COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS … · COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS CNPJ/MF No. 22.677.520/0001-76 ... (IBRACON) and our auditors. The decision

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COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS

CNPJ/MF No. 22.677.520/0001-76

PUBLICLY-TRADED COMPANY

To Our Shareholders,

We are pleased to submit for your appreciation the financial statements for the year ended December 31, 2005, together with the reports of the Independent Auditors and Fiscal Council.

We express our appreciation to ADENE (Northeast Development Agency), the BNDES (National Economic and Social Development Bank), BDMG (Minas Gerais Development Bank), BNB (Bank of the Northeast of Brazil), Banco do Brasil, the commercial bank system, the press, customers and suppliers, our shareholders, public authorities, trade associations, our employees and all those who directly or indirectly contributed to achieving our business objectives.

Josué Christiano Gomes da Silva President

MANAGEMENT REPORT

THE ECONOMY IN 2005

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OUR RESULTS

COTEMINAS’ sales totaled R$1.7 billion in 2005 and 2004. The table below shows the main results for 2005 compared to 2004. Since July 2004, the Company has been consolidating the results of its subsidiary Companhia Tecidos Santanense.

R$ 000 Variation Consolidated Financial Highlights 2005 2004 % Gross sales 1,718,976 1,699,632 1.1 Net sales 1,359,782 1,421,985 (4.4)Cost of sales (994,791) (965,743) 3.0 Gross profit 364,991 456,242 (20.0) (% of net sales) 26.8% 32.1% Selling, general and administrative expenses (156,376) (135,870) 15.1 Depreciation and amortization 89,974 82,788 8.7 Income from operations before financial items 215,955 315,921 (31.6) (% of net sales) 15.9% 22.2% Net income 101,915 175,828 (42.0)Earnings per share (R$/thousand shares) 16.77 28.93 (42.0)Number of shares (million) 6,076 6,076 - Sales volume (tons) 131,747 121,313 8.6 Average price (in R$ per kilo) 10.32 11.72 (11.9)

Net Sales

Total sales in 2005 reached R$1.7 billion, the same figure reported in 2004. Net sales accumulated average growth of 16.9% per year over the last five years, during which COTEMINAS increased its production of consumer goods, especially in the household segment (bed, table and bath), which in 2005 represented 59.7% of sales. Foreign sales grew 16.8% in U.S. dollars, despite the continued appreciation of Brazilian real against the U.S. dollar, reaching US$241.2 million.

Although net sales fell 4.4%, sold volumes grew 8.6%, totaling 131,700 tons. The Company has been increasing volumes produced and sold by an average of 10.6% per year over the last five years, as a result of investments in expanding and constantly modernizing production facilities. Net fixed asset turnover (sales over net fixed assets) has evolved favorably thanks to greater use of facilities constructed in recent years, going from 0.65 in 1999 to 1.10 in 2005.

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Information by Segment

R$ million Variation Segmented Financial Information 2005 2004 % Intermediate products (threads and fabrics) Sales volume (thousands of tons) 68.6 63.9 7.4 Net sales 501.4 528.3 (5.1)Average prices (in R$ per kilo) 7.31 8.26 (11.6)

Household products (bed, table and bath) Sales volume (thousands of tons) 61.1 54.2 12.6 Net sales 811.6 819.3 (1.0)Average prices (in R$ per kilo) 13.29 15.10 (12.0)

Clothing (T-shirts, underwear and socks) Sales volume (thousands of tons) 2.0 3.2 (35.0)Net sales 46.8 74.4 (37.1)Average prices (in R$ per kilo) 22.60 23.37 (3.3)

Total Sales volume (thousands of tons) 131.7 121.3 8.6 Net sales 1,359.8 1,422.0 (4.4)Average prices (in R$ per kilo) 10.32 11.72 (11.9)

Intermediate products - Sales of threads and raw and finished fabrics totaled 68,600 tons in 2005. These products accounted for 52.1% of sales volume in 2005, compared to 52.7% in 2004. The average price of R$7.31 in 2005 is 11.6% lower than that reported in 2004, which was R$8.26. This drop was due to changes in the product mix.

