

Provision for tax, civil and labor risks

19

22,138 19,067

22.138 19.067

Other liabilities

276 3,425

12.114 14.036

Total noncurrent liabilities

487.202 423.261

580,384 507,402

Equity

Capital

20

670,013 664,563

670.013 664.563

Capital reserve

20

1,700 5,450

1.700 5.450

Income reserve

187,010 91,146

187.010 91.146

Equity valuation adjustment

115,170 116,837

115.170 116.837

Cumulative translation adjustments

20

4,825 1,030

4.825 1.030

Controlling interest

978,718 879,026

978.718 879.026

Noncontrolling interest

- -

7.023 5.936

Total equity

978.718 879.026

985,741 884,962

Total liabilities and equity

1.846.998 1.718.819

2,002,573 1,839,260


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Vicunha Têxtil S.A. Income statements Years ended December 31, 2012 and 2011 (In thousands of reais, except earnings per share)


Note 12/31/12 12/31/11 12/31/12 12/31/11

Restated Restated

Net revenue 23 953,010 917,552 1,170,243 1,036,218

Cost of products sold 24 (713,763) (697,628) (865,113) (761,402)

Gross profit

239,247 219,924 305,130 274,816

Operating income (expenses)

Selling expenses 24 (98,694) (77,211) (130,493) (107,914)

General and administrative expenses 24 (64,992) (64,821) (89,345) (81,334)

Management fees 10 (7,812) (5,260) (7,812) (5,260)

Other operating income, net 26 22,199 33,861 22,585 33,149

Income before net financial income (expenses), equity pickup and taxes – continuing operations

89,948 106,493 100,065 113,457

Financial income 25 136,822 144,312 139,984 152,556

Financial expenses 25 (146,496) (168,147) (157,933) (181,631)

Financial expenses, net

(9,674) (23,835) (17,949) (29,075)

Equity pick-up 14 5,078 1,149 - -

Income before income taxes

85,352 83,807 82,116 84,382

Income and social contribution taxes

Current 18 (5,247) (4,510) (5,343) (4,164)

Deferred 18 45,803 967 50,054 378

40,556 (3,543) 44,711 (3,786)

Net income for the year

125,908 80,264 126,827 80,596

Attributed to controlling shareholders

- - 125,908 80,264

Attributed to noncontrolling shareholders

- - 919 332

Basic and diluted earnings per share – R$

Common shares (ON) 20 2.72 1.74 2.72 1.74

Preferred Shares (PN) 20 3.26 2.09 3.26 2.09


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Vicunha Têxtil S.A. Statements of comprehensive income Years ended December 31, 2012 and 2011 (In thousands of reais)


12/31/12 12/31/11 12/31/12 12/31/11

Net income for the year 125,908 80,264 126,827 80,596

Other comprehensive income components Other comprehensive income - subsidiaries 1,042 3,473 1,177 2,047

Foreign exchange on investments abroad 3,795 6,756 4,158 7,269 Income tax – incentive – CPC 07 (7,343) (9,620) (7,343) (9,620)

Total comprehensive income for the period 123,402 80,873 124,819 80,292

Attributed to controlling shareholders - - 123,402 80,873

Attributed to noncontrolling shareholders - - 1,417 (581)


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Vicunha Têxtil S.A. Statements of changes in equity Years ended December 31, 2012 and 2011 (In thousands of reais)

Capital reserve Income reserve

Capital Future capital contribution

Tax incentives

Proposed additional dividends

Legal reserve

Statutory reserve for

investments Tax

incentives

Equity valuation

adjustment

Cumulative translation

adjustments

Retained earnings/(Accumulated

losses) Equity Noncontrolling

interest Consolidated

equity

Note

Balances at January 1, 2011

660,809 3,754 2,295 30,000 3,475 21,456 - 114,681 (5,726) - 830,744 8,379 839,123

Capital increase

3,754 (3,754) - - - - - - - - - - - Future capital contribution

- 5,450 - - - - - - - - 5,450

5,450

Capital loss on change of interest in Vicunha Ecuador S.A.

- - - - - - - - - - - (1,093) (1,093)

Acquisition of shares held by noncontrolling shareholders

- - - - - - - - - - - (769) (769)

Total comprehensive income

- - - - - - - 3,473 6,756 70,644 80,873 (581) 80,292

Net income for the period

- - - - - - - - - 80,264 80,264 332 80,596 Other comprehensive income

- - - - - - - 3,473 6,756 (9,620) 609 (913) (304)

Translation adjustments for the period

- - - - - - - - 6,756 - 6,756 513 7,269 Other comprehensive income - subsidiaries

- - - - - - - 3,473 - - 3,473 (1,426) 2,047

Income tax – incentive – CPC 07

- - - - - - - - - (9,620) (9,620) - (9,620)

Realization of revaluation reserve

- - - - - - - (1,996) - 1,996 - - - Taxes on realization of revaluation reserve

- - - - - - - 679 - (679) - - -

Transfer of tax incentives – income tax

- - (2,295) - - - 2,295 - - - - - - Tax incentives – income tax

- - - - - - 9,620 - - - 9,620 - 9,620

Legal reserve

- - - - 3,532 - - - - (3,532) - - - Statutory reserve for investments

- - - - - 37,829 - - - (37,829) - - -

Proposed additional dividends

- - - 12,939 - - - - - (12,939) - - - Dividends paid

- - - (30,000) - - - - - (17,661) (47,661) - (47,661)

Balances at December 31, 2011

664,563 5,450 - 12,939 7,007 59,285 11,915 116,837 1,030 - 879,026 5,936 884,962 Capital increase 20 5,450 (5,450) - - - - - - - - - - -

Future capital contribution 20 - 1,700 - - - - - - - - 1,700 - 1,700

Dividends

- - - (12,939) - - - - - (19,814) (32,753) - (32,753) Capital loss on sale of shares from noncontrolling

shareholders

- - - - - - - - - - - (185) (185) Acquisition of shares from noncontrolling

shareholders

- - - - - - - - - - - (145) (145)

-

-

Total comprehensive income

- - - - - - - 1,042 3,795 118,565 123,402 1,417 124,819

Net income for the period

- - - - - - - - - 125,908 125,908 919 126,827

Other comprehensive income

- - - - - - - 1,042 3,795 (7,343) (2,506) 498 (2,008) Translation adjustments for the period 20 - - - - - - - - 3,795 - 3,795 363 4,158

Other comprehensive income - subsidiaries

- - - - - - - 1,042 - - 1,042 135 1,177 Income tax – incentive – CPC 07

- - - - - - - - - (7,343) (7,343) - (7,343)

Realization of revaluation reserve

- - - - - - - (4,105) - 4,105 - - -

Taxes on realization of revaluation reserve

- - - - - - - 1,396 - (1,396) - - - Investment grant – State VAT (ICMS)

- - - - - - 35,137 - - (35,137) - - -

Tax incentives – income tax

- - - - - - 7,343 - - - 7,343 - 7,343 Legal reserve

- - - - 4,172 - - - - (4,172) - - -

Statutory reserve for investments

- - - - - 62,151 - - - (62,151) - - -

Balances at December 31, 2012

670,013 1,700 - - 11,179 121,436 54,395 115,170 4,825 - 978,718 7,023 985,741


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Vicunha Têxtil S.A. Cash flow statements - indirect method Years ended December 31, 2012 and 2011 (In thousands of reais)


12/31/12

12/31/11 12/31/12

12/31/11

Income before taxes 85,352

83,807 81,197

84,050 Noncontrolling interests -

- 919

332

Equity pick-up (5,078)

(1,149) -

- Disposal of assets 5,334

2,931 6,944

5,991

Write-off of investments -

17 -

17 Provision for investment loss 4,359

2,434 4,359

2,795

Reversal of provision for investment loss -

(2,460) -

(2,460) Interest gain – capital payment (3,894)

(3,882) -

-

Interest loss – capital payment 2,798

- -

- Provision for/reversal of allowance for doubtful accounts 25,891

13,962 28,740

12,511

Provision for/reversal of inventory loss (757)

166 (691)

116 Depreciation and amortization 41,187

37,694 54,155

47,851

Interest, exchange and monetary variation, net (37,515)

(683) (40,835)

27,820 Interest and monetary variation on loans and financing 42,924

27,820 42,924

(4,182)

Provision for civil and labor contingencies 3,071

(9,163) 3,071

(9,163) Dividends and interest on equity received 63

56 -

-

163,735

151,550 180,783

165,678

Short-term investments (117,883)

(59,120) (113,588)

(38,681) Trade accounts receivable (10,136)

(62,726) (46,255)

(114,043)

Inventories 73,375

(60,081) 68,200

(92,538) Taxes recoverable (7,533)

(2,969) (14,949)

(16,158)

Receivables 92,085

34,520 117,352

35,346 Operations with derivatives (6,152)

(10,530) (6,152)

(10,530)

Judicial deposits (748)

3,103 (1,067)

3,103 Other assets (8,273)

6,321 (8,676)

7,743

14,735

(151,482) (5,135)

(225,758) Trade accounts payable (17,833)

7,402 (5,213)

63,084

Dividends 1

- (212)

22 Salaries and social charges (1,198)

1,694 (317)

4,105

Taxes payable (6,134)

(24,720) (4,201)

(24,627) Advances from customers 596

(3,179) 7,914

(2,725)

Sundry provisions (1,336)

(3,658) (129)

(941) Income and social contribution taxes paid (1,280)

(5,604) (1,280)

(5,604)

Other accounts payable 337

5,085 1,984

4,105

(26,847)

(22,980) (1,454)

37,419

151,623

(22,912) 174,194

(22,661)

Financing activities Loans and financing raised 291,605

348,245 321,706

384,744

Payment of loans, financing and swap (277,742)

(207,484) (277,742)

(207,484) Changes in intercompany loans 186

14,299 186

12,452

Dividends paid (17,484)

(43,056) (17,484)

(43,056) Future capital contribution 1,700

5,450 1,700

5,450

Monetary variation on loans and financing 13,206

32,907 13,206

32,907 Acquisition of subsidiaries -

- -

(575)

11,471

150,361 41,572

184,438

Investing activities PP&E (88,730)

(115,166) (140,633)

(148,107)

Intangible assets (316)

- (316)

- Investment (21,309)

(8,037) (572)

(5,429)

(110,355)

(123,203) (141,521)

(153,536)

Net changes in cash and cash equivalents 52,739

4,246 74,245

8,241

Increase in cash and cash equivalents At beginning of year 7,384

3,138 22,010

13,769

At end of year 60,123

7,384 96,255

22,010

52,739

4,246 74,245

8,241


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Vicunha Têxtil S.A. Statements of value added Years ended December 31, 2012 and 2011 (In thousands of reais)


12/31/12 12/31/11 12/31/12 12/31/11

Revenues (expenses) Goods and products sold and services rendered (less returns and

rebates) 1,175,341 1,116,198 1,444,253 1,265,048 Provision for/reversal of allowance for doubtful accounts (2,898) (9,145) (5,977) (10,780) Other revenues

39,684 6,923 42,839 6,334

1,212,127 1,113,976 1,481,115 1.260.602

Inputs acquired from third parties Cost of goods and products sold and services rendered

536,990 520,601 683,009 581,400

Materials, electric energy, outsourced services and other

228,807 213,090 249,084 234,388 Loss/recovery of asset values

23,300 5,500 23,720 5,800

789,097 739,191 955,813 821.588

Gross value added

423,030 374,785 525,302 439,014 Retentions

Depreciation and amortization

(41,187) (37,694) (54,155) (47,851)

Net value added generated by Company and subsidiaries 381,843 337,091 471,147 391,163 Value added received in transfer

Equity pick-up

5,078 1,149 - - Financial income

136,822 144,313 139,984 152,556

141,900 145,462 139,984 152.556

Total value added to be distributed

523,743 482,553 611,131 543,719

Distribution of value added

Employees Payroll and charges

169,622 162,829 187,812 177,288 Taxes, charges and contributions

Federal

61,403 53,653 114,502 83.852 State

9,926 8,170 9,926 8.170

Municipal

1,174 919 1,307 1,116 Debt remuneration

Interest including exchange variation

145,848 167,844 157,285 181,326 Rent

9,862 8,874 13,472 11.371

Equity remuneration Dividends paid

19,814 17,661 19,814 17,661

Proposed dividends

- 12,939 - 12,939 Retained earnings

106,094 49,664 106,094 49,664

Noncontrolling interest in retained earnings

- - 919 332

523,743 482,553 611,131 543,719

(*) The statement of value added in not part of the consolidated financial statements under IFRS.


Vicunha Têxtil S.A. Notes to financial statements

December 31, 2012 (In thousands of reais)

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1. Operations Vicunha Têxtil S.A. (“Company”) is a publicly-held corporation with its head office at Rodovia Dr. Mendel Steinbruch, s/nº, bloco 1 – KM 9, in the city of Maracanaú, state of Ceará. Its operations are focused on manufacturing denim, twill, yarns, synthetic and artificial textile fibers and textile articles manufactured with cotton for sale in the domestic and foreign markets. The Company and its subsidiaries Vicunha Ecuador S.A., Tintoreria Ullum S.A., Tejeduria Galícia S.A., Tejeduria Panamá S.A. and Vicunha Argentina S.A. have plants located in Brazil (Rio Grande do Norte and Ceará states), Ecuador and Argentina.

Shares are traded on Brazilian Securities, Commodities and Futures Exchange (BM&FBovespa), under codes VINE3, VINE5 and VINE6. Projects related to construction and installation of plants, located in the Northeast region, were approved by the Superintendency for the Development of the Northeast (SUDENE) and enjoy tax benefits to reduce income tax base approved by the Brazilian IRS through 2019 (Pacajus unit – State of Ceará); through 2021 (Maracanaú unit – State of Ceará) and through 2017(São Gonçalo do Amarantes unit – State of Rio Grande do Norte). Corporate events – 2012

In March 2012, subsidiary Vicunha Argentina S.A. paid capital of Tejeduria Galícia S.A. amounting to 10,000,000.00 pesos, through issue of 10,000,000 new shares, and became direct holder of 83.37% of its capital. This capital payment generated a capital decrease by 3,772,199 pesos through cancellation of 3,772,199 shares. In June 2012, subsidiary Vicunha Argentina S.A. paid capital to Tintoreria Ullum S.A. amounting to 5,560,336.51 pesos, through issue of 1,049,120 new shares, and became direct holder of 32.01% of its capital. Concurrently, capital was increased through reserves by 7,406,729.00 pesos upon issue of 7,406,729 shares, and subsequently decreased by 6,218,440.00 pesos upon cancellation of 6,218,440 shares. In June 2012, subsidiary Vicunha Argentina S.A. paid capital to Tejuderia Panamá S.A. amounting to 6,615,363.00 pesos, through issue of 6,615,363 new shares, and became direct holder of 66.13% of its capital. Concurrently, capital was increased through reserves by 2,968,835.00 pesos upon issue of 2,968,835 shares, and subsequently decreased by 8,140,721.00 pesos upon cancellation of 8,140,721 shares.

Vicunha Têxtil S.A. Notes to financial statements (Continued) December 31, 2012 (In thousands of reais)

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1. Operations (Continued) In July 2012, subsidiary La Internacional S.A. had its corporate name changed to Vicunha Ecuador S.A. In September and October 2012, Vicunha Têxtil S.A. acquired 87,719 shares of its subsidiary Vicunha Ecuador S.A. from noncontrolling shareholders, and became the holder of 89% of its capital. In November 2012, the Company paid capital of Vicunha Argentina S.A. amounting to 20,980, through issue of 3,000,000 new shares, and became direct holder of 82.73% of its capital.