Household products - There was growth of 12.6% in this segment’s sales volume, going from 54,200 tons in 2004 to 61,100 tons in 2005, which was only possible through the Company’s competitiveness, which remained leader in costs, in both the domestic and foreign markets. Average sale prices decreased 12.0%, a result of the Brazilian real’s appreciation, which affected the local currency price of export-oriented products in this segment. The sales volume of bed, table and bath products grew an average 24.5% per year over the last five years.

Clothing - In 2005 2,000 tons of t-shirts, underwear and socks were produced and sold, down 35% from 2004. This decrease is due to the fact that in 2004 there were seasonal domestic sales, which did not happen in 2005.

Cost of Sales

COTEMINAS recorded a gross margin of 26.8% in 2005, with gross profit reaching R$365.0 million, compared to R$456.2 million in 2004. The gross margin in 2005 was impacted by the appreciation of the Brazilian real in relation to the dollar, to the detriment of exports. Costs remained stable, with a slight increase in the costs administered by the government, such as energy, telecommunications and oil. Other manufacturing costs per kilo, such as labor and utilities, fell thanks to major productivity gains and savings in input usage through the use of more advanced technology.

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R$ million R$/kilo Variation Cost of Sales 2005 2004 2005 2004 % Purchased inputs (*) 681.1 680.6 5.17 5.61 (7.8) Depreciation and amortization 79.1 74.0 0.60 0.61 (1.6) Other manufacturing costs 234.6 211.1 1.78 1.74 2.3 Total cost of sales 994.8 965.7 7.55 7.96 (5.2)

(*) Inputs acquired from third parties, applied to the product

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 15.1%, and its share of net sales was 11.5% in 2005, compared to 9.6% in 2004.

This increase in expenses is due to:

• A 17.8% increase in variable expenses directly related to gross sales, which grew 8.6%; an addition to the allowance for doubtful accounts; and an increase in freight costs.

• A 13.5% increase in fixed expenses due to various items, such as: (a) expenses for the period of 12 months of operation of Santanense in 2005 compared to 6 months in 2004; (b) nonrecurring services contracted with third parties, such as advising on the analysis of the joint venture with Springs, temporary labor for adaptation and migration of the data processing system to a more modern platform; and (c) escrow deposits with the respective allowance for losses referring to isolated tax discussions in court.

R$ million Variation Expense Category 2005 2004 % Depreciation and amortization 10.9 9.4 16.0 Fixed expenses 93.2 82.1 13.5 Variable expenses (*) 52.3 44.4 17.8 Total expenses 156.4 135.9 15.1

(*) Commissions, freight and royalties

Income from Operations

Income from Operations before Financial Items was R$216.0 million in 2005, compared to R$315.9 million in 2004, representing a 31.9% drop. Meanwhile, the sales margin went from 22.2% in 2004 to 15.9% in 2005, basically impacted by the appreciation of the Brazilian real against the U.S. dollar and also by the increase in selling, general and administrative expenses. In addition, in 2005, the provision referring to the expansion of the PIS and COFINS (taxes on revenue) tax basis was reversed, in accordance with a recommendation by the Brazilian Institute of Independent Auditors (IBRACON) and our auditors. The decision on the matter, favorable to the Company, became final and unappealable, and the reversed provision was classified under “Other operating income”.

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Net Financial Result

For 2005, the Company recorded net financial expenses of R$42.2 million, compared to net financial expenses of R$43.1 million for 2004. 2005’s result is impacted by the Brazilian real’s appreciation, which caused losses on the Company’s accounts receivable from exports. The financial expenses include CPMF, IOF, PIS, COFINS and IRRF taxes on financial transactions, which totaled R$10.4 million in 2005 (R$11.9 million in 2004).

Net Income, Income and Social Contribution Taxes, and Reserve for Contingencies

Both corporate income and social contribution taxes based on taxable income remained unchanged in 2005 and 2004.

In 2005, reserves for contingencies totaled R$82.3 million. Of this total, R$41.1 million is related to the levy of social contribution tax challenged in court, and various other minor lawsuits.

The Company makes escrow deposits for taxes challenged, in addition to recognizing reserves for their full amounts.

Net income for 2005 totaled R$101.9 million, or R$16.77 per thousand shares.

Working Capital

Working capital grew from R$623.3 million at the end of 2004 to R$695.0 million as of December 31, 2005, an increase of R$71.7 million. This fact is basically due to the Company’s operating cash flow.

Investments

In 2005, investments of R$166.2 million were made in fixed assets. The Company invested in the purchase of new machines and equipment for modernization and expansions, optimizing the use of preexisting facilities and infrastructure.

In the period from 2001 to 2005, COTEMINAS invested R$778.0 million in expansions and modernizations in its 16 manufacturing units. In the same period, the Company’s cash flow reached R$1,531.9 million, and depreciation and amortization, R$380.5 million.

OUTLOOK FOR 2006

CAPITAL MARKET, SHARE LIQUIDITY AND DIVIDENDS

In 2005, the Company’s registered common (ON) and registered preferred (PN) shares were involved in 11,880 trades on BOVESPA (São Paulo Stock Exchange) (in 2004 trades totaled 10,319). Trading volume in 2005 was 1.8 billion shares, involving R$400 million (in 2004, 2.1 billion shares were traded, involving R$500 million). The average daily trading volume in 2005 was 6.7 million preferred shares, while the average daily financial volume was R$1,478,000 per day in 2005 (R$2,006,000 in 2004).

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Management proposes to the Annual Shareholders’ Meeting, to be held by April, the payment of dividends in the amount of R$5.31 per thousand shares (R$9.16 per thousand shares in 2004), in the amount of R$32.3 million (R$55.7 million in 2004), 33.3% of adjusted net income for the year, excluding the mandatory allocation to the legal reserve.

Relationship with Independent Auditors

In 2005, the Company did not engage the independent auditors for any nonaudit service.

Montes Claros - MG, March 24, 2006.

Management

Companhia de Tecidos Norte de Minas - COTEMINAS and Subsidiaries Financial Statements for the Years Ended December 31, 2005 and 2004 and Independent Auditors’ Report Deloitte Touche Tohmatsu Auditores Independentes

(Convenience Translation into English from the Original Previously Issued in Portuguese)


INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Management of Companhia de Tecidos Norte de Minas - COTEMINAS Montes Claros - MG

1. We have audited the accompanying individual (Company) and consolidated balance sheets of Companhia de Tecidos Norte de Minas - COTEMINAS and subsidiaries as of December 31, 2005 and 2004, and the related statements of income, changes in shareholders’ equity and changes in financial position for the years then ended, all expressed in Brazilian reais and prepared under the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements.

2. Our audits were conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Company and its subsidiaries, (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed, and (c) evaluating the significant accounting practices and estimates adopted by management, as well as the presentation of the financial statements taken as a whole.

3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all material respects, the individual and consolidated financial position of Companhia de Tecidos Norte de Minas - COTEMINAS and subsidiaries as of December 31, 2005 and 2004, and the results of their operations, the changes in shareholders’ equity and the changes in their financial position for the years then ended in conformity with Brazilian accounting practices.

4. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil.

São Paulo, February 21, 2006

DELOITTE TOUCHE TOHMATSU Michael J. Morrell Auditores Independentes Engagement Partner

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COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

1. OPERATIONS

Companhia de Tecidos Norte de Minas - COTEMINAS (the “Company”) is a Brazilian publicly-traded company engaged in the production and trade of threads and fabrics in general, imports and exports, and may hold equity interest in other companies and acquire marketable securities in the capital market.

The Company is a leader in the textile industry in Brazil and one of the country’s largest integrated manufacturers of fabrics for clothing and home use. The Company produces and trades threads and finished and unfinished fabrics, bed linens, table and bath products; and knit apparel, including T-shirts, socks and underwear. Its finished products are sold under some of the most well-known brands in the market, such as Artex, Santista, Paládio, Calfat and Garcia, among others, for bed linens, table and bath products, and Attitude and Jamm, among others, for clothing; the Company also supplies major retail chains with store brands and/or exclusive brands.

The Company and its branches are located in the area of the Northeast Development Agency (ADENE), except for the Blumenau and Goiás facilities.

2. PRESENTATION OF FINANCIAL STATEMENTS

a. Accounting practices

The individual and consolidated financial statements of the Company and its subsidiaries, including notes thereto, are expressed in thousands of Brazilian reais and have been prepared in conformity with Brazilian accounting practices, which include the accounting practices set forth in Brazilian corporate law - Laws No. 6,404, No. 9,457 and No. 10,303, of December 15, 1976, May 5, 1997 and October 31, 2001, respectively, and supplementary provisions of the Brazilian Securities Commission (CVM).