2. Summary of significant accounting practices

The financial statements were prepared in accordance with several measurement bases used in accounting estimates. Accounting estimates involved in the preparation of the financial statements were based on both objective and subjective factors and use of professional judgment by Management to determine the adequate value to be recorded in the financial statements. Significant items subject to these estimates and assumptions include the selection of property and equipment useful lives and impairment, assessment of financial assets at fair value and under the present value adjustment method, credit risk analysis to determine an allowance for doubtful accounts, as well as other risk analyses to determine other provisions, including for tax, civil and labor claims. Book values of recognized assets and liabilities representing hedged items at fair value, which would otherwise be recorded at amortized cost, are adjusted so as to state changes in fair values attributable to hedged risks.

Settlement of transactions involving these estimates may result in amounts significantly different from those recorded in the financial statements due to the probabilistic treatment inherent in their estimate process. The Company reviews its estimates at least on a quarterly basis.

The consolidated financial statements were prepared and presented in accordance

with accounting practices adopted in Brazil, which comprise rules established by the Brazilian SEC (CVM) and Brazilian Financial Accounting Standards Board (CPC) pronouncements, which are in line with the IFRS issued by the IASB.


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2. Summary of significant accounting practices (Continued) The Company is reclassifying balances related to the individual and consolidated

financial statements as of December 31, 2011 so as to enable comparison with balances as of December 31, 2012.

Issue of these financial statements was authorized by the Company’s officers on

March 27, 2013.

2.1. Basis of consolidation The consolidated financial statements comprise the financial statements of

Vicunha Têxtil S.A. and its subsidiaries as of December 31, 2012 and 2011, as follows:

Equity interest

2012 2011

Company name Home country Direct Indirect Direct Indirect

Vicunha Europe S.à r.l. Switzerland 100.00 - 100.00 - Nova Marajó S.A. Uruguay 100.00 - 100.00 - Asaki Participações Ltda. Brazil 100.00 - 100.00 - Vicunha Ecuador S.A. Ecuador 89.00 - 88.42 - Vicunha Distribuidora de Produtos Têxteis Ltda. Brasil 99.90 - 99.90 - Vicunha Argentina S.A. Argentina 82.73 17.27 75.22 24.78 Tintoreria Ullum S.A. Argentina 67.99 32.01 78.96 21.04 Tejuderia Galicia S.A. Argentina 16.63 83.37 78.96 21.04 Tejuderia Panamá S.A. Argentina 33.87 66.13 78.96 21.04 Nova Marajó Trading Intermediary LLC United States - 100.00 - 100.00

The subsidiaries are fully consolidated as from their organization or acquisition date, which is the date when Vicunha Têxtil S.A. obtains control thereover, and continue being consolidated through the date on which such control ceases to exist. The financial statements of the subsidiaries are prepared for the same reporting period of the Company, using consistent accounting practices. All intra-group balances, revenues and expenses as well as unrealized gains and losses arising from intra-group transactions are fully eliminated. Profit and loss for the year and each component of other comprehensive income (posted directly to equity) are attributed to Company’s controlling and non-controlling shareholders. Losses are attributed to non-controlling interest, even if this results in a deficit balance.


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2. Summary of significant accounting practices (Continued)

2.2. Foreign currency translation

These financial statements are presented in Brazilian Reais, which is the Company’s functional currency. Each entity determines its own functional currency, and in those in which functional currency is different from Real, the financial statements are translated into Real as of closing date.

2.2.1. Transactions and balances

Foreign currency transactions are initially recorded at the exchange rate of the functional currency in effect at the date of transaction. Monetary assets and liabilities stated in foreign currency are then retranslated at the functional currency exchange rate in force as of balance sheet date.

All currency translation differences are recognized in the income statement.

Non-monetary items that are measured at historical cost are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

2.2.2. Group companies

Assets and liabilities of foreign subsidiaries abroad are translated into reais at the exchange rate as of balance sheet date, and the corresponding income statements are translated at the exchange rate in force on transaction date. Exchange gains and losses arising from such translation are recorded separately in equity. When a foreign subsidiary is sold, accumulated deferred charges posted to equity, regarding this foreign subsidiary, are recognized in profit and loss. Any goodwill on purchase of a foreign subsidiary after January 1, 2009, and any book value of assets and liabilities resulting from acquisition adjusted to fair value, will be treated as assets and liabilities of the foreign subsidiary and translated as of closing date.


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2.3. Cash and cash equivalents

Cash and cash equivalents are held so as to meet short-term cash commitments, and not for investment or other purposes. Cash equivalents are construed by the Company as short-term investments immediately convertible into a known cash amount, posing low risk of any change in market value. As such, an investment normally qualifies as cash equivalent when redeemable in the short-term, for instance, within three months from transaction date.

2.4. Trade accounts receivable

Trade accounts receivable are recorded at billed amount, adjusted to present value, including the corresponding direct taxes applicable to Company and subsidiaries. Allowance for doubtful accounts was set up at an amount considered sufficient by management to cover any credit realization losses, based on the criterion of individual balance analysis of customers with default risk.

2.5. Inventories

Inventories are measured at the lower of cost or net realizable value. Costs incurred to transport each product to its current location and condition are recorded as follows: Raw materials – acquisition cost according to average cost. Finished and in-progress products – cost of direct materials and workforce and a proportional portion of general indirect manufacturing expenses based on normal operating capacity. Net realizable value corresponds to the selling price in the normal course of business, less estimated costs of completion and estimated costs necessary for the realization of the sale and inventory reserve, where applicable.


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2.5. Inventories (Continued)

Fluctuation of cotton prices, Company’s main input: cotton, an international commodity that may have significant price changes, accounts for a significant portion of cost for Company and subsidiaries.

2.6. Investments in subsidiaries

Investments of Company and subsidiaries are recorded under the equity method in the individual financial statements. In the consolidated financial statements, investments in subsidiaries are fully consolidated.

Based on the equity method, investments in subsidiaries are accounted for in

the balance sheet of the Company at cost, plus changes after the acquisition of ownership interest in the subsidiaries.

The income statement reflects the Company’s interest in P&L and operations of

its subsidiaries. When a change is directly recognized in subsidiaries’ equity, the Company shall recognize its portion in the changes occurred and disclose this fact, when applicable, in the statement of changes in equity. Unrealized gains and losses, resulting from intercompany transactions, are eliminated according to the interest held by the Company in such subsidiaries.

The financial statements of the subsidiaries are prepared for the same reporting

period of the Company. Adjustments are performed when necessary in order to align accounting policies to those adopted by the Company.


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2.7. Property, plant and equipment (PP&E)

PP&E items are stated at acquisition or construction cost and partial revaluation recorded by the Company in 2006, net of accumulated depreciation and/or accumulated impairment losses, as the case may be. Referred to cost includes replacement cost of part of PP&E and loan costs related to long-term construction projects, when recognition criteria are met. When significant parts of PP&E are replaced, Company and subsidiaries recognize such parts as an individual asset item, with specific depreciation and useful life. Accordingly, when significant maintenance is carried out, cost thereof is recognized in property, plant and equipment book value if recognition criteria are met. All other repair and maintenance costs are posted to profit and loss, when incurred. Present value of expected cost of asset decommissioning after its use is included in the cost of the corresponding asset if the recognition criteria for a provision are met.

Depreciation is calculated by the straight line method over the useful life of assets, at rates that take into consideration their estimated useful life.

A property, plant and equipment item is written off when it is sold or when no future economic benefit is expected from its use or sale. Any gains or losses arising from the asset write-off (calculated as the difference between asset net sales and book value) are included in profit and loss for the year when the asset is written off.

Assets net book value and useful lives, as well as depreciation methods, are reviewed at each year end, and adjusted on a prospective basis, as the case may be.

2.8 Intangible assets

Intangible assets acquired separately are measured at cost of acquisition upon their initial recognition. Cost of intangible assets acquired in a business combination corresponds to fair value on acquisition date. After initial recognition, intangible assets are recorded at cost, less accumulated amortization and impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is reflected in the income statement in the year they are incurred.


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2.8. Intangible assets (Continued)

Intangible assets are assessed as having a finite or indefinite useful life.

Intangible assets that have a finite useful life are amortized over their economic useful life and are submitted to impairment tests whenever there are indications of impairment loss. The amortization period and the method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in these assets are recorded by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization charges on intangible assets with finite lives are recognized in the income statement in the expense category consistent with the use of the intangible asset. Indefinite-lived intangible assets are not amortized, but are submitted to annual impairment tests, either individually or based on the relevant cash generating unit. The useful life of an intangible asset having indefinite life is reviewed annually to determine whether indefinite life assessment remains supportable. Otherwise, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains and losses arising from write-off of an intangible asset are measured as the difference between the net sale price and the book value of the asset, recognized in the income statement at the write-off of the asset.

2.9. Impairment of nonfinancial assets

Management annually reviews the net book value of assets in order to determine whether there are any events or changes in economic, operating, or technological circumstances that may indicate impairment. When such evidence is found and the net book value exceeds the recoverable amount, a provision for impairment is set up to adjust the net book value to the recoverable amount. Recoverable amount of an asset item or of a cash-generating unit is defined as the higher of value in use and net sales.


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2. Summary of significant accounting practices (Continued) 2.9. Impairment of nonfinancial assets (Continued)

In estimating value in use of an asset item, estimated future cash flows are discounted to present value at a pretax discount rate reflecting the weighted average capital cost for the industry in which the cash-generating unit operates. The net sale price is determined, whenever possible, for firm sale contracts on an arm’s length basis, between knowledgeable, willing parties, adjusted by costs to sell the asset, or, in the absence of firm sale contracts, based on the observable market price in an active market, or on the most recent transaction price involving similar assets. Impairment tests are carried out annually (at December 31) or whenever the circumstances indicate impairment loss.

2.10. Investment properties and discontinued operations

Investment properties are initially measured at cost, including transaction costs. Book value includes replacement cost of an investment property existing at the time the cost is incurred if the recognition criteria are met; this excludes daily service costs of investment properties. The Company opted for the cost method to measure investment properties after their initial recognition.

Investment properties are written off when sold or when no longer permanently used, and no future economic benefit is expected from their sale. The difference between net value obtained from sale and book value of the asset is recognized in P&L for the period when such investment properties are written off.

In the consolidated income statement, revenues and expenses from discontinued operations, when they exist, are reported separately from other revenues and expense, after the Income After Taxes account, even when the Company holds non-controlling interest after the sale. Resulting income or loss (after taxes) is separately reported in the income statement.

Once they are classified as held for sale, assets are not subject to depreciation or amortization.


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2. Summary of significant accounting practices (Continued) 2.11. Provisions

Provisions are recorded when the Company has a present (legal or constructive) obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits, in an amount that can be reliably estimated.

2.11.1. Provisions for tax, civil and labor claims

The Company and its subsidiaries are party to various legal and administrative proceedings. Provisions are recorded for all litigation contingencies, the settlement of which is expected to result in an outflow of economic benefits, in an amount that can reliably estimated. Assessment of the likelihood of loss includes an evaluation of available evidence, the hierarchy of laws, available case law, recent court decisions and their relevance in the legal system, as well as the opinion of outside legal advisors. Provisions are reviewed and adjusted to take into consideration changes in circumstances, such as applicable statute barring period, conclusion from tax audits or additional; exposures identified based on new matter or court decisions.

2.11.2. Contingent liabilities recognized in a business combinations

A contingent liability recognized in business combination is initially measured at fair value. It is subsequently measured for the higher of:

the amount that would be recognized in accordance with the accounting practice addressing the provisions above (CPC 25); or

amount initially recognized, less, as the case may be, accumulated amortization recognized in accordance with the revenue recognition practice (CPC 30).


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2. Summary of significant accounting practices (Continued) 2.12. Payment of dividends

Dividend payment to shareholders is recognized as a liability in the year-end financial statements, according to Company articles of incorporation. Any amount above mandatory minimum dividend is accrued on the date of its approval by the shareholders in the Board of Directors’ Meeting and confirmed in the Minutes of the General Shareholders’ Meeting.

2.13. Present value adjustment of assets and liabilities

Current and noncurrent monetary assets and liabilities are adjusted to present value when the effect is considered significant in relation to the overall financial statements. Present value adjustment is calculated considering contractual cash flows and the explicit, sometimes implicit, interest rates of the corresponding assets and liabilities. Therefore, interest rates accrued on revenues, expenses and costs associated with these assets and liabilities are discounted with a view to recognizing them on an accrual basis. This interest is subsequently reallocated to financial income and expenses in profit and loss by using the effective interest rate method in relation to contractual cash flows. The Company adopts the Weighted Average Cost of Capital (WACC) as the discount rate.

2.14. Financial instruments

2.14.1. Financial assets

Initial recognition and measurement Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, investments held to maturity, financial assets available for sale or as derivatives designated as hedging instruments in an effective hedge, as the case may be. The Company determines the classification of its financial assets at the time of inception, when it becomes party to the contractual provisions of the instrument.


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2. Summary of significant accounting practices (Continued) 2.14. Financial instruments (Continued)

2.14.1. Financial assets (Continued)

Initial recognition and measurement (Continued)

Financial assets are initially recognized at fair value plus, in the case of investments not designated at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of financial assets. Purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (regular way purchases) are recognized on the trade date, which is the date when Company and subsidiaries commit to purchase or sell the asset. Financial assets of Company and subsidiaries include cash and cash equivalents, short-term investments, trade accounts receivable, related-party receivables, amounts receivable and derivative financial instruments.

Subsequent measurement Subsequent measurement of financial assets depends on their classification, which may be as follows: Financial assets at fair value through profit or loss These include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if acquired to be sold within short term. This category includes derivative financial instruments taken out by Group companies that do not meet the hedge accounting criteria, defined by CPC 38. Financial assets at fair value through profit or loss are presented in the balance sheet at fair value, with the related gains and losses recognized in profit and loss.


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Financial assets measured at fair value through profit or loss (Continued) Company and subsidiaries evaluated their financial assets at fair value through profit or loss, as they intend to sell them in the short term. When Company and subsidiaries are under unfavorable conditions to sell these financial assets due to inactive markets and the Company’s intention to sell them in the near future changes significantly, Company and subsidiaries may elect to reclassify such financial assets under certain circumstances. The reclassification to loans and accounts receivable – available for sale or held to maturity – depends on the nature of the asset. Such valuation does not affect any financial assets designated at fair value through profit and loss using the fair value option at the time of presentation.

Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments which, however, are not traded in an active market. After initial measurement, these financial assets are carried at amortized cost using the effective interest rate method (effective interest rate), less impairment. Amortized cost is calculated by taking into consideration any discount or premium on acquisition and fees or costs incurred. Amortization of the effective interest rate method is included in financial income in the income statement. The losses arising from impairment are recognized in profit and loss as financial expenses.


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Investments held to maturity

Nonderivative financial assets with fixed or determinable payments and defined maturity are classified as held to maturity when Company and subsidiaries have expressed their intent and financial ability to hold them to maturity. After initial recognition, investments held to maturity are measured at amortized cost under the effective interest rate method, less impairment. Amortized cost is calculated by taking into consideration any discount or premium on acquisition and fees or costs incurred. Amortization of the effective interest rate is included in financial income in the income statement. The losses arising from impairment are recognized in the income statement as financial expenses.

Financial assets available for sale

Financial assets available for sale are those nonderivative financial assets which are not classified as (a) loans and receivables, (b) investments held to maturity or (c) financial assets at fair value through profit or loss. These financial assets include equity instruments and debt bonds. Debt bonds in this category are those intended to be kept for an indefinite period and that can be sold to meet liquidity needs or in response to changes in market conditions.

After initial recognition, financial assets available for sale are measured at fair value, and unrealized gains and losses are recognized directly in other comprehensive income in the available-for-sale reserve, except for impairment of interests calculated using the effective interest rate method and exchange gains or losses on monetary assets, which are recognized directly in net income for the period.


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2.14. Financial instruments (Continued)


Financial assets available for sale (Continued) When the investment is derecognized or when there is loss by impairment, the cumulative gains or losses previously recognized in other comprehensive income should be recognized in v. The fair value of monetary assets available for sale denominated in foreign currency is measured in this foreign currency and translated using the exchange rate in force at the reporting date of financial statements. The variations in fair value attributable to translation differences that result from a change in the amortized cost of the asset are recognized in profit and loss, and other variations are recognized directly in equity.