For a better understanding of the Company’s balance sheet as of December 31, 2005, see note 17 to the financial statements.

Significant accounting practices applied in the preparation of the financial statements are as follows:

a) Results of operations

Income and expenses are recorded on the accrual basis of accounting.

Companhia de Tecidos Norte de Minas - COTEMINAS and Subsidiaries

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b) Monetary and exchange variations

Assets and liabilities subject to monetary and exchange variations are restated through the balance sheet date, in accordance with Central Bank of Brazil (BACEN) published exchange rates or contractual indices. Monetary and exchange variations are recognized in income.

c) Temporary cash investments

Included in cash and cash equivalents, is stated at cost plus income earned through the balance sheet date, not exceeding market value.

d) Allowance for doubtful accounts

Recognized based on an analysis of accounts receivable, in an amount considered sufficient by management to cover possible losses on receivables.

e) Export prepayment

Recorded as a reduction of the respective balance of foreign customers, where they remain until the date of the respective settlement.

f) Inventories

Stated at average production or acquisition cost, lower than realizable value.

g) Investments

Investments in subsidiaries are carried under the equity method based on the balance sheet of the subsidiaries as of the same date as the Company. Other investments are carried at cost, monetarily restated through December 31, 1995, net of allowance for adjustment to market value, when applicable.

h) Property, plant and equipment

Stated at cost, monetarily restated through December 31, 1995. Depreciation is determined under the straight-line method based on the estimated useful lives of the assets. Expenditures that increase or extend the estimated useful lives of assets are included in their respective cost; expenditures related to maintenance and repairs are recorded in income as incurred.

i) Deferred charges

Principally related to preoperating costs, monetarily restated through December 31, 1995, and amortized at annual rates of 10% to 20%.

j) Provisions

Reserves for contingencies are recognized based on the assessment by management and legal counsel of probable losses, in an amount considered sufficient to cover these losses.


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k) Provision for income tax

Calculated at the rate of 15% on taxable income, plus a surtax of 10%, and recorded in full, in accordance with tax legislation. The portion of the income tax liability related to reductions and exemptions is reversed as a credit to shareholders’ equity. The provision is stated net of prepayments made during the year.

l) Provision for social contribution tax

Recognized after income from operations and calculated at the rate of 9% on taxable income. The provision is stated net of prepayments made during the year.

b. Consolidation criteria

The consolidated financial statements include the accounts of the Company and the following subsidiaries:

Ownership interest - % 12/31/05 12/31/04 COTEMINAS S.A. 100 -COTEMINAS International Ltd. 100 100Wentex International Ltd. 100 100Companhia de Tecidos Norte de Minas - COTEMINAS (Sucursal Argentina) 100 100COTEMINAS Argentina S.A. 100 -Fiação Canadá S.A. 100 100Oxford Comércio e Participações S.A. 59 59American Sportswear Ltda. 50 50Companhia Tecidos Santanense 2 -Springs Global Participações S.A. 100 -

In consolidation, all significant intercompany transactions, balances and unrealized profits are eliminated, together with the Company’s investments in the subsidiaries. In the consolidated statement of income, equity in subsidiaries refers to the exchange variation arising from foreign subsidiaries.

The financial statements of foreign subsidiaries were translated into Brazilian reais based on the exchange rate at December 31, 2005, R$2.3407 per US$1.00 (R$2.6544 in 2004); these subsidiaries follow the Company’s accounting practices.

The minority interest is shown separately.

The subsidiary Oxford Comércio e Participações S.A., parent company of Companhia Tecidos Santanense, with ownership interest of 85.91%, was included in the consolidation process with its already consolidated financial statements as of December 31, 2005. The consolidated statement of income as of December 31, 2004, presented for comparative purposes, includes the operations of this subsidiary, whose start-up was on July 1, 2004.


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3. ACCOUNTS RECEIVABLE

Company Consolidated 2005 2004 2005 2004 Domestic customers - 265,499 322,715 320,602 Foreign customers 21,058 90,026 111,317 100,523 Subsidiary: Domestic market - 3,230 - - Foreign market 24,002 25,532 - -

45,060 384,287 434,032 421,125 Export prepayment/Advances on export contracts (11,928) (26,650) (11,928) (26,650)

Allowance for doubtful accounts - (12,811) (19,385) (17,526) 33,132 344,826 402,719 376,949

4. INVENTORIES

Company Consolidated 2005 2004 2005 2004 Raw materials and supplies - 205,378 214,487 223,119 Work in process - 59,368 91,648 63,333 Finished products - 42,706 78,227 53,192 - 307,452 384,362 339,644


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5. INVESTMENTS IN SUBSIDIARIES

Shareholders’ Ownership Net Company investment Company equity

in subsidiaries equity - % income (loss) 2005 2004 2005 2004

COTEMINAS S.A. (a) 1,109,437 100 - 1,109,437 - - - Oxford Comércio e Participações S.A. (b) 106,889 59 36,548 62,936 43,401 21,522 15,575 COTEMINAS International Ltd. (c) 16,054 100 15,915 16,054 157 4,559 158 Wentex International Ltd. 4,428 100 3,360 4,428 1,210 3,217 1,216 Companhia Tecidos Santanense (d) 135,207 2 38,051 1,545 - 779 - American Sportswear Ltda. 1,570 50 89 785 740 45 20 Fiação Canadá S.A. (e) 41,479 100 (2,544) - 30,070 (2,544) - COTEMINAS (Sucursal Argentina) (f) (13,020) 100 4,670 - 20,552 1,877 (1,978) Springs Global Participações S.A. (g) 1 100 - 1 - - -

1,195,186 96,130 29,455 14,991

(a) COTEMINAS S.A. was established on December 31, 2005, as a subsidiary of the Company, which subscribed capital with its operating assets and liabilities, as described in note 17 to the financial statements.

(b) The subsidiary Oxford is the parent company of Companhia Tecidos Santanense, with ownership interest of 85.91% since July 2004, when a negative goodwill was determined in the amount of R$13,598, classified as “Deferred credits - negative goodwill”, in liabilities. This negative goodwill is derived from “Other economic reasons” and will be amortized upon realization of this investment.

(c) Intercompany profits (losses) have been eliminated.

(d) The Company acquired a direct investment in Companhia Tecidos Santanense on February 22, 2005, when a negative goodwill was determined in the amount of R$1,253, classified as “Deferred credits - negative goodwill” in liabilities. This negative goodwill is derived from “Other economic reasons” and will be amortized upon realization of this investment.

(e) The investment in Fiação Canadá S.A. was an integral part of the contribution of capital to COTEMINAS S.A., detailed in note 17 to the financial statements.

(f) The negative shareholders’ equity basically refers to obligations with the parent company and was reclassified to the caption “Other payables” in long- -term liabilities.

(g) Springs Global Participações S.A. was established on November 24, 2005 as a subsidiary of the Company.


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6. PROPERTY, PLANT AND EQUIPMENT

Annual depreciation Company Consolidated rate - % 2005 2004 2005 2004 Land and improvements - - 14,456 19,286 19,583 Buildings 1.67 to 4 - 299,330 361,324 350,610 Installations 6.67 to 10 - 131,885 187,697 170,911 Equipment 4 to 20 54,573 904,627 1,168,603 1,070,117 Furniture and fixtures 10 - 13,592 15,430 14,996 Vehicles 20 - 11,363 8,670 13,270 Trademarks and patents - - 14,054 15,794 14,139 UHE - Porto Estrela (*) 2 to 10 - 36,136 36,136 36,136 Construction in progress - - 14,598 29,366 20,555 Other 5 to 10 - 29,631 30,485 35,249

54,573 1,469,672 1,872,791 1,745,566 Accumulated depreciation (3,638) (480,988) (679,929) (603,759)

50,935 988,684 1,192,862 1,141,807

(*) See note 15 to the financial statements.

7. DEFERRED CHARGES

Company Consolidated 2005 2004 2005 2004 Preoperating costs and other 33,667 33,447 50,080 48,367 Accumulated amortization (31,794) (28,869) (42,856) (40,836) 1,873 4,578 7,224 7,531

8. SUPPLIERS

Includes specific financing to purchase raw material (cotton), granted by the federal government, in the amount of R$74,234 (R$80,104 in 2004), with maturities through April 2006.