Derecognition (write-off)

A financial asset (or, where appropriate, a part of a financial asset or part of a group of similar financial assets) is written off when:

The rights to receive cash flows from the asset expire;

Company and subsidiaries have transferred their rights to receive cash flows of the asset or have assumed an obligation to fully pay the cash flows received, without significant delay, to a third party under an onlending agreement, and (a) Company and subsidiaries have transferred substantially all risks and rewards of the asset, or (b) Company and subsidiaries have not transferred nor retained substantially all risks and rewards related to the asset, but have transferred control over the asset.

When Company and subsidiaries have transferred their rights to receive cash flows from an asset or have executed an agreement to transfer, and have not transferred or retained substantially all risks and benefits related to the asset, an asset is recognized to the extent of the continued involvement of the Company and its subsidiaries with the asset.


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Derecognition (write-off) (Continued)

In this case, Company and subsidiaries also recognize an associated liability. The transferred asset and associated liability are measured based on rights and obligations that Company and subsidiaries maintained. The continuous involvement in the form of a guarantee on the transferred asset is measured at the lower of original book value of the asset or the maximum consideration that may be required by Company and subsidiaries. Impairment of financial assets At the balance sheet date, Company and subsidiaries evaluate whether there is any objective evidence to determine whether the financial asset or group of financial assets is not recoverable. A financial asset or group of financial assets is considered not recoverable if and only if there is objective evidence of impairment as a result of one or more events that have happened after the initial recognition of assets (a "loss event" incurred) and this loss event has an impact on estimated future cash flows of the financial asset or group of financial assets that can be reasonably estimated. Impairment evidence may include indications that borrowers are undergoing material financial difficulties. The likelihood that borrowers will go bankrupt or undergo any other type of financial restructuring, be in default or make late principal or interest payment may be indicated by a measurable decrease in future estimated cash flows, such as changes in maturity or economic conditions related to the defaults.


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2.14.2. Financial liabilities

Initial recognition and measurement

Financial liabilities are classified as financial liabilities at fair value through profit or loss, loans and financing or derivatives classified as hedging instruments, as appropriate. Company and subsidiaries determine the classification of its financial liabilities upon initial recognition. Financial liabilities are initially recognized at fair value and, in the case of loans and financing agreements, plus the cost directly related to the transaction. Financial liabilities of Company and subsidiaries include trade accounts payable, loans and financing and other liabilities. Subsequent measurement Measurement of financial liabilities depends on their classification, which may be as follows: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities are classified as held for trading if acquired to be sold within short term. This category includes derivative financial instruments taken out by the Company that do not meet the hedge accounting criteria, defined by CPC 38 – Derivatives: Recognition and measurement Gains and losses on liabilities held for trading are recognized in the income statement.


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2.14.2. Financial liabilities

Loans and financing

After initial recognition, loans and financing agreements subject to interest are subsequently measured at amortized cost, using the effective interest rate. Gains and losses are recognized in the income statement upon write-off of the liabilities, as well as during the amortization process using the effective interest rate.

Derecognition (write-off)

A financial liability is written off when the obligation is revoked, canceled or expires. When an existing financial liability is replaced by another from the same lender with substantially different terms, or terms of an existing liability are substantially modified, such replacement or modification is treated as write-off of original liability and recognition of a new liability, and the difference in corresponding carrying amounts is recognized in the income statement.

2.14.3. Financial instruments – net

Financial assets and liabilities are presented net in the balance sheet when, and only when, the entity currently has a legally enforceable right to offset the amounts recognized and intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

2.14.4. Fair value of financial instruments

The fair value of financial instruments actively traded in organized financial markets is determined based on purchase prices quoted in the market at close of business at balance sheet date, without deduction of transaction costs.


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2.14.4. Fair value of financial instruments (Continued)

The fair value of financial instruments for which there is no active market is determined using valuation techniques. These techniques can include using recent market transactions (on an arm’s length basis); reference to the current fair value of another similar instrument, analysis of discounted cash flows or other valuation models.

2.15. Derivative financial instruments

Initial recognition and subsequent measurement The Company uses derivative financial instruments such as such as foreign exchange swaps to hedge against exposure to exchange rate variation, to commodity price variation and to interest rate variation. Derivative financial instruments designated as hedge are initially measured at fair value on the respective contract execution date and are subsequently remeasured at fair value. Derivatives are presented as financial assets or liabilities upon fair value gain or loss on the respective instrument. Any gains or losses from changes in fair value of derivatives during the year are recorded directly in the income statement. At December 31, 2012 and 2011, Company and subsidiaries had no derivative financial instruments recorded under hedge accounting, or financial instruments with embedded derivatives.

Current versus noncurrent classification When the Company maintains a derivative as economic hedge for a period exceeding 12 months after the balance sheet date, the derivative is classified as noncurrent (or segregated into current and noncurrent portions) consistently with the classification of corresponding item.


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2. Summary of significant accounting practices (Continued) 2.16. Revenue recognition

Revenue is recognized to the extent that future economic benefits are likely to

flow to the Company and its subsidiaries in an amount that may be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates and taxes or charges on sales.

2.16.1. Sales of products

Revenue from product sales is recognized when significant risks and

rewards of ownership of the products are transferred to the buyer, which generally occurs upon delivery thereof.

2.16.2. Interest income

For all financial instruments evaluated at amortized cost and financial

assets that generate interest, classified as available for sale, the revenue or financial expense is recorded using the effective interest rate that exactly discounts the expected future payments or cash receipts over the estimated useful life of the financial instrument or a shorter period of time, where applicable, to net book value of the financial asset or liability. Interest income is included in financial income, in the income statement.

2.17. Taxes

2.17.1. Current income and social contribution taxes

Current tax assets and liabilities for last and prior years are measured at

the estimated amount recoverable from or payable to tax authorities. Tax rates and laws used to calculate the amounts are those in force, or substantially in force, at balance sheet date in those countries where Company and subsidiaries operate and generate taxable profit.


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2. Summary of significant accounting practices (Continued) 2.17. Taxes (Continued)

2.17.2. Deferred income and social contribution taxes

Deferred taxes are generated by temporary differences as of the balance

sheet date between assets and liabilities tax bases and their corresponding book values.

Deferred tax liabilities are recognized for all temporary tax differences, except:

when the deferred tax liability arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination and, at transaction date, does not affect book net income or profit or loss for tax purposes; and

on temporary differences related to investments in subsidiaries, where the period of reversal of temporary differences can be controlled and the temporary differences are not likely to be reversed in the near future.

Deferred tax assets are recognized on all deductible temporary

differences, unused tax credits and tax losses to the extent that taxable income will likely be available so that the deductible temporary differences may be realized, and unused tax credits and losses may be used, except:

when the deferred tax liability related to the deductible temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination and, at transaction date, does not affect book net income or profit or loss for tax purposes; and

on deductible temporary differences with investments in subsidiaries. Deferred tax assets are recognized only to the extent that temporary differences are likely to be reversed in the near future and taxable profit is available so that the temporary differences can be used.


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2. Summary of significant accounting practices (Continued) 2.17. Taxes (Continued)

2.17.2. Deferred income and social contribution taxes (Continued)

Book value of deferred tax assets is reviewed at each balance sheet date and written off, as taxable profit is no longer likely to allow deferred tax assets to be fully or partially used. Deferred tax assets written off are reviewed at each balance sheet date, and are recognized to the extent future taxable income is likely to allow such tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rate likely to be applicable in the year in which the asset or the liability will be realized or settled, based on the tax rates (and tax law) in force at the balance sheet date. Deferred tax assets and liabilities will be stated net if there is a legal or contractual right to offset the tax assets against tax liabilities, and when the deferred taxes are related to the same corporate taxpayer and subject to the same tax authority.

2.17.3 Sales taxes

Revenues, expenses and assets are recognized net of sales tax except:

When the sales taxes incurred on the purchase of goods or services are not recoverable from tax authorities, in which case the sales tax is recognized as part of the cost of acquiring of the asset or expense item as applicable;

When the receivables and payables are presented together with the amount of sales taxes; and

The net value of sales taxes, recoverable or payable, is included as part of receivables or payables in the balance sheet.


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2. Summary of significant accounting practices (Continued) 2.18. Government grants

Company branches, located within the region under Superintendency for the Development of the Northeast (SUDENE) administration, enjoy federal tax incentive, equivalent to 75% fixed reduction in Corporate Income Tax (IRPJ) and nonrefundable surtax, calculated on profit from tax incentive activities (lucro de exploração). The Company records tax benefit, by deducting the amount corresponding to income and social contribution tax expenses and payable. Government grant may not be distributed or otherwise passed on to shareholders, and retention thereof is required after flowing through the income statement, in a specific equity account, to evidence compliance with this condition. In such cases, after recognition of this amount in the income statement, it is credited to own reserve (tax incentive reserve), from the retained earnings or accumulated losses account. The branches located in the States of Ceará and Rio Grande do Norte enjoy state tax incentives, equivalent to a fixed deduction in the ICMS payable of 88% and 75%, respectively. The Company records this tax benefit under other operating income. These amounts may not be distributed or otherwise passed on to shareholders, since they refer to investment grants. After recognition in the income statement, these amounts are credited to the tax incentive reserve, from the retained earnings or accumulated losses account.

2.19. Earnings (loss) per share

Basic and diluted earnings per share are reached after dividing the net income

attributed to Company shareholders by the weighted average of outstanding common and preferred shares in the year, under the terms of CPC 41 – Earnings per Share and IAS 33 – Earnings per Share.


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2. Summary of significant accounting practices (Continued) 2.20. Business combinations

Business combinations are recorded under the acquisition method. The cost of

an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any noncontrolling interest in the acquiree. For each business combination, the acquirer should measure the noncontrolling interest in the acquiree at fair value or based on its interest in the acquiree’s identifiable net assets. Acquisition costs are expensed as incurred.

When purchasing a business, the Company evaluates the financial assets and

liabilities assumed in order to classify and allocate them according to the contractual terms, economic circumstances and the relevant conditions on the purchase date, which include segregation, by the acquiree, of embedded derivatives existing in host contracts in the acquiree.

In case the business combination is performed in stages, fair value at acquisition

date of the controlling interest previously held in the acquiree’s capital is remeasured at fair value at acquisition date and impacts are recognized in the income statement.

Any contingent consideration to be transferred by the acquirer shall be

recognized at fair value at acquisition date. Subsequent changes in fair value of contingent consideration treated as an asset or as a liability are recognized in accordance with CPC 38 in the income statement or in other comprehensive income. If the contingent consideration is classified as equity, it should not be revaluated until it is finally settled in equity.

Goodwill is initially measured as the excess consideration transferred and the

amount recognized for the net assets acquired (net assets identifiable acquired and liabilities assumed). If consideration is less than the fair value of net assets acquired, the difference shall be recognized as a gain in the income statement.


35

2. Summary of significant accounting practices (Continued) 2.20. Business combinations (Continued)

After initial recognition, goodwill is measured at cost less any accumulated

impairment losses. For impairment testing purposes, goodwill acquired in a business combination is, as from the acquisition date, allocated to each cash-generating unit of the Company that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

When goodwill is part of a cash-generating unit and a portion of that unit is

disposed of, the goodwill associated with the sold portion is included in operating costs when calculating sale gains or losses. Goodwill sold under these circumstances is calculated based on the proportional amounts of the sold portion in relation to the cash-generating unit which was maintained.

2.21. Information by segment

An operating segment is a component of Company and subsidiaries that carries

out business activities from which revenues may be obtained and expenses incurred, including revenues and expenses related to transactions with other components. All operating income (loss) of the operating segments is frequently reviewed by the Company’s managing officers for purposes of decisions concerning funds to be allocated thereto and performance evaluation.

Segment results include items directly attributable to the segment, as well as

those that can be allocated on a reasonable basis.

2.22. Statements of value added The Company prepared individual and consolidated Statements of Value Added

(SVAs) in compliance with Technical Pronouncement CPC 09 – Statements of Value Added. These statements are presented as an integral part of the financial statements under accounting practices adopted in Brazil – under CPC, Brazilian Corporation Law and CVM standards applicable to publicly held companies, whereas under the IFRS they represent additional financial information.


36

2. Summary of significant accounting practices (Continued) 2.23 IFRS Pronouncements not in effect as of December 31, 2012

Standards issued which were not in effect as at the date of Company financial statements are as under: This list of standards and interpretations issued comprises those whose adoption the Company reasonably anticipates will lead to a material impact on Company disclosures, financial situation or performance due to their application on a future date. The Company intends to adopt these standards upon effectiveness thereof. IAS 1 – Presentation of financial statements – Presentation of items in Other Comprehensive Income IAS 1 Revisions changed the grouping of items recorded in Other comprehensive income. Items potentially reclassifiable (or “recycled”) to profit or loss subsequently (for instance, net gains from hedge transactions of net investments, exchange rate variation differences due to translation of foreign transactions, net changes in cash flow hedge or gains from sale of assets classified as available for sale) should be disclosed separately from items which will never be reclassified (for instance, actuarial gains or losses in defined benefit plans). These revisions refer to disclosures and do not impact the financial position or performance of the Company. These revisions are effective for years beginning on or after January 1, 2013, and will be applied in Company financial statements when they become effective. IAS 19 Employee benefits (Revision) The IASB has issued several IAS 19 revisions. Such revisions include from basic changes, such as exclusion of the corridor approach and the concept of expected returns on plan assets to simple clarifications on appreciation, depreciation and reformulation. The Company is currently evaluating the full impact of the remaining revisions. This revision will be effective for annual periods beginning on or after January 1, 2013.


37

2. Summary of significant accounting practices (Continued) 2.23 IFRS Pronouncements not in effect as of December 31, 2012 (Continued)

IFRS 9 - Financial Instruments Classification and Measurement IFRS 9, as issued, reflects the first phase of the work carried out by the IASB referring to replacement of IAS 39 and applies to the classification and measurement of financial assets and financial liabilities, as defined in IAS 39. This standard was initially effective for annual periods beginning as from January 1, 2013; however, the Amendments to IFRS9 – Mandatory Effective Date and Transition Disclosures, issued in December 2011, changed the mandatory effective date to January 1, 2015. In subsequent stages, the IASB will focus on the accounting procedures for hedge instruments and impairment of financial assets. Adoption of the first IFRS 9 phase will have effects on the classification and measurement of Company financial assets, but will have no impacts on the classification and measurement of the financial liabilities.

The Company will quantify said effect in conjunction with the other phases, upon issue of the final standard, which will comprise all phases. IFRS 12 Disclosure of interest in other entities IFRS 12 includes all requirements previously included in IAS 27 relating to consolidated financial statements, as well as all the disclosure requirements previously included in IAS 31 Interests in Joint Ventures and IAS 28 Investments in Associates. These requirements are related to the interest held by an entity in subsidiaries, joint arrangements, associates and structured entities. New disclosure requirements will be met, but these disclosures will have no impact on Company financial position or performance. This standard will come into force for annual periods beginning on or after January 1, 2013.


38

2. Summary of significant accounting practices (Continued) 2.23 IFRS Pronouncements not in effect as of December 31, 2012 (Continued)

With regard to first-time adoption of IFRS 7 (R) – Financial Instruments: Disclosure, IFRS 11 - Joint Arrangements, IFRS 13 – Fair Value Measurement, IAS 32 (R) – Offsetting a Financial Asset and a Financial Liability, IFRS 1 (R) – First-time Adoption of IFRS, IFRS 10 – Consolidated Financial Statements , IFRS 13 – Fair Value Measurement and IAS 28 (R) – Investments in Associates, which were issued (new pronouncements) and/or revised by the IASB prior to 2012 and are effective for fiscal years beginning January 1, 2013, Company management does not anticipate significant impacts on its individual and consolidated financial statements.