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9. LOANS AND FINANCING

Interest rate Company Consolidated Currency (% per year) Maturity 2005 2004 2005 2004 Export prepayment:

Banco Real ABN Amro US$ 0.2 (a) 2007 11,703 13,274 11,703 13,274 Banco Real ABN Amro (*) US$ 0.2 (a) 2007 - - 16,428 18,621 BankBoston US$ 1.15 (a) 2009 47,192 23,975 47,192 23,975

58,895 37,249 75,323 55,870 Advances on export contracts:

Banco HSBC (*) US$ 5.9 2005 - - - 56 Banco Rural (*) US$ 8.0 2005 - - - 141 Banco Santander S.A. (*) US$ 4.45 2005 - - - 390

- - - 587 Local currency:

Industrial Development Support Program (PROADI) R$

TR (managed prime rate) + 3.0 2006 19 14 19 14

National Bank for Economic and Social Development (BNDES) R$

TJLP (Brazilian long-term interest

rate) + 2.5 2005 - 24,378 - 24,378 Banco do Brasil S.A. R$ TJLP + 3.8 2005 - 30,563 - 30,563 BankBoston R$ TJLP + 3.8 2005 - 31,113 - 31,113 Banco Real ABN Amro R$ (b) 2006 - - 285,193 - Banco Itaú S.A. R$ (b) 2006 - - 285,193 - National Bank for Economic

and Social Development (BNDES) (*) R$ TJLP + 3.0 2014 - - 30,696 30,550

Minas Gerais State Development Bank (BDMG) R$ TJLP + 5.0/5.5 2005 - - - 200

Unibanco S.A. (*) R$ TJLP + 3.9/5.0 2006 - - 229 821 Banco Bradesco (*) R$ TJLP + 3.7/5.5 2006 - - 47 760 Banco Alfa S.A. (*) R$ TJLP + 4.0/5.5 2006 - - 77 174 Banco do Brasil S.A. (*) R$ TJLP + 3.9 2006 - - 51 125 Banco Real ABN Amro (*) R$ TJLP + 4.0 2007 - - 765 1,140

19 86,068 602,270 119,838 Foreign currency:

International Finance Corporation - IFC US$ 2.75 (a) 2007 9,049 15,254 9,049 15,254

Banco Itaú S.A. $ Arg. 9.5 2006 - - 12,700 13,466 Citicorp US$ 2.15 (a) 2009 36,895 6,976 36,895 6,976 West LB (*) US$ 1.25 (a) 2005 - - - 539 Dresdner Bank (*) US$ 1.125 (a) 2006 - - 341 772 Banco do Brasil S.A. $ Arg. 10.25 2006 - - 9,086 -

45,944 22,230 68,071 37,007 Total 104,858 145,547 745,664 213,302 Current (15,354) (95,079) (617,074) (113,970) Long term 89,504 50,468 128,590 99,332 (a) Plus LIBOR.

(b) Loan obtained as part of the process of incorporation of COTEMINAS S.A., detailed in note 17 to the financial statements. Charges thereon are based on the higher of exchange variation or 70% of the Interbank Deposit Rate (CDI).

(*) Loans of the subsidiary Santanense.


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Loans are collateralized by property, plant and equipment with a book value of R$47,453 (R$128,580 in 2004) and by bank guarantees, sureties and promissory notes in the amount of R$698,211 (R$90,423 in 2004).

Maturities are as follows:

Consolidated

2006 2007 2008 2009 to 2014 Total

Export prepayment:

Banco Real ABN Amro 7,845 20,286 - - 28,131

BankBoston 704 14,895 15,612 15,981

47,192 8,549 35,181 15,612 15,981 75,323Local currency:

Industrial Development Support Program (PROADI) 19 - - - 19

National Bank for Economic and Social Development (BNDES) 2,880 3,709 3,709 20,398 30,696

Banco do Brasil S.A. 51 - - - 51Unibanco S.A. 229 - - - 229Banco Bradesco 47 - - - 47Banco Alfa S.A. 77 - - - 77Banco Itaú S.A. 285,193 - - - 285,193Banco Real ABN Amro 285,611 347 - - 285,958

574,107 4,056 3,709 20,398 602,270Foreign currency:

International Finance Corporation - IFC 4,660 4,389 - - 9,049Banco Itaú S.A. 12,700 - - - 12,700Citicorp 7,631 7,538 7,538 14,188 36,895Dresdner Bank 341 - - - 341