3. Significant accounting judgments, estimates and assumptions

3.1. Judgments

The preparation of Company financial statements requires that Management make judgments and estimates and adopt assumptions that affect the amounts disclosed referring to revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities, as at the date of the financial statements. However, the relative uncertainty of such assumptions and estimates could lead to results that require a significant adjustment to the carrying amount of the assets or liabilities affected in future periods.

3.2. Estimates and assumptions

Key estimates and assumptions related to future estimate uncertainty sources and other significant estimate uncertainty sources as of the balance sheet date, involving material risk of significant adjustment to book value of assets and liabilities for the following financial year, are discussed below.


39

3. Significant accounting judgments, estimates and assumptions (Continued)

3.2. Estimates and assumptions (Continued)

Impairment of nonfinancial assets

An impairment loss exists when the book value of an asset of cash-generating unit exceeds its recoverable amount, which is the higher of fair value less cost to sell and value in use. Fair value less cost to sell is calculated based on information available about similar assets sold or market prices less additional costs to dispose of the asset item. Value in use is calculated based on the discounted cash flow model. Cash flows derive from the budget for the following five years and do not include reorganization activities which the Company and the subsidiary have not yet been committed to or significant future investments that will improve the asset base of the cash generating unit tested. The recoverable amount is sensitive to the discount rate used by the discounted cash flow method, as well as to expected future cash receipts and the growth rate used for extrapolating cash flow projections.

Taxes There are uncertainties related to the interpretation of complex tax regulations and to the amount and time of future taxable profit/loss. Given the broad spectrum of international business relationships, as well as long-term nature and complexity of existing contractual instruments, differences between actual results and the assumptions adopted, or future changes in these assumptions could require future adjustments in revenue and tax expense already recorded. Based on reliable estimates, Company and subsidiaries record provisions for contingencies that may arise as a result of tax audits by relevant authorities of the jurisdictions in which it operates. The amount of these provisions is based on several factors, such as previous tax audit experiences and different tax ruling interpretations by the taxable entity and relevant tax authorities. These different interpretations may arise in a wide range of issues, depending on the prevailing conditions in the respective domicile of Company and subsidiaries.


40

3. Significant accounting judgments, estimates and assumptions (Continued)

3.2. Estimates and assumptions (Continued)

Taxes (Continued) Deferred tax assets are recognized to the extent taxable profit is likely to be available so that unused tax credits and losses can be used. Significant judgment calls are required of management in order to determine the amount of deferred tax assets which may be recognized, based on probable period and level of future taxable profits, together with future tax planning strategies. Fair value of financial instruments

When the fair value of financial assets and liabilities in the balance sheet cannot be obtained in active markets, it shall be determined through measurement techniques, including the discounted cash flow method. These methods use observable market data, whenever possible; otherwise, a given judgment call is required in order to determine the fair value. Judgment includes consideration about the data used such as, for instance, liquidity risk, credit risk and volatility. Changes in the assumptions regarding these factors could affect the stated fair value of the financial instruments.

Provisions for tax, civil and labor claims

Company and subsidiaries recognize a provision for civil, tax and labor claims. Assessment of the likelihood of loss includes an evaluation of available evidence, the hierarchy of laws, available case law, recent court decisions and their relevance in the legal system, as well as the opinion of outside legal advisors. Provisions are reviewed and adjusted to take into consideration changes in circumstances, such as applicable statute barring period, conclusion from tax audits or additional; exposures identified based on new matter or court decisions.


41

4. Cash and cash equivalents


2012 2011 2012 2011

Cash 19 24 1,239 473 Banks 5,427 7,360 40,339 21,537 Foreign exchange receivables 3,003 - 3,003 - Short-term investments 51,674 - 51,674 -

Total 60,123 7,384 96,255 22,010

Bank deposits comprise balances in banks and highly-liquid investments not subject to limitations whatsoever regarding their use.

Foreign exchange receivables refer to amounts received in foreign currency and, at Company discretion, these instruments have not yet been closed out. Short-term investments, such as Rural Credit Bank Notes (LCA) and repurchase agreements, refer to agreed-upon repurchase amounts within 90 days, with no risk of change in value and daily liquidity.

5. Short-term investments

Breakdown of short-term investments by nature


2012 2011 2012 2011

Bank deposit certificates (CDB) (a) 209,254 92,008 212,084 99,133 Agribusiness credit bills

12,222

12,222

Repurchase agreements - DI (b) 22,267 - 22,267 - Liquidity fund – CDB (c) 4,482 - 4,482 - Other 92 652 92 652

236,095 104,882 238,925 112,007 (-) Current (231,521) (104,391) (234,351) (111,516)

Noncurrent 4,574 491 4,574 491

(a) Investments in Bank Deposit Certificates mature within no longer than 1034 days and their remuneration ranges

from 100.1% to 118% of the Interbank Deposit Certificate (CDI).

(b) Repurchase agreements have a short grace period and their remuneration ranges from 102.5% to 102.8% of CDI.

(c) Investments in Bank Deposit Certificates maturing on January 27, 2022 and remunerated at 99% of CDI. This constitutes a Liquidity Fund together with Banco do Nordeste, representing a guarantee to the FNE operation.

Company exposure to interest rate and credit risks and a sensitivity analysis of financial assets and liabilities are disclosed in Note 21.


42

6. Trade accounts receivable

a) Breakdown of trade accounts receivable


2012 2011 2012 2011

Domestic customers 295,381 260,712 299,510 263,419 Domestic customers – related parties 218 263 218 263 Foreign customers 28,003 33,384 100,338 81,453 Foreign customers – related parties 44,781 66,837 889 15,221 Other receivables 7,734 6,122 15,203 16,979 Allowance for doubtful accounts (57,472) (42,380) (61,878) (43,937) Present value adjustment (2,364) (2,417) (2,364) (2,417)

316,281 322,521 351,916 330,981

For more information on the terms and conditions involving accounts receivable from related parties, see Note 10.

b) Changes in the allowance for doubtful accounts are as follows:

Company and subsidiaries set up allowance for doubtful accounts based on an individual analysis of the trade accounts receivable balance, considering the history of default, negotiations in progress and existence of security interest.


2012 2011 2012 2011

At beginning of year (42,380) (33,136) (43,937) (36,144) Set-up (reversal) of allowance (25,891) (13,962) (28,740) (12,511) Losses written off trade accounts receivable 10,799 4,718 10,799 4,718

At end of year (57,472) (42,380) (61,878) (43,937)

c) Maturities of accounts receivable, net of allowance for doubtful accounts


2012 2011 2012 2011

Accounts receivable falling due 286,484 257,816 315,303 267,571 Accounts receivable from negotiated credits 8,949 17,131 8,949 17,131 Accounts receivable - overdue

Up to 30 days 15,155 19,033 16,665 21,956 From 31 to 60 days 4,655 12,016 6,124 7,346 From 61 to 90 days 275 4,426 1,917 3,013 From 91 to 180 days 763 6,394 2,292 6,283 Above 181 days - 5,705 666 7,681

316,281 322,521 351,916 330,981


43

6. Trade accounts receivable (Continued)

d) Accounts receivable in foreign currency


2012 2011 2012 2011

Reais 247,179 230,817 248,629 235,464 US dollars 69,102 91,704 52,509 63,195 Swiss francs - - 13,616 3,806 Argentinean pesos - - 37,162 28,516

316,281 322,521 351,916 330,981

Company exposure to credit and currency risks referring to accounts receivable is described in Note 21.

7. Inventories

a) Inventory breakdown


2012 2011 2012 2011

Finished products 74,137 90,728 118,414 130,549 Work-in-process 27,798 35,500 34,165 42,030 Raw materials 32,008 52,805 46,521 68,214 Supplies, packages and other 27,740 23,274 32,832 35,301 Advances to suppliers 12,030 38,262 8,616 38,262 Provision for losses on inventories (1,839) (2,596) (1,994) (2,685)

171,874 237,973 238,554 311,671

b) Changes in the provision for inventories

A provision for adjustments to realizable value was recorded for certain items considered obsolete or slow-moving.


2012 2011 2012 2011

At beginning of year (2,596) (2,430) (2,685) (2,569) Set-up (1,472) (1,282) (1,627) (1,282) Reversal 2,229 1,116 2,318 1,166

At end of year (1,839) (2,596) (1,994) (2,685)


44

8. Taxes recoverable


2012

2011 2012

2011

State VAT (ICMS) 3,331

3,145 3,331

3,145

Federal VAT (IPI) 472

614 472

614

Withholding Income Tax (IRRF) 444

358 444

358

Corporate Income Tax (IRPJ) 17,378 16,758 30,120 23,209 Social Contribution Tax on Gross Revenue for Social Security Financing (COFINS) 5

5 180

83

Social Contribution Tax on Gross Revenue for Social Integration Program (PIS) 14,378

2,325 14,416

2,342

Value Added Tax (VAT) -

- 9,105

7,651

Import duty (II) 1,186

1,082 1,186

1,082

Prepayment of federal taxes in installments 5,159 4,904 5,159 4,904 Other 2,281

2,139 2,553

3,615

Total 44,634

31,330 66,966

47,003

(-) Current (38,355)

(25,552) (56,563)

(39,035)

Noncurrent 6,279

5,778 10,403

7,968

9. Receivables

a) Breakdown of receivables

2012 2011

Company

Company

Consolidated and

Consolidated

Disposal of properties (i), (ii), (vi) and (vii) 63,719

38,288 64,856 Disposal of machinery, equipment, facilities and

furniture (iii) 14,987

14,987 50,770 Disposal of machinery, inventories, services and

rental (iv) and (v) -

- 47,566 Other -

164 2,188 Present value adjustment (1,284)

(1,284) (6,345)

Total 77,422

52,155 159,035 (-) Current (12,710)

(6,771) (30,287)

Noncurrent 64,712

45,384 128,748

Receivables arise from the following sales contracts:

i) In 2007, the Company disposed of property located in the city of São Paulo to Partifib Projetos

Imobiliários Epsilon Ltda., Partifib Projetos Imobiliários Theta Ltda. and Partifib Projetos Imobiliários Zeta Ltda., for R$22,600. In 2010, by means of amendment to the Debt Acknowledgment and other agreements, the debt was transferred to Partifib Projetos Imobiliários Nações Unidas Ltda and Partifib Projetos Imobiliários Nações Unidas II Ltda. This amount was restated by the General Market Price Index (IGP-M). The restated debt amounting to R$27,211 was settled in advance on September 28, 2012.


45

9. Receivables (Continued) ii) In 2008, the Company disposed of property located in the city of Fortaleza, state of Ceará, to

Partifib Projetos Imobiliários Shfor Ltda., for R$32,000. This amount was restated by the Reference Rate (TR) until October 2011. Since November 2011, this amount has been restated by the General Market Price Index (IGP-M). As amended, the payments are expected to be made up until June 2020. This operation is secured by guarantee granted by related party Fibra Empreendimentos Imobiliários S.A. (Note 10).

iii) In December 2010, the Company sold Fibracel Têxtil Ltda. equipment, facilities and furniture for

R$16,386 and goods for R$37,446, in connection with the viscose operation. In April 2012, debt was consolidated in the amount of R$50,763, payable in 47 monthly consecutive installments restated by the change in the Interbank Deposit Certificate (CDI). In September 2012, Fibracel Textil S/A disposed of property to subsidiary Asaki Participações Ltda. for R$36,000 and immediately transferred this amount to Vicunha Têxtil S.A. as debt reduction. The amount of R$15,674 remained, payable in 50 monthly consecutive installments, restated by the change in the Interbank Deposit Certificate (CDI) as from October 2012. (Note 10).

iv) Receivables for the sale in 2009 of the knitting operation, including machinery, equipment,

facilities, furniture, IT equipment, vehicles and trademark to Têxtil Itatiba Ltda. for R$36,000. In December 2011, such debt was undertaken by Vicunha S.A. and settled in advance on May 23, 2012.

v) Receivables from the sale of units of interest and inventories in June 2010 owned by then

subsidiary Texfibra Têxtil Ltda. to Wpar Administração de Bens Próprios, Empreendimentos e Participações Ltda. for R$16,556. In December 2011, such debt was undertaken by Vicunha S.A. and settled in advance on May 23, 2012.

vi) In October 2010 the Company disposed of buildings to Elizabeth S.A. – Indústria Têxtil for

R$3,948, payable in 10 equal, semi-annual consecutive installments by reference to the change in the Interbank Deposit Certificate (CDI) beginning October 2010 (Note 10).

vii) In September 2012, Asaki Participações Ltda. undertook part of the debt of Fibracel Textil Ltda.

amounting to R$36,000 (prior item iii) payable to Vicunha Têxtil S/A as follows: R$10,000 payable in October 2012 and the remaining amount in 52 monthly consecutive installments, restated by the change in the Interbank Deposit Certificate (CDI), as from November 2012 (Note 10).


46

10. Related parties

The major assets and liabilities balance at December 31, 2012 and 2011, in addition to transactions that impacted P&L for the year regarding related-party transactions, arise from operations in the ordinary course of sales and purchases involving related parties, as well as agreements for disposal of real properties and intercompany loan agreements. The Company does not expect to incur losses on these transactions. Company corporate structure is as follows:

CFL Participações S.A. – holds 39.29% of Vicunha Participações S.A.;

Rio Purus Participações S.A. – holds 59.09% of Vicunha Participações S.A.;

Vicunha Participações S.A. – holds 62.94% of Têxtilia S.A.; and

Têxtilia S.A. – holds 91.29% of Vicunha Têxtil S.A. The prices and other business conditions in connection with related party transactions are agreed in contracts among the parties involved.


47

10. Related parties (Continued) a) Balances and transactions with related parties:

Company

Liabilities

Current assets

Noncurrent assets

Current

Transactions

Purchases and

Accounts

Dividends

Intercompany

Financial

Short-term investment

s

receivable Receivab

les receivable

loans Receivabl

es


Revenues expenses

Banco Fibra S.A. 147,857

- - -

- -

-

8,672 - Nova Marajó S.A. -

6,350 - -

- -

-

14,396 -

Vicunha Argentina S.A. -

31,455 - -

- -

-

53,089 - Vicunha Europe S.à r.l -

5,224 - 1,909

- -

-

14,129 141

Partifib Projetos Imobiliários Shfor Ltda. -

- 1,801 -

- 34,038

-

2,596 -

Partifib Projetos Imobiliários Nações Unidas Ltda. -

- - -

- -

-

911 -

Elizabeth S.A. Indústria Têxtil -

- 980 -

- 1,469

-

243 -

Asaki Participações Ltda. -

- 6,103 -

- 19,328

-

506 1,786 Finobrasa Agroindustrial S.A. -

206 - -

- -

-

- -

Vicunha Ecuador S.A. -

1,752 - -

- -

758

6,223 - Vicunha S.A. -

- - -

- -

-

1,754 -

Fibracel Têxtil Ltda. -

- 3,826 -

- 11,161

-

3,503 - Other -

12 - -

- -

-

- -

Total 147,857

44,999 12,710 1,909

- 65,996

758

106,022 1,927 Present value adjustment -

- - -

- (1,284)

-

- -

At December 31, 2012 147,857

44,999 12,710 1,909

- 64,712

758

106,022 1,927

At December 31, 2011 86,808

67,100 30,287 1,606

186 126,560

-

132,072 96


48

10. Related parties (Continued) a) Balances and transactions with related parties: (Continued)

Consolidated

Noncurrent

Current

Current assets

assets

liabilities

Transactions

Accounts

Intercompany

Short-term investment

s receivable Receivable

s

loans Receivabl

es


Revenues

Banco Fibra S.A. 150,687 - -

- -

-

5,572 Partifib Projetos Imobiliários

Shfor Ltda. - - 1,801

- 34,038

-

2,596 Partifib Projetos Imobiliários

Nações Unidas Ltda. - - -

- -

-

911 Elizabeth S.A.

Indústria Têxtil - - 980

- 1,469

-

243 Finobrasa Agroindustrial S.A. - 206 -

- -

-

-

Vicunha S.A. - - -

- -

-

1,754 Fibracel Têxtil Ltda. - - 3,826

- 11,161

-

3,503

Other - 12 164

- -

-

-

Total 150,687 218 6,771

- 46,668

-

14,579 Present value adjustment - - -

- (1,284)

-

-

Amounts as of 12/31/12 150,687 218 6,771

- 45,384

-

14,579

Amounts as of 12/31/11 93,927 15,484 30,287

186 126,560

6

15,310


49

10. Related parties (Continued) b) Management fees

Management with authority and responsibility for planning, guiding and controlling the Company’s activities are members of the Board of Directors and statutory officers. For the years ended December 31, 2012 and 2011, management fees were as follows:

Company and Consolidated

2012 2011

Compensation of directors and executive officers 5,813 5,179 Benefits 1,924 - Other 75 81

Total fees paid to key management 7,812 5,260

11. Investment properties

a) Balance breakdown

2012 2011

Company and

Company Consolidated Consolidated

Land 7,250 7,335 7,250 Buildings 327 353 327

7,577 7,688 7,577

The fair value of investment properties amounts to approximately R$185,660, which was determined based on an appraisal report issued by Setape – Serviços Técnicos de Avaliação do Patrimônio e Engenharia Ltda. (Independent Valuers). Setape is a company which specializes in appraisal reports of this type of investment properties. The fair value appraisal report was prepared under the “Direct Market Data Method”, which is based on market research that takes into consideration, in addition to selling and/or offered prices, the other characteristics and attributes which may influence property value.


50

12. Property, plant and equipment a) Company

Furniture,

Machinery fixtures and IT

Land Buildings

and equipment facilities equipment Vehicles Other Total

Cost or valuation At January 1, 2011 5,958 313,538 567,930 94,559 18,726 1,499 6,596 1,008,806

Additions - - 76,848 476 4,173 188 33,481 115,166 Write-offs - - (61,480) (32,998) (196) (212) - (94,886) Transfers - - 3,460 (3,911) 119 5 - (327)

At December 31, 2011 5,958 313,538 586,758 58,126 22,822 1,480 40,077 1,028,759 Additions - 460 85,665 1,203 867 533 2 88,730 Write-offs - - (40,503) (496) (263) (302) (2) (41,566) Transfers - - 26,606 602 (595) - (27,229) (616)

At December 31, 2012 5,958 313,998 658,526 59,435 22,831 1,711 12,848 1,075,307

Depreciation in connection with impairment loss

At January 1, 2011 - (113,560) (424,237) (80,351) (15,821) (1,321) - (635,290) Depreciation expenses for the year - (5,102) (25,619) (2,683) (919) (103) - (34,426) Write-offs - - 58,582 32,985 196 192 - 91,955 Transfers - - 26 12 (38) - - -

At December 31, 2011 - (118,662) (391,248) (50,037) (16,582) (1,232) - (577,761) Depreciation expenses for the year - (5,117) (30,209) (2,424) (1,275) (105) - (39,130) Write-offs - - 35,363 408 263 198 - 36,232

Transfers - - (3) 3 - - - -

At December 31, 2012 - (123,779) (386,097) (52,050) (17,594) (1,139) - (580,659)

Net book value: At December 31, 2012 5,958 190,219 272,429 7,385 5,237 572 12,848 494,648

At December 31, 2011 5,958 194,876 195,510 8,089 6,240 248 40,077 450,998

Depreciation rate - 1% to 5% 5 to 10% 10% 20% 20% -


51

12. Property, plant and equipment (Continued)

b) Consolidated

Furniture,

Machinery fixtures and IT

Land Buildings

and equipment facilities equipment Vehicles Other Total

Cost or valuation

At January 1, 2011 49,415 524,089 634,319 105,198 19,571 1,932 9,384 1,343,908

Acquisition of subsidiaries 4 1,533 129 17 - - 3 1,686

Additions 8 1,905 80,799 1,629 4,262 258 59,246 148,107 Write-offs - (1,336) (67,283) (33,150) (278) (261) (1,493) (103,801)

Transfers - - 3,460 (3,911) 119 5 - (327)

Exchange rate fluctuation 831 2,031 22,277 1,745 196 121 (11,725) 15,476

At December 31, 2011 50,258 528,222 673,701 71,528 23,870 2,055 55,415 1,405,049

Additions 14,000 16,563 92,201 11,421 1,149 556 4,743 140,633

Write-offs (298) - (43,666) (616) (329) (399) (912) (46,220)

Exchange rate fluctuation 666 1,302 8,388 819 90 30 587 11,882

Transfers (382) 1,074 49,746 2,993 (415) 185 (45,310) 7,891

At December 31, 2012 64,244 547,161 780,370 86,145 24,365 2,427 14,523 1,519,235 Depreciation in connection with impairment loss

At January 1, 2011 - (120,707) (460,978) (82,243) (16,442) (1,545) (219) (682,134)

Depreciation expenses for the year - (11,856) (28,127) (3,344) (1,043) (153) (60) (44,583)

Write-offs - 1,117 63,020 33,129 272 218 - 97,756 Transfers - - 26 12 (38) - - -

Exchange rate fluctuation - (484) (4,734) (222) (73) (21) (24) (5,558)

At December 31, 2011 - (131,930) (430,793) (52,668) (17,324) (1,501) (303) (634,519)

Depreciation expenses for the year - (12,145) (34,685) (3,487) (1,491) (191) (86) (52,085) Write-offs - (3) 38,179 523 317 260 - 39,276

Exchange rate fluctuation - (328) (3,750) (184) (65) (15) (9) (4,351)

Transfers - (1,126) (6,316) (1,233) 13 (15) (36) (8,713)

At December 31, 2012 - (145,532) (437,365) (57,049) (18,550) (1,462) (434) (660,392)

Net book value: At December 31, 2012 64,244 401,629 343,005 29,096 5,815 965 14,089 858,843

At December 31, 2011 50,258 396,292 242,908 18,860 6,546 554 55,112 770,530

Depreciation rate - 1% to 5% 5 to 10% 10% 20% 20% -

Review of the useful life of property, plant and equipment

At December 31, 2012, the management of Company and subsidiaries did not change the remaining useful life of PP&E items, since there were no significant changes in the conditions under which these PP&E items are used. Guarantee and pledge assets At December 31, 2012, Company and subsidiaries had property, plant and equipment items provided as guarantee of loans and financing, as mentioned in Note 16.


52

12. Property, plant and equipment (Continued) b) Consolidated

Impairment of assets

In accordance with CPC 01 (IAS 36) "Impairment of Assets", property, plant & equipment items indicating that their carrying amount exceeds their recoverable amount (market value) are reviewed to determine the need to recognize a provision for impairment and thus reduce the carrying amount to realizable value. Management conducted an analysis of its assets’ operating and financial performance. At December 31, 2012, no evidence was identified indicating any fixed assets recorded at carrying amounts in excess of their recoverable values. The Company has capitalized interest on its fixed assets related to the acquision of machinery in the amount of R$ 1,925 in 2012. This interest refers to funding obtained with “FINAME – Machinery and Equipment Financing”.

13. Intangible assets



2012

2011 2012

2011

Programs and system implementation 2,397

3,522 2,481

3,524

Goodwill 4,722

4,722 6,247

6,320

7,119

8,244 8,728

9,844

14. Investments



2012

2011 2012

2011

Shareholding interest in subsidiaries 354,901

324,745 -

-

Other investments 18,271

22,630 18,842

22,630

Total 373,172

347,375 18,842

22,630


53

14. Investments (Continued)

b) Changes in subsidiaries’ balances

Vicunha Nova Vicunha Vicunha Vicunha Tintoreria Tejeduria Tejeduria Asaki

Europe Marajó Distr. de Prod. Ecuador Argentina Ullum Galicia Panamá Participações

S.à.r.l. S.A. Têxteis Ltda. S.A. S.A. S.A. S.A. S.A. Ltda. Total

Balance at December 31, 2011 18,507 10,396 - 45,328 11,464 1,333 - - 237,717 324,745

Investment acquisition - - - 329 20,980 - - - - 21,309 Equity pick-up (599) 4,050 - 7,341 (4,941) (1,520) 223 318 206 5,078 Dividends (179) - - - - - - - - (179) Foreign exchange fluctuation

on investment abroad 2,110 114 - 2,756 (1,082) (152) 116 (67) - 3,795

Comprehensive income - - - 1,042 - - - - - 1,042 Capital gain - - - - - 1,472 918 1,504 - 3,894 Capital loss - - - - (2,798) - - - - (2,798) Reversal of negative

equity - - (1) - - - (777) (2,094) - (2,872) Transfer of negative

equity - - 1 - - - - 886 - 887

Balance at December 31, 2012 19,839 14,560 - 56,796 23,623 1,133 480 547 237,923 354,901


54

14. Investments (Continued) c) Information on investees

Balance at December 31, 2011

Net profit/

Interest

loss

held

Number of % for

Total in Equity

Companies shares/units of interest Interest the period Assets Liabilities Revenue Capital equity equity pick-up

Vicunha Europe S.à r.l. 2 100 (1,506) 34,630 16,123 49,947 1,990 18,507 18,507 (1,506) Nova Marajó S.A. 816,677,025 100 2,175 28,935 18,539 115,967 80,452 10,396 10,396 2,175 Vicunha Distr. de Prod.Têxteis

Ltda. 999 99.90 - - - - 1 - - - Vicunha Argentina S.A. 5,190,000 75.22 (3,267) 69,598 54,356 109,210 11,361 15,242 11,464 (1,729) Tintoreria Ullum S.A. 4,196,724 78.96 (1,147) 9,878 8,189 6,322 5,369 1,689 1,333 (906) Tejeduria Galicia S.A. 789,600 78.96 (505) 2,437 3,422 6,228 957 (985) (778) (399) Tejeduria Panamá S.A. 1,579,200 78.96 (149) 1,663 3,193 1,766 1,913 (1,530) (1,209) (117) Vicunha Ecuador S.A. 13,494,290 88.42 2,863 149,090 97,826 75,966 28,628 51,264 45,328 2,531 Asaki Participações Ltda. 245,938,059 100 1,100 238,797 1,080 13,632 236,438 237,717 237,717 1,100

Total

322,758 1,149

negative equity - subsidiaries - - - - - - - - 1,987 -

Total investments

324,745


55

14. Investments (Continued) c) Information on investees (Continued)

Balance at December 31, 2012

Net profit/

Interest

loss

held

Number of % for

Total in Equity

Companies shares/units of interest Interest the period Assets Liabilities Revenue Capital equity equity pick-up

Vicunha Europe S.à r.l. 2 100 (599) 33,984 14,145 49,378 2,221 19,839 19,839 (599) Nova Marajó S.A. 816,677,025 100 4,050 48,314 33,754 77,025 80,452 14,560 14,560 4,050 Vicunha Distr. de Prod.Têxteis Ltda. 999 99.90 - - - - 1 - (1) -

Vicunha Argentina S.A. 8,190,000 82.73 (6,340) 93,813 65,258 159,058 30,961 28,555 23,623 (4,941) Tintoreria Ullum S.A. 5,134,997 67.99 (2,304) 31,363 9,756 41,268 5,016 21,607 (*) 1,133 (1,520) Tejeduria Galicia S.A. 1,478,844 16.63 (374) 4,361 1,471 15,283 3,698 2,890 480 223 Tejeduria Panamá S.A. 1,166,253 33.87 325 2,285 673 3,594 1,432 1,612 547 318 Vicunha Ecuador S.A. 13,582,009 89.00 8,260 174,288 110,468 134,738 31,187 63,820 56,796 7,341 Asaki Participações Ltda. 245,938,059 100 206 264,986 27,063 13,344 236,438 237,923 237,923 206

equity

354,900 5,078

negative equity - subsidiaries - - - - - - - - 1 -

Total investments

354,901

(*) Future Capital Contribution of subsidiary Vicunha Argentina S.A. in subsidiary Tintoreria Ullum S.A. amounting to R$19,941.


56

14. Investments (Continued) c) Information on investees (Continued)

Vicunha Europe Sl. Located in Nyon, Switzerland, the business purpose of this company is the sale and representation of textile products, substantially in the European market. Nova Marajó S.A. Located in Montevideo, Uruguay, this company is engaged in management of companies in the country and abroad, with direct investments in the following subsidiaries: Vicunha Argentina S.A. located in Argentina and Nova Marajó Trading Intermediary LLC located in the USA. Asaki Participações Ltda. This company is located in São Paulo and is engaged in management of own assets and holding interest in the capital of other entities. Vicunha Ecuador S.A. Located in Quito, Ecuador, the business purpose of this company is the industrial

processing and sale of textile products. Vicunha Distribuidora de Produtos Têxteis Ltda. Located in the city of São Paulo, State of São Paulo, this company is engaged in distribution, wholesale, import and export and storage of textile products, and its activities have been suspended. Vicunha Argentina S.A., Tintoreria Ullum S.A., Tejeduria Galícia S.A. and Tejeduria Panamá S.A. Located in Argentina, the business purpose of this company is the industrial processing and sale of textile products.


57

14. Investments (Continued) d) Investments stated at acquisition cost:

Company and

Company Consolidated Consolidated

2012 2012 2011

Companhia Fiação e Tecidos Santo Antonio (i) 14,883 14,883 14,883 Eletrobrás, net of provision (ii) 2,791 2,791 7,150 Other 597 1,168 597

Total 18,271 18,842 22,630

(i) The Company holds an 11.03% equity interest in Fiação e Tecidos Santo Antônio. (ii) In the past, the Brazilian federal government instituted a compulsory loan on the electric energy

consumption required through Centrais Elétricas Brasileiras S.A. – Eletrobrás. Such loan has been refunded by Eletrobrás itself by converting the credits to bearer securities, later converted to Eletrobrás’s preferred shares, without the related monetary adjustment and interest thereon. Accordingly, the Company filed legal claims seeking the recognition of the right to monetary adjustment of the credit, plus 6% p.a. interest on the restated amount. The likelihood of prevailing in such legal claims is rated as probable by Company legal advisors, who set the historical cost of R$ 11,946 to the claim. The actual amount of the probable credit will depend on the claims being declared res judicata and later closing of case by completion of the expert inspection of Company books.