Banco do Brasil S.A. 9,086 -

- - 9,086 34,418 11,927 7,538 14,188 68,071Total 617,074 51,164 26,859 50,567 745,664


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10. SHAREHOLDERS’ EQUITY

a. Capital

Subscribed and paid-up capital is represented as follows:

2005 2004 Common 2,176,597,891 2,176,597,891 Preferred 3,900,240,221 3,900,240,221 6,076,838,112 6,076,838,112

All shares are registered and without par value. Preferred shareholders do not have voting rights, but have the following advantages: (a) priority to capital redemption in the event of liquidation, and (b) right to be included in any public offering for the sale of the controlling interest, as legally determined, and to receive dividends at least equivalent to those paid on common shares.

b. Proposed dividends

Shareholders are entitled to dividends equivalent to 33.33% of annual net income.

Proposed dividends were calculated as follows:

2005 2004 Net income 101,915 175,828 Legal reserve (5,095) (8,791)Adjusted net income 96,820 167,037 Proposed dividends 32,273 55,682 Prior year balances 928 549 Dividends payable 33,201 56,231 Proposed dividends total R$32,273, equivalent to R$5.31 per thousand outstanding shares (R$55,682 in 2004, equivalent to R$9.16 per thousand shares).

c. Profit retention reserve

The profit retention reserve was recognized under article 196 of Law No. 6,404/76 with the purpose of future investments.


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11. RELATED-PARTY TRANSACTIONS

Receivable Payable Financial charges 2005 2004 2005 2004 2005 2004 Subsidiaries:

COTEMINAS International Ltd. 26,869 24,848 - - 1,971 1,952 Wentex International Ltd. - - 20,271 19,178 (1,452) (980)COTEMINAS Sucursal Argentina - - 448 510 60 (91)American Sportswear Ltda. - - 629 547 (101) - Fiação Canadá S.A. 470 198 - - 1,106 384 Oxford Com. e Participações S.A. - 12 - - (3) 1 Companhia Tecidos Santanense - - 10,786 13,320 (3,281) (661)

27,339 25,058 32,134 33,555 (1,700) 605 Affiliated companies:

Empresa Nacional de Comércio, Rédito e Participações S.A. - ENCORPAR - - 6,692 - (903) -

Holtex Inc. - - 306 - (11) - Wembley Sociedade Anônima 200 1,003 - - 177 2

200 1,003 6,998 - (737) 2

The balances refer to loans with long-term maturities, whose charges, for subsidiaries and affiliates, were calculated according to the rates equivalent to those in effect in the financial market (100% to 103% of the CDI (interbank deposit rate) for companies based in Brazil, and LIBOR plus 3% per year for companies based abroad). The Company receives commissions on surety at the rate of 1.3% per year from its indirect subsidiary Companhia Tecidos Santanense, which as of December 31, 2005 totaled R$682 (R$345 in 2004), considered as financial charges.

In 2005, the Company supplied bed, table and clothing products to its branch in Argentina, in the amount of R$43,078 (R$38,177 in 2004). These transactions were conducted at market prices and conditions, and comply with transfer pricing legislation.

12. INCOME AND SOCIAL CONTRIBUTION TAXES

a. Tax incentives

All manufacturing units of the Company, except the Blumenau and Goiás facilities, are located in the ADENE area, which provides federal and state tax benefits.

The federal and state tax benefits of the Company and its manufacturing units expire on different dates, depending on the plant in question, until December 31, 2013.

These tax benefits are calculated based on gross sales and income tax due on income from sales and industrial operations, recorded as sales deductions or income tax expense and credited to a capital reserve in shareholders’ equity.


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b. Reconciliation of income tax expense

Company Consolidated 2005 2004 2005 2004 Income before taxes on income and

management compensation 142,514 257,764 174,904 277,042 Permanent differences:

Equity in subsidiaries (29,455) (14,991) (1,017) 1,042 Effect of foreign subsidiaries’ results 7,938 - (3,547) (2,021)Offset of subsidiaries’ tax loss

carryforwards - - (15,414) (7,046)Gain on investment in subsidiary - - - (4,829)Other, net 927 2,723 786 (6,203)

Taxable income 121,924 245,496 155,712 257,985 Tax rate - 25% 30,456 61,350 38,928 64,496 Other deductions, net (1,381) (2,300) (270) (1,552) Income tax expense 29,075 59,050 38,658 62,944