15. Trade accounts payable


2012 2011 2012 2011

Local 26,847 38,767 27,019 38,858 Abroad 5,689 6,371 19,759 13,869

Total 32,536 45,138 46,778 52,727 (-) Current (30,032) (41,522) (44,274) (49,111)

Noncurrent 2,504 3,616 2,504 3,616


58

16. Loans and financing



Type/investment Charges 2012 2011 2012 2011

Local currency: EXIM TJLP + 4.7% p.a. - 27,399 - 27,399

REVITALIZA (i) 8.00% to 9.00% p.a. 44,396 16,526 44,396 16,526 PROGEREN (ii) TJLP + 2.75% p.a. 51,249 - 51,249 - PROVIN/PROADI TR + 3.0% p.a. or TJLP 1,017 1,120 1,017 1,120 EGF/FGPP 5.5% to 6.75% p.a. 35,243 11,513 35,243 11,513 FNE/FAT (iii) 10% p.a. 151,855 82,933 151,855 82,933

FINAME (iv) 4.5% to 8.70% p.a. 59,324 57,184 59,324 57,184 WORKING CAPITAL (v) 100% of CDI 27,327 30,955 27,327 30,955 NCE 10.35% p.a. - 10,023 - 10,023 GIROFLEX 12.67% p.a. - 10,831 - 10,831 VENDOR 0.72% to 0.75 p.m. 13,088 20,552 13,088 20,552 Other

2,063 2,779 2,063 2,779

385,562 271,815 385,562 271,815

Foreign currency:

PPE (vi) Libor (quarterly) + 4.25%

p.a. 18,584 34,413 18,584 34,413 ACC VC + 3.00% p.a. - 16,891 - 16,891

FINIMPs (vii) VC + 2.72% to 4.58%

p.a. 132,994 149,904 132,994 149,904 NCE Transfer (Res. 2770) (viii) VC + 3.50% p.a. 40,942 37,578 40,942 37,578 CCB (Res. 4131) VC + 3.15% p.a. 21,669 19,157 21,669 19,157

WORKING CAPITAL (ix) Libor + 3.10% to 4.25%

p.a. - - 71,958 65,512 WORKING CAPITAL (x) 4.65% p.a. - - 6,043 - WORKING CAPITAL (xi) 16.5% p.a. - - 26,167 8,897 REVOLVING CREDIT VC + 3.75% p.a. - - 4,087 3,745

214,189 257,943 322,444 336,097

Total

599,751 529,758 708,006 607,912 (-) Current

(220,460) (264,819) (248,811) (273,317)

Noncurrent

379,291 264,939 459,195 334,595

The aging list of portions classified as noncurrent liabilities is as follows:

2012

Maturity Company Consolidated

2014

209,412 249,968

2015

40,872 60,415

2016

23,776 36,125

2017

23,776 27,454

2018 onwards 81,455 85,233

Noncurrent 379,291 459,195


59

16. Loans and financing (Continued)

a) Balance breakdown (Continued) (i) From August to September 2012, the Company engaged in operations with BNDES amounting to R$44,014,

subject to interest rate at 8% p.a. and maturing in August and September 2014. (ii) In September 2012, the Company engaged in PROGEREN operations with BNDES amounting to R$50,000,

subject to TJLP interest plus 2.75% p.a. and maturing in August 2015. (iii) Between June 2008 and September 2012, FNE lines of credit were obtained from Banco do Nordeste do

Brasil, totaling R$165,400, subject to interest at 10% p.a., 15% or 25% nondefault bonus, maturing until December 2021.

(iv) Between November 2009 and October 2011, FINAME transactions were entered into with BNDES, subject to interest ranging from 4.5% p.a. to 8.7% p.a. and final settlement within 10 years.

(v) In November 2008, working capital financing was obtained from Banco Itaú BBA in the amount of R$35,500, subject to interest at 100% of CDI, maturing until November 2020.

(vi) In December 2009, an Export Prepayment (PPE) transaction was entered into with Banco do Brasil, in the

amount of USD25,000, subject to interest at 4.25% p.a. plus 3-month Libor, maturing until December 2013.

(vii) Between June 2011 and September 2012, import financing arrangements were entered into in the amount of R$130,589, subject to interest ranging from 2.72% p.a. to 4.58% p.a. plus foreign exchange differences and amortization within 2 years.

(viii) In June 2011, an Export Credit Note (NCE Transfer) financing arrangement was obtained from Banco Itaú BBA, in the amount of R$31,800, subject to interest at 3.5% p.a. plus foreign exchange differences, maturing in June 2013.

(ix) In April 2011, subsidiary Vicunha Ecuador S.A. obtained loans from the Inter-American Development Bank

(IDB) (A-Loan) and from Banco do Brasil (B-Loan), totaling USD25,000, subject to interest at 4% and 4.25% p.a. plus 6-month Libor, payable within 6 and 8 years. In January 2012, a working capital transaction was renewed with Banco do Brasil, amounting to USD10,000, subject to interest at 3.8% p.a. plus 6-month Libor, maturing in January 2014.

(x) In August 2012, subsidiary Nova Marajó S.A. entered into a working capital transaction with Banco Itaú BBA,

in the amount of USD2,900, subject to interest at 4.65% p.a., maturing in July 2013. (xi) In May 2011, subsidiary Vicunha Argentina S.A. entered into a working capital transaction with Banco

Patagonia, in the amount of ARS20,000, subject to interest at 16.5% p.a., maturing until May 2014. In December 2012, the Company contracted three working capital lines with Banco da Patagônia amounting to ARS 16,667 each, maturing in November 2013, December 2014 and December 2015, and subject to interest, in Pesos, at 20.5% p.a., 21.5% p.a. and 23% p.a., respectively.

The loan agreement entered into with the Inter-American Development Bank (“IDB”) establishes that the Company and its subsidiary Vicunha Ecuador S.A must meet a debt limit requirement, and periodically provide IDB with certain documents.


60

16. Loans and financing (Continued) Company management is currently discussing with IDB the criteria for calculating the debt indicator which, in management view, are not fairly detailed in aforementioned agreement. The debt is not overdue for there is no clause providing for its advance maturity in case of noncompliance with contractual clauses. In addition, IDB may also formally notify the Company, in case the Company is in default. The parties reached an understanding regarding the new method for calculating the debt indicators. The contractual amendment, including these changes, is in signature phase.

b) Guarantees, mortgages and sureties at December 31, 2012

Loan

Creditor amount Guarantees

Banco do Nordeste do Brasil S.A. - FNE/FAT 151,855

Mortgage, chattel mortgage, liquidity fund of credit notes, Reserve Account, bona fide depositary, securities - Individual and Corporate of Vicunha Participações S.A.

FINIMPs 132,994 Promissory note Banco Itaú BBA S.A. - Bank Credit Bill 27,327 Sureties - Individuals Banco Itaú BBA S.A. – EGF 21,941 Pledge of Rural Credit Bills (CPR) Banco do Brasil S.A. – BNDES Finame 29,800 Guarantee - Textilia S.A. Banco do Brasil S.A. – BNDES Finame 54,077 Chattel mortgage Banco Daycoval S.A. – BNDES Finame 5,247 Chattel mortgage Banco do Brasil S.A. – BNDES Progeren 51,249 Pledge of Trade Notes

Banco do Brasil S.A. - EGF 12,876 Pledge of Rural Credit Bills (CPR) and Pledge of Trade Notes

Banco do Brasil S.A. – Pre-payment 18,584 Promissory note, “Standby” letter of credit and Sureties (Corporate) Textilia S.A.

Banco do Brasil S.A. - Working Capital (Vicunha Ecuador S.A.) 20,831 Standby of Vicunha Têxtil S.A. Banco do Brasil S.A. / Banco Interamericano de Desenvolvimento - Loan Agreement (Vicunha Ecuador S.A.) 51,128 Guarantee Agreement Vicunha Têxtil S.A.

Banco Bradesco S.A. – FINIMP 6,723 Guarantor Vicunha Participações S.A. Banco Patagônia S.A. – Working Capital 45,979 Guarantee Banco Patagônia S.A. – Working Capital 10,218 Guarantee Vicunha Têxtil S.A. Banco Itaú BBA S.A. – Nassau Branch 5,926 Guarantor Vicunha Têxtil S.A.


61

17. Taxes in installments

Installment payment established by Law No. 11941 of May 27, 2009 In October 2009, the Company joined the installment program provided for by Law No. 11941 of May 27, 2009, covering taxes administered by the Brazilian IRS, Office of the Attorney-General of the Public Finances and those of a social security nature, the deferral of which occurred in December 2009. In June 2011, the debt was consolidated by tax authorities.


2012

2011

COFINS 47,035

46,480

PIS 10,649

10,462

IPI 2,014

2,007

CSLL 4,863

4,863

IRPJ 24,437

24,861

INSS 19,102

19,418

Other 898

1,043

Total taxes in installments 108,998

109,134

(-) Current (55,135)

(51,669)

Noncurrent 53,863

57,465

The amounts classified in non-current liabilities mature as follows (Company and consolidated):

Maturity 2012

2014 7,457

2015 6,492

2016 4,561

2017 4,561

2018 4,561

2019 4,561

2020 onwards 21,670

53,863


62

18. Income and social contribution taxes - Current and deferred

a) Breakdown of deferred taxes


2012 2011 2012 2011

IRPJ CSLL IRPJ CSLL IRPJ CSLL IRPJ CSLL

Deferred income and social contribution tax assets on: income and social contribution tax losses 22,287 153,383 - - 22,413 153,509 2,952 563

Temporarily nondeductible provision

88,528 82,627 - - 91,206 85,305 - -

Total

110,815 236,010 - - 113.619 238.814 2.952 563 Rates

25% 9% - - 25% 9% 25% 9%

Deferred tax assets

27,704 21,241 - - 28,405 21.493 738 51 Deferred income and social contribution tax liabilities on:

Revaluation of PP&E items

(156,953) (156,953) (161,057) (161,057) (156,953) (156,953) (173.345) (161.057) Gain on the disposal of PP&E items

(15,051) (15,051) (15,051) (15,051) (15,051) (15,051) (15.051) (15.051)

Transition Tax Regime (RTT) adjustments

(33,561) (33,561) (20,219) (20,219) (37,425) (37.425) (22.577) (22.577)

Total

(205,565) (205,565) (196,327) (196,327) (209.429) (209.429) (210.973) (198.685) Rates

25% 9% 25% 9% 25% 9% 25% 9%

Deferred tax liabilities

(51,391) (18,501) (49,082) (17,669) (52,357) (18.849) (52.743) (17.882) Deferred income and social contribution taxes, net (23,687) 2,740 (49,082) (17,669) (23,952) 2,644 (52,005) (17,831)

In 2012, the Company has consolidated its strategic actions and reached a level consistent with business profitability expectations. Projected future results prepared by management in 2012 has indicated future taxable profit sufficient for offsetting unused income and social contribution tax losses. In this context, the Company recorded deferred tax assets amounting to R$48,945 at December 31, 2012. According to projected future taxable profit, referred to deferred tax assets are expected to be realized within seven years.


63

18. Deferred income and social contribution taxes (Continued) b) Reconciliation of the expense calculated by applying the combined tax rates and

the income and social contribution tax expenses charged to P&L is as follows:


2012 2011 2012 2011

Pre-tax income 85,352 83,807 82,116 84,382 Statutory rates - % 34 34 34 34

Income tax and social contribution (expenses) at official rates (29,020) (28,494) (27,919) (28,690)

Equity pick-up 1,726 391 - - Nondeductible expenses (580) (445) (580) (445) Use of tax credits 5,406 11,517 5,406 11,517 Nondeductible provisions (2,832) - (2,832) - Reversals of nondeductible provisions - 4,471 - 4,471 Other deductions 12,123 1,336 16,903 1,336 Other TTR adjustments (767) (690) (767) (690) CPC 07 adjustment (Note 30) 7,343 9,620 7,343 9,620 Profits made available abroad (1,531) (1,171) (1,531) (1,171) Transfer price adjustment abroad (257) (78) (257) (78) CPC 02 elimination adjustment - - - 344 Set up of deferred taxes on temporary provisions 29,568 - 29,176 - Set up of deferred taxes on income tax losses 5,572 - 5,572 - Set up of deferred taxes on social contribution losses 13,805 - 13,805 -

40,556 (3,543) 44,319 (3,786)

Income and social contribution taxes - current (5,247) (4,510) (5,343) (4,164) Income and social contribution taxes - deferred 45,803 (4,543) 50,054 (5,132)

40,556 (9,053) 44,711 (9,296)

Use of tax credits – deferred in installments - 5,510 - 5,510

Income/expense with income and social contribution taxes 40,556 (3,543) 44,711 (3,786) Effective rates 48% -4% 54% -4%

19. Provision for tax, civil and labor risks The Company and its subsidiaries are party to legal and administrative proceedings in various courts and government entities arising in the normal course of business, involving tax, labor and civil issues and other. Based on the opinion of its legal advisors, analyses of pending legal demands and the amounts involved in past labor claims, the Company set a provision in an amount deemed to be sufficient to cover probable losses on the claims presently in progress.


64

19. Provision for tax, civil and labor risks (Continued) There is no objective evidence of the scheduled future payment of the related provisions since the outcome of legal or administrative claims is uncertain and subject to appeals.



2012

2011

Civil (i) 1,336

1,805

Labor (ii) 10,977

7,266

Tax (iii) 9,825

9,996

22,138

19,067

i) Civil

These consist of litigations in connection with third parties, representatives, customers and work accidents.

ii) Labor

These consist mainly of litigations involving labor claims and social security charges and claims for damages.

iii) Tax

These consist mainly of an FGTS claim in which the Company questions the constitutionality of the FGTS contribution at 10% on the amount of all deposits due to employees in case of termination without cause and at 0.5% on each employee’s compensation, imposed by Supplementary Law No. 110/2001.

Management believes there are no significant risks in disputes and litigations, which are not covered by sufficient provisions in its financial statements.


65

19. Provision for tax, civil and labor risks (Continued) b) Contingencies

The Company is a party to other administrative and legal claims, amounting approximately to R$116,769, R$114,864 of which relates to tax and social security claims and R$1,905 relates to labor claims. Company legal advisors’ analyses rate these claims as a possible loss, thus not requiring any provision to be established:

i. State

The Company discusses state credits for R$60,094, addressing the following matters: (i) non-levy of ICMS on interstate operations for R$43,699; (ii) assumed simulation of shipment to the State of Rio de Janeiro for R$10,444; (iii) undue ICMS credit in light of the tax incentive granted to the supplier, not reported in a tax document, for R$3,221; and (iv) other ICMS matters for R$2,730.

ii. Federal

Federal contingencies amounting to R$54,770 drag along, as follows: (i) non-approved offsets of federal taxes for R$35,198 (ii) differences on the calculation base of PIS, computed on the previous six-month billings, according to Supplementary Law Nº 7/1970, amounting to R$12,403; and (iii) other matters amounting to R$7,169.

c) Provision for tax, civil and labor risks


Write-offs/

2011 Additions Reversals 2012

Civil 1,805 325 (794) 1,336

Labor 7,266 5,766 (2,055) 10,977

Tax 9,996 1,071 (1,242) 9,825

19,067 7,162 (4,091) 22,138


66

20. Equity

a) Capital

At December 31, 2012, capital amounted to R$ 670,013, represented by 42,315,023 shares (R$ 664,563 at December 31, 2011, represented by 42,048,749 shares):

Subscribed and

Authorized paid in

Common shares 100,000,000 21,698,915 Preferred shares: Class “A” shares 25,000,000 772,008 Class “B” shares 75,000,000 19,844,100

200,000,000 42,315,023

Characteristics of shares Company capital is comprised of registered book shares, without par value. Common shares may not be converted into any other type of share; preferred class “A” shares are intended for subscription with resources from official investment funds, particularly the Northeast Investment Fund (FINOR), and conversion of shares and debentures acquired, in addition to subscription of shares to which tax incentives of any nature were attributed and may, at the discretion of the shareholder, be converted into preferred class "B" shares. Preferred class “B” shares are intended for public or private subscription by all investors, and for conversion of class “A” shares and convertible debentures into shares. Preferred shares entitle holders to full participation in Company profits, with a bonus 20% higher than common shareholders, not convertible into common shares. No other type or class of shares is entitled to advantages higher than preferred class “A” shares. Furthermore, preferred shares are ensured priority in distribution of mandatory minimum dividends, equivalent to 25% of net income for the year, and in reimbursement in the event of liquidation of the Company.


67

20. Equity (Continued)

a) Capital (Continued) Changes in capital Pursuant to the Board of Directors’ Meeting held on May 21, 2012, a capital increase of R$5,450 was approved, through private subscription by current shareholders, with issue of 266,274 new shares, of which 136,544 are common and 129,730 are preferred class “B” shares, with par value of R$20.46 per share, increasing capital by R$670,013.

Changes in common and preferred shares

Common shares

Preferred shares Total

Balance at 12/31/2011 21,562,371 20,486,378 42,048,749 (+) Capital increase by 05/21/2012 136,544 129,730 266,274

Balance at 12/31/2012 21,698,915 20,616,108 42,315,023

Future capital contribution This year, parent company Textília S.A. provided the Company R$1,700 as future capital contribution, recorded in a specific sub-account of the balance sheet. Such amount can be used only as future capital contribution and cannot be returned to the parent company. The procedures laid down in corporation law for capitalization of that amount must be completed no later than the date of the Annual Shareholders’ Meeting, when it will be duly approved and the amount will be added to capital.

b) Revaluation reserve - Equity valuation adjustment

This reserve is set up as a result of revaluation of property, plant and equipment, based on valuation report prepared by independent experts. Deferred income and social contribution taxes corresponding to such revaluations are classified as noncurrent liabilities. Company management confirms the option of keeping balances of revaluation reserves set up until effectiveness of Law No. 11638, of 2007, in its registers until write-off due to depreciation or disposal of revalued assets. The revaluation reserve is realized through depreciation against accumulated losses, net of taxes.


68


c) Income reserve

Legal reserve The legal reserve is set up at the rate of 5% of net income determined each year, under the terms of article 193 of Law No. 6404/76. Statutory reserve for investments This reserve comprises the variable portion of net income adjusted pursuant to legislation, according to Company articles of incorporation, for the purpose of ensuring availability of funds for investments in property, plant and equipment. Payment of dividends The mandatory minimum dividends are calculated as follows:

2012

Parent Company’s net income for the year 125,908

Income tax incentives (7,343)

Investment grant – State VAT (ICMS) (35,137)

83,428

Set up of legal reserve (5%) (4,172)

Adjusted net income 79,256

Mandatory minimum dividends (25%) 19,814

Distribution of dividends Distribution of dividends to common shares 9,258

Distribution of dividends to preferred shares 10,556

Total distribution 19,814

Dividends payables – prior years 88

Total dividends payable 19,902

d) Cumulative translation adjustments

At December 31, 2012, the cumulative translation adjustment account balance in comprehensive income amounts to R$4,825 (R$1,030 at December 31, 2011), arising from foreign exchange losses at its subsidiaries, in accordance with the standards set out in CPC 02 – Effect of Changes in Foreign Exchange Rates and Conversion of Financial Statements, approved by CVM Rule No. 534.


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e) Earnings per share

Basic and diluted earnings per share was calculated based on income attributed to Company controlling shareholders in 2012 and the related average number of outstanding common shares in the period, in comparison with 2011, as shown in the table below:


12/31/12 12/31/11

Earnings attributed to common shareholders 58,832 37,504 Weighted average number of common shares issued

(thousands) 21,653 21,529

Basic and diluted earnings per share – common 2.72 1.74


12/31/12 12/31/11

Earnings attributed to preferred shareholders 67,076 42,760 Weighted average number of common shares issued

(thousands) 20,573 20,454

Basic and diluted earnings per share – preferred 3.26 2.09

21. Financial instruments and risk management

21.1. Financial instruments

Company and subsidiaries conduct operations with financial instruments. These instruments are managed through operational strategies and internal controls aiming at liquidity, profitability and risk minimization.

The policy concerning contracting of financial instruments for hedging purposes is approved by the Board of Directors and subsequently analyzed on a regular basis in relation to exposure to the risk that management intends to protect. The Company and its subsidiaries have no investments of a speculative nature, in derivatives or any other risk assets. The results obtained from such operations are in line with the policies and strategies defined by Company management.


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21. Financial instruments and risk management (Continued)


Estimated realizable amounts of the financial assets and liabilities of the Company and its subsidiaries were determined through information available in the market and appropriate valuation methodologies. Judgments were required in interpreting market data to produce estimates of the most adequate realizable value. Consequently, the estimates below do not necessarily indicate the amounts that could be realized in a current market exchange. The use of different market methodologies could have a material impact on estimated realizable values.

Company and subsidiaries may use derivatives to minimize certain risks deemed acceptable as a result of their profiles. When minimizing a risk, the Company and subsidiaries accrue financial income in exchange for offsetting the counterparty upon occurrence of a specific event. Derivatives are initially recognized at fair value and the related transaction costs are recognized in P&L as incurred. Company risk management policies were established by the Board of Directors with a view to identifying and analyzing risks faced by the Company, and thus establish adequate risk limits and controls and monitor risks and compliance with limits. Risk and systems management policies are reviewed regularly to reflect any changes in market conditions and Company activities. Company Finance and Risk Committee and Board of Directors supervises the way in which management monitors compliance with risk management policies and procedures, and reviews the adequacy of the risk management model in relation to risks accepted by the Company.


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a) Classification of financial instruments

Company

2012 2011

Fair value through profit or

loss Loans and receivables

Financial liabilities measured

at amortized

cost

Fair value of the financial instrument




at amortized

cost


Assets Short-term investments 236,095 - - 236,095 104,882 - - 104,882

Operations with derivatives 16,682 - - 16,682 10,530 - - 10,530 Trade accounts receivable - 316,281 - 316,281 - 322,521 - 322,521 Receivables - 77,422 - 77,422 - 159,035 - 159,035 Receivables from related parties - - - - 186 - - 186

Liabilities Loans and financing - - 599,751 599,751 - - 529,758 529,758

Trade accounts payable: - - 32,536 32,536 - - 45,138 45,138

Consolidated

2012 2011




at amortized

cost





at amortized

cost

Fair value of the

financial instrument

Assets Short-term investments 238,925 - - 238,925 112,007 - - 112,007

Operations with derivatives 16,682 - - 16,682 10,530 - - 10,530 Trade accounts receivable - 351,916 - 351,916 - 330,981 - 330,981 Receivables - 52,155 - 52,155 - 159,035 - 159,035 Receivables from related parties - - - - 186 - - 186

Liabilities Loans and financing - - 708,006 708,006 - - 607,912 607,912

Trade accounts payable - - 46,778 46,778 - - 52,727 52,727

Classification of financial instruments is presented in the table below and, in accordance with management’s assessment, there are no financial instruments classified in categories other than those informed.


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b) Fair value

In compliance with CPC 38 - Financial Instruments: Recognition and measurement: at December 31, 2012, the fair value of publicly quoted investments was based on current purchase prices. For financial assets with no active market or public quotation, management established the fair value by means on valuation techniques. These techniques include the use of recently contracted operations with third parties, reference to other instruments that are substantially similar, and analysis of discounted cash flows that make maximum use of information generated by the market and have the minimum possible information generated by the Company management. IFRS 7/CPC 40 defines the fair value as the amount by which as asset may be exchanged or a liability settled, between parties that are knowledgeable of the business and willing to perform it, on an arm's length basis, in addition to establishing a hierarchy of three levels to be used for fair value measurement, as follows:

Level 1 – prices negotiated (without adjustments) in active markets for identical assets or liabilities;

Level 2 – different inputs for prices negotiated in active markets included in Level 1, observable for the asset or liability, either directly (that is, based on the prices) or indirectly (that is, deriving from the prices);

Level 3 - inputs for the asset or liability that are not based on market observable variables (nonobservable inputs).

A market is considered active when the quoted prices are readily and regularly available based on a securities exchange, regulatory agency, among others, and those prices represent actual market transactions that occur frequently, on purely commercial bases, and, as such the fair value of financial instruments traded in active markets is based on market prices, quoted at the balance sheet date, included in Level 1.


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b) Fair value (Continued) The fair value of financial instruments that are not traded in active markets (for instance, OTC derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of data adopted in the market where it is available and relies as little as possible on specific Company estimates. If all significant information required for the fair value of an instrument is provided by the market, the instrument will be classified under Level 2. If the information results from internal Company data, the instrument falls under Level 3. Company and subsidiaries maintained certain assets who are required to be measured at fair value on a recurring basis. Such assets refer to investments in private securities. Company assets and liabilities measured at fair value on a recurring basis and subject to disclosure, according to IFRS 7/CPC 40 requirements at December 31, 2012 and 2011, are as follows:

Fair value measurement

2012


Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Current assets Short-term investments - 236,095 - 236,095 - 238,925 - 238,925

Operations with derivatives - 16,682 - 16,682 - 16,682 - 16,682

- 252,777 - 252,777 - 255,607 - 255,607

Fair value measurement

2011


Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Current assets Short-term investments - 104,882 - 104,882 - 112,007 - 112,007

Operations with derivatives - 10,530 - 10,530 - 10,530 - 10,530

- 115,412 - 115,412 - 122,537 - 122,537

No assets or liabilities were transferred between fair value hierarchy levels at December 31, 2012 and December 31, 2011.


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21.2. Risk management

Risks

Company operations and those of its subsidiaries are subject to the following major risks:

a) Credit risk

This risk arises from the possibility of the Company and subsidiaries incurring losses as a result of default of counterparties, or of depository or investment financial institutions. To mitigate such risks, the Company and subsidiaries adopt the practice of analyzing financial and equity positions of their counterparties, in addition to defining credit limits and ongoing monitoring of outstanding positions. In connection with financial institutions, the Company and subsidiaries only conduct operations with financial institutions carrying low credit risk, as per rating agencies. Credit risk referring to trade notes receivable is minimized due to a dispersed customer base, and concentration on one customer does not exceed 4% of total trade notes receivable. Company management is of the belief that the provisions are sufficient to cover non-receipts, and the fair and book values of such provisions do not differ (refer to quantitative analysis on allowance for doubtful accounts in Note 6).

b) Liquidity Risk

The Treasury area prepares the estimated cash flows. This area monitors the Company’s estimated ongoing liquidity requirements to ensure that cash is sufficient to meet operating needs. Excess cash maintained by the Company additionally to the balance required for working capital management purposes is invested in interest-bearing checking accounts, term deposits, short-term deposits and securities, and instruments with adequate maturities or sufficient liquidity to provide enough margin, as determined by the above estimates are selected.


75


21.2. Risk management (Continued)

Risks (Continued)

b) Liquidity risk (Continued)

The following table analyzes Company nonderivative financial liabilities, by maturity, corresponding to the remaining period in the balance sheet until the contractual maturity date:

2012


Less than 1 year

Between 1 and 2 years


Less than 1 year



Loans and financing 220,460 209,412 169,879 248,811 249,968 209,227

220,460 209,412 169,879 248,811 249,968 209,227

c) Interest rate risk

This risk arises from the possibility of the Company and subsidiaries incurring gains or losses as a result of fluctuation of interest rates on financial assets and liabilities. With a view to mitigating this type of risk, the Company and subsidiaries seek to diversify fund-raising in terms of fixed or variable rates.

d) Currency risk

This arises from the possibility of changes in exchange rates of foreign currencies used by the Company and subsidiaries for purchase of inputs, sale of products and contracting of financial instruments. In addition to amounts payable and receivable in foreign currencies, the Company holds interest in subsidiaries abroad and has operating flows referring to purchases and sales in other currencies.


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Risks (Continued)

d) Currency risk (Continued) The Company contracts derivative financial instruments (foreign exchange hedge) to protect against exchange variation arising from the totality of loans taken out in foreign currency. At December 31, 2012, derivatives outstanding aimed at managing risk of change in foreign exchange rates are broken down as follows:

Notional value

Curve value

Unrealized gain (loss)

2012

Description 2012 2012 Gain/(loss)

a.1 Swap agreements

40,938 31,888 9,050

Asset position - VC + 3.50% p.a. (Itaú BBA)

Liability position – 105.0% of CDI

a.2 Swap agreements

5,900 4,686 1,214



a.3 Swap agreements

10,289 8,244 2,045



a.4 Swap agreements

Asset position - VC + 3.95% p.a. (Safra)

Liability position – 106.0% of CDI 21,691 18,540 3,151

a.5 Nondeliverable Forward (NDF) agreements Asset position – Ptax 800 (Banco Pine) Liability position – FWD-Buy 4,093 3,614 479

a.6 NDF agreements Asset position – Ptax 800 (Banco Bradesco) Liability position – FWD-Buy 6,386 5,643 743

Total gains 89,297 72,615 16,682

Total 89,297 72,615 16,682

a.1 Swap agreements: At December 31, 2012, the Company has outstanding swap

transactions (index swap) with Banco Itaú BBA S.A. with adjusted notional value of R$40,938 (USD 20,033) maturing on June 14, 2013. The parameters to restate this operation consist of short position (bank) and long position (Vicunha) at 105.0% of CDI and short position at Forex + 3.50% p.a., according to the information above;


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Risks (Continued)

d) Currency risk (Continued) a.2 Swap agreements: At December 31, 2012, the Company has outstanding Swap


a.3 Swap agreements: At December 31, 2012, the Company has outstanding Swap


a.4 Swap agreements: At December 31, 2012, the Company has outstanding Swap

transactions (index swap) with Banco Safra S.A. with adjusted notional value of R$21,691 (USD 10,614) maturing on June 10, 2013. The parameters to restate this operation consist of short position (bank) and long position (Vicunha) at 106.0% of CDI and short position at Forex + 3.95% p.a., according to the information above;

a.5 NDF agreements: At December 31, 2012, the Company has outstanding non-

Deliverable Forward (NDF) transactions with Banco Pine S.A. with adjusted notional value of R$4,093 (USD 2,003) maturing on April 1, 2013. The parameters to restate this operation consist of short position (Forward) and long position (PTAX 800);

a.6 NDF agreements: At December 31, 2012, the Company has outstanding non-Deliverable Forward (NDF) transactions with Banco Pine S.A. with adjusted notional value of R$6,386 (USD 3,125) maturing on June 24, 2013. The parameters to restate this operation consist of short position (Forward) and long position (PTAX 800);


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Risks (Continued)

e) Currency risk - foreign exchange exposure

Foreign exchange exposure is substantially, and not entirely, indexed to the US dollar, as follows:

2012 2011

Company Consolidated Company Consolidated

Assets: Financial assets 3,003 27,078 - 8,516

Trade accounts receivable 69,102 59,111 91,737 60,752 Swap agreements 78,817 78,817 89,092 89,092 NDF agreements 10,479 10,479

Other assets 7,592 18,903 6,020 16,703

168,993 194,388 186,849 175,063

Liabilities: Loans and financing (214,189) (296,277) (206,639) (274,817)

Trade accounts payable (2,037) (15,165) (2,061) (13,422) Advance on exchange contracts (18,584) (18,584) (51,305) (51,305) Other liabilities (5,113) (20,613) (6,476) (24,401)

(239,923) (350,639) (266,481) (363,945)

Assets/liabilities, net (70,930) (156,251) (79,632) (188,882)

Assets/liabilities, net - equivalent to thousands of US dollars (34,710) (76,462) (42,452) (100,694)

At December 31, 2012, foreign exchange exposure is USD34.710 (consolidated: USD76,462). Foreign exchange exposure is hedged by exports projected for the next 12 months. Annual export volume estimated for the next 12 months is USD83,608 (unaudited).

f) Commodity price risk

The Company is exposed to price fluctuations of its major raw material, cotton. Protection of commodities is based on an adequate purchasing policy. Accordingly, management negotiates agreements in advance for future delivery of this raw material. At December 31, 2012, the Company had agreements that had been negotiated but not yet delivered, as described in Note 23.


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Sensitivity analysis Financial instruments, including derivatives, are exposed to fair value variations as a result of fluctuation in foreign exchange rates, interest rates (TJLP) and rate (CDI). Analyses of sensitivity of financial instruments to such variables are presented below:

a) Selection of risks

Company and subsidiaries selected three market risks that are most likely to impact the fair value of financial instruments held, as follows: (1) US dollar-real exchange rate; (2) interest rates (TJLP); (3) rate (CDI).

b) Selection of scenarios

The table below considers three risk scenarios for the currency index rates of such financial liabilities, and the probable scenario was adopted by Company and subsidiaries. Additionally to this scenario, Ruling No. 475 of the Brazilian Securities and Exchange Commission (CVM) determined that two other scenarios be presented, with deterioration of 25% and 50% of the risk variables considered. Management is of the understanding that the possible reasonable scenario is that the US dollar rate remains approximately R$2.05.

The possible and remote scenarios consider increases of 25% and 50%, respectively, in relation to the probable scenario. Sensitivity analysis of changes in US dollar rate Scenarios in reais (1-year term)

Foreign currency Probable Possible - 25% Remote - 50%

US dollar rate 2.0500 2.5625 3.0750

Exchange exposure – USD34,710 thousand 71,156 88,944 106,733

Forecast exports - USD83,608 thousand 171,396 214,246 257,095


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Sensitivity analysis (Continued) b) Selection of scenarios (Continued)

Sensitivity Analysis - interest rate variation (Continued)

Scenarios in reais (1-year term)

Loans and financing agreements Probable Possible - 25% Remote - 50%

TJLP 5% 6.25% 7.5%

Indexed financing - TJLP - R$52,188 54,797 55,450 56,102

CDI rate at 12/31/12 6.90% 8.63% 10.35%

Indexed financing - TJLP - R$27,326 29,211 29,684 30,154

Short-term investments

Scenarios in reais (1-year term)

Probable Possible - 25% Remote - 50%

CDI rate 6.90% 8.63% 10.35%

Short-term investments:

CDB – Banco Fibra, Banco Daycoval, Banco Pine, Caixa Econômica Federal, Banco do Nordeste do Brasil and Banco do Brasil - R$213,736 228,484 232,181 235,858

Repurchase agreements – Banco Santander, Banco Pine and Banco do Brasil - R$71,860 76,818 78,062 79,298

LCA – Banco ABC do Brasil - R$2,081 2,225 2,261 2,296

21.3. Capital management

In managing capital, Company objective is to safeguard its capacity to continue providing return to shareholders and benefits to other stakeholders, in addition to maintaining an optimal capital structure to reduce costs. To maintain or adjust the capital structure, the Company may review the dividend payment and capitalization policy regarding shareholders so as to reduce debt.


81

21. Financial instruments and risk management (Continued) 21.3. Capital management (Continued)

The Company monitors its capital based on financial leverage ratio. This ratio is defined as net debt divided by total capital. Net debt, in turn, corresponds to total loans (including short and long-term loans, as disclosed in the consolidated balance sheet), less cash and cash equivalents. Total capital is determined adding equity, as disclosed in the consolidated balance sheet, to net debt. Financial leverage indices as of December 31, 2012 and December 31, 2011 are summarized below:

Consolidated

2012 2011

Total loans and financing 708,006 607,912 Less:

Cash and cash equivalents, and short-term investments (335,180) (134,017) Operations with derivatives (16,682) (10,530)

Net debt (a) 356,144 463,365

Total equity 985,741 884,962

Total capital (b) 1,341,885 1,348,327

Financial leverage ratio - % (c)=(a):(b) 27 34

At December 31, 2012, the financial leverage ratio decreased significantly as compared to December 31, 2011, due to a decrease in inventories and profit generation.


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22. Commitments

a) Purchase of cotton

At December 31, 2012, the Company had various cancelable agreements for purchase of imported and local cotton for future delivery. The price of cotton may be set in US dollars or reais. Agreements entered into until December 31, 2012 and not yet received are as follows:

2012

Local cotton in thousands of reais: Total quantity (tons) 15,009

Total amount (R$) 53,317

Local cotton in thousands of US dollars: Total quantity (tons) 2,912

Total amount (USD) 5,928

Local cotton in thousands of US dollars: Total quantity (tons) 1,276

Total amount (USD) 2,333

In connection with settlement of the agreement on a future date, the Company undertakes to incur expenses equivalent to the consolidated amount of R$53,317 and USD5,928 thousand from purchase of local cotton and USD2.333 thousand of imported cotton. Such commitments must be settled in the subsequent year.

b) Electric power supply

At December 31, 2012, the Company had an electric power purchase and sale agreement with CHESF (Companhia Hidro Elétrica de São Francisco) effective until December 31, 2017, for the supply of average monthly volumes of 35.5MW to the Company’s industrial facilities located in the states of Ceará and Rio Grande do Norte, currently at a cost of R$165.40 MW/h (excluding ICMS). In case of early termination of the agreement, fines equivalent to as much as 14-months’ supply may apply.


83

23. Net revenue


2012 2011 2012 2011

Restated Restated

Gross revenue 1,205,588 1,134,751 1,483,956 1,290,757

(-) Deductions from revenue Taxes on sales (222,331) (198,646) (274,010) (229,038)

Returns and rebates (30,247) (18,553) (39,703) (25,501)

Total net revenue 953,010 917,552 1,170,243 1,036,218

24. Expenses by nature


2012 2011 2012 2011

Restated Restated

By function: Cost of products sold 713,763 697,628 865,113 761,402

Selling expenses 98,694 77,211 130,493 107,914 General and administrative expenses 64,992 64,821 89,345 81,334

877,449 839,660 1,084,951 950,650

By nature: Raw material, chemical products and use and consumption materials 414,891 401,772 560,908 462,571

Expenses with personnel and benefits 169,622 162,829 187,812 177,288 Depreciation and amortization 41,187 37,695 54,155 47,851 Freight services and commissions 45,771 41,521 56,219 51,193 Electric power, water and industrial fuel 108,940 112,747 108,970 113,075 Other 97,038 83,096 116,887 98,672

877,449 839,660 1,084,951 950,650


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25. Financial income (expenses)


2012

2011 2012

2011

Financial income:

Interest receivable 34,983

42,173 35,724

42,803

Operations with derivatives 23,036

18,331 23,036

18,331

Reversal of financial provisions 820

3,993 820

3,993

Gains on swap transaction 4,454

- 4,454

-

Present value adjustment 7,688

6,140 7,688

6,140

Other financial income 4,768

2,506 5,173

2,573

Exchange gains 61,073

71,169 63,089

78,716

Total financial income 136,822

144,312 139,984

152,556

Financial expenses: Interest payable (43,137)

(53,889) (43,761)

(53,893)

Discounts granted (4,040)

(2,134) (4,040)

(2,137)

Operations with derivatives (16,885)

(7,801) (16,885)

(7,801)

Financial provisions (820)

(3,930) (820)

(3,930)

Losses on swap transactions (2,146)

- (2,146)

-

Present value adjustment (2,574)

(2,023) (2,574)

(2,023)

Other financial expenses (3,486)

(4,878) (9,971)

(9,760)

Exchange losses (73,408)

(93,492) (77,736)

(102,087)

Total financial expenses (146,496)

(168,147) (157,933)

(181,631)

Financial income (expenses), net (9,674)

(23,835) (17,949)

(29,075)

26. Other operating income/expenses, net


2012

2011 2012

2011

Restated Restated

Income: Reversal of sundry provisions 18,363

42,928 18,363

42,928

Investment grant - ICMS 35,136

34,739 35,136

34,739 Sundry indemnification 2,169

- 2,169

-

PIS recovered 3,204

- 3,204

- Export credit - Reintegra 4,054

4,054

Income from taxes paid in installments - Law No. 11941/2009 -

3,166 -

3,166

Disposal of property, plant and equipment 2,477

3,847 4,386

3,847 Capital gains on investment 3,894

3,882 -

3,882

Other 2,554

5,978 5,034

6,737

Total income 71,851

94,540 72,346

95,299

Expenses: PIS and COFINS on other revenues (1,077)

(3,767) (1,087)

(3,775)

Sundry provisions (27,099)

(24,582) (25,150)

(24,582) Expenses with taxes paid in installments - Law No. 11941/2009 -

(5,548) -

(5,548)

Employees’ profit sharing (6,604)

(11,505) (6,607)

(12,097) Expenses with discontinued units (7,410)

(9,606) (7,410)

(9,606)

Cost of disposal of property, plant and equipment (5,334)

(2,931) (5,731)

(2,931) Other (2,128)

(2,740) (3,776)

(3,611)

Total expenses (49,652)

(60,679) (49,761)

(62,150)

Net income/expenses 22,199

33,861 22,585

33,149


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27. Information by segment Segment information is being presented in accordance with CPC 22 – Operating Segments (IFRS 8) and refers to activities carried out by Company and subsidiaries identified based on management structure and on internal management information used by the major Company decision-makers. A segment is an identifiable component of the Company, intended for manufacturing of products or rendering of services, or for supply of products and services, in a specific economic environment, subject to risks and remuneration different from other segments. The segment results include items directly attributable to the segment, as well as those that may be allocated on a reasonable basis. Segments used for decision-making and internal management by Company and subsidiaries were defined based on the product line, as follows: i. Denim and twill: Includes production and sale of cotton fabrics to the domestic

and foreign markets. ii. Yarn: Includes production and sale of cotton yarn to the domestic and foreign

markets. iii. Real estate: refers to rental and sale activities carried out by subsidiary Asaki

Participações Ltda. iv. Other: Includes other Company activities, which could result in revenues or

expenses, not directly related to the above-mentioned segments. Information on assets and liabilities, financial income (expenses) and income and social contribution taxes is not disclosed in the operating segment information, given that the Company management does not use such data in a segmented manner, since it is managed and analyzed on a consolidated basis.


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27. Information by segment (Continued)

Consolidated

01/01/2012 to 12/31/2012

Denim and twill Yarn

Real estate Other

Total - management

Reconciliation (*)

Total - Corporation

Law

Net operating revenue 1,109,517 33,175 12,060 - 1,154,752 15,491 1,170,243 Cost of products sold (821,448) (38,532) - - (859,980) (5,133) (865,113)

Gross profit 288,069 (5,357) 12,060 - 294,772 10,358 305,130 Operating expenses/income (165,041) (5,303) (12,006) (12,357) (194,707) (10,358) (205,065) Selling expenses (118,816) (3,982) (2,679) (3,217) (128,694) (2,740) (131,434) Administrative (83,181) (3,258) (10,930) - (97,369) 1,153 (96,216) Other 36,956 1,937 1,603 (9,140) 31,356 (8,771) 22,585

EBIT 123,028 (10,660) 54 (12,357) 100,065 - 100,065

Depreciation and amortization 43,144 1,162 7,230 2,619 54,155 - 54,155

EBITDA 166,172 (9,498) 7,284 (9,738) 154,220 - 154,220

Adjustments to EBITDA Profit sharing - employees 8,804 - 3 - 8,807 - 8,807

Share variation - Eletrobrás - - - 4,359 4,359 - 4,359

Adjusted EBITDA 174,976 (9,498) 7,287 (5,379) 167,386 - 167,386

Financial loss - - - - - - (17,949) IR/CSLL - - - - - - 44,711

Net income (loss) - - - - - - 126,827


87

27. Information by segment (Continued)

Consolidated

01/01/2011 to 12/31/2011

Denim and twill Yarn

Real estate Other

Total - management

Reconciliation (*)

Total - Corporation

Law

Net operating revenue 941,784 49,245 12,371 - 1,003,400 32,818 1,036,218 Cost of products sold (687,700) (54,823) - - (742,523) (18,879) (761,402)

Gross profit 254,084 (5,578) 12,371 - 260,877 13,939 274,816 Operating expenses/income (121,829) (7,989) (11,365) (6,237) (147,420) (13,939) (161,359) Selling expenses (92,583) (4,634) (1) (1,650) (98,868) (9,659) (108,527) Administrative (75,723) (5,757) (11,442) - (92,922) 6,941 (85,981) Other 46,477 2,402 78 (4,587) 44,370 (11,221) 33,149

EBIT 132,255 (13,567) 1,006 (6,237) 113,457 - 113,457

Depreciation and amortization 35,265 2,746 6,851 2,989 47,851 - 47,851

EBITDA 167,520 (10,821) 7,857 (3,248) 161,308 - 161,308

Adjustments to EBITDA Profit sharing - employees 9,772 389 - - 10,161 - 10,161

Share variation - Eletrobrás - - - (27) (27) - (27)

Adjusted EBITDA 177,292 (10,432) 7,857 (3,275) 171,442 - 171,442

Financial loss - - - - - - (29,075) IR/CSLL - - - - - - (3,786)

Net income (loss) - - - - - - 80,596

(*) Revenues, costs and expenses arising from sales transactions, waste, scraps, cotton and parts of each segment are analyzed by

managers and classified in internal management reports under operating income/expenses, depending on the role thereof. In accounting registers, the aforesaid revenues, costs and expenses are classified as sales revenue, cost of sales and operating expenses. The item "reconciliation" states revenues, costs and expenses amounts.

28. Insurance coverage

The Company and subsidiaries adopt the policy of taking out insurance coverage for assets subject to risks, in amounts deemed sufficient to cover any losses, considering the nature of their activities. The scope of our auditors’ work does not include issuing an opinion on the adequacy of insurance coverage, which was determined by Company management and considered sufficient to cover any losses. At December 31, 2012, fire insurance coverage’s maximum limit for compensation is R$210,000, whilst for loss of profit is R$205,329, and a twelve-month period for compensation, which Company management deems to be sufficient to cover risks.


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29. Environment (not audited) In the last decade, the Company planned and fulfilled the project for implementation of an Environment Management System (SGA) at the plants located in the Northeast, pursuant to the international standard NBR ISO 14001. The project led to a change in the plant management models, confirming that the environment is an important customer with needs to be met.

Implementation of an SGA was marked by significant phases: Identification and classification of environmental aspects and impacts, identification and understanding of applicable environmental legislation, control and monitoring of significant aspects and applicable legal requirements, development of environmental programs, creation of communication channels with the public in general, preparation of plans for emergency assistance and internal and external audits. The core principles of all the above phases are environmental preservation, continuous improvement of environmental performance and compliance with legislation applicable to Company activities.

This principle is explicit and documented in the Integrated Management System Policy for Quality, Environment, Health and Safety, which lists the commitments assumed by the Company before customers, shareholders, employees and the society.


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30. Tax incentives

Federal The calculation of profit from tax incentive activities on income tax reduction is as follows:

Taxable profit calculation: 2012

Pre-tax income 85,352

RTT adjustment (17,484)

Additions of expenses and operating provisions 69,234

Reversal of operating provisions (48,963)

Exclusions from revenue (35,136)

Use of tax credits (15,901)

37,102

IR (official rates of 15% + 10%) 9,251

Calculation of profit from tax incentive activities: Income before income and social contribution taxes 85,352

RTT adjustment (17,484)

Additions 31,333

Exclusions (54,639)

44,562

Total net billing 953,010

Tax incentive billing, net 899,759

Tax incentive billing % of total 94.41%

Profit from tax incentive activities 42,073

IR on profit from tax incentive activities (official rate of 15%) 6,311

Surtax on profit from tax incentive activities 3,480

Total 9,791

Income tax exemption (reduction) - 75% 7,343

State The branches located in the towns of Maracanaú and Pacajus, state of Ceará, were granted tax incentive effective until August and November 2013, denominated Industrial Development Incentive Program (PROVIN), which is part of the Industrial Development Fund of the State of Ceará (FDI), consisting of extension of the deadline for payment of the monthly ICMS (Service Tax) debt balance, with 88% (eighty-eight percent) deduction, until September 2011. After such date, the Company will be entitled to a 75% (seventy-five percent) deduction, should the debt be settled until maturity date. The unit located in the state of Rio Grande do Norte, in turn, was granted tax benefit under the Industrial Development Support Program (PROADI), through an agreement entered into with the Rio Grande do Norte State Government, consisting of financing of up to 75% (seventy-five percent) of the ICMS, effective until calendar year 2015.


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31. Subsequent events

On February 27, 2013, the branches located in the cities of Maracanaú and Pacajus, state of Ceará, provided evidence of investments above R$200 million in the revamping and increase of manufacturing capacity, and obtained a special tax incentive from the Industrial Development Incentive Program (PROVIN), which is part of the Industrial Development Fund of the State of Ceará (FDI), consisting of extension of the deadline for payment of the monthly ICMS (Service Tax) debt balance, with a 99% (ninety-nine per cent) deduction, should the debt be settled until maturity date. This tax incentive is effective from March 1, 2013 to February 28, 2023 (units I and II) and to November 30, 2022 (unit V).

Financial statements Vicunha Têxtil S.A. · Financial statements Vicunha Têxtil S.A. December 31,...

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