Current 27,757 57,037 36,925 61,867 Deferred 1,318 2,013 1,733 1,077

c. Reconciliation of social contribution tax expense

Company Consolidated 2005 2004 2005 2004 Taxable income (see item b. above) 121,924 245,496 155,712 257,985 Permanent differences:

Profit sharing (627) (841) (627) (910)Other, net (224) (348) 26 (32)

Tax basis 121,073 244,307 155,111 257,043 Social contribution tax expense (9%) 10,897 22,045 13,960 23,193

Current 9,851 20,672 12,765 22,155 Deferred 1,046 1,373 1,195 1,038


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d. Recoverable taxes and deferred income tax

Company Consolidated 2005 2004 2005 2004 Assets:

Current: Recoverable income tax (a) 4,987 9,589 6,338 10,525Social contribution tax (a) 57 1,102 543 1,439State VAT (ICMS) (b) 63,378 45,784 68,125 47,586Recoverable taxes on revenue (PIS and COFINS) 31,445 4,364 32,017 4,398Recoverable federal VAT (IPI) 3,517 1,698 3,936 1,787Value-added tax (IVA) - - 3,117 4,175Other 3 24 2,035 612

103,387 62,561 116,111 70,522 Liabilities:

Long-term liabilities: Income tax on accelerated depreciation incentive - 3,284 - 3,284Other - 867 791 867

- 4,151 791 4,151 (a) Refers to income and social contribution taxes on temporary differences, including

temporarily suspended taxes and other nondeductible provisions, all realizable next year, included in the calculation of said taxes.

(b) Refers mainly to credits arising from export volumes.

13. RESERVE FOR CONTINGENCIES

The Company and its subsidiaries are challenging, in the courts, the legality of certain taxes and labor claims. The reserve for contingencies was recorded based on management’s and legal counsel’s risk assessment for all lawsuits in which the Company’s chances of losses are considered probable. Regarding the tax charges under discussion, the Company has adopted the policy of accruing and making escrow deposits for the full amounts.

In 2005, the reserve for contingencies amounted to R$82,269 (R$102,953 in 2004), of which R$41,120 (R$41,096 in 2004) refers to the challenge regarding the social contribution tax; the remaining balance refers to various cases of less than R$5,000.

The Company challenged in court the legitimacy of Law No. 9,718/98, which changed the PIS and COFINS tax basis, and increased the COFINS rate. In December 2005, a decision favorable to the Company on the change in the tax basis was rendered, and the claim for rate increase was dismissed. In February 2006, the decision became final and unappealable.

As established by Brazilian Institute of Independent Auditors (IBRACON) Technical Bulletin No. 02/2006, the Company reversed the reserves and escrow deposits referring to the matter, and the portion of these reserves referring to the expansion of the tax basis, in the amount of R$5,981, was recorded as “Other operating income”.


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14. FINANCIAL INSTRUMENTS

The Company’s operations comprise the production and trade of threads and fabrics in general. The main market risk factors that affect the Company’s business are as follows:

a) Risk management

The Company has transactions involving financial instruments, exclusively related to its activities, to reduce the exposure of its operating assets and liabilities to market, currency and interest rate risks.

b) Exchange rate risk

This risk arises from the possibility of the Company incurring losses on fluctuations in exchange rates, which reduce nominal billed amounts or increase amounts of funds raised in the market.

Exchange exposure

Consolidated 2005 2004 Cash and cash equivalents (1) 37,967 57,772 Accounts receivable (1) 99,389 73,873 Suppliers (1) (3,033) (1,513)Loans and financing (2) (143,394) (93,464) (9,071) 36,668 (1) Indexed to U.S. dollar exchange rate.

(2) See note 9.

c) Estimated fair values

Financial assets and liabilities are stated in the balance sheets at cost, reflecting the respective revenues earned and expenses incurred through the balance sheet dates, which approximate fair value. For temporary cash investments, fair value was determined based on market quotations of these investments. The fair values for BNDES and EGF financing are identical to the carrying amounts.

d) Credit risk

The Company is subject to credit risk on its temporary cash investments. The risk is mitigated by the policy of dealing only with major financial institutions. Cash and cash equivalents are summarized as follows:

Consolidated 2005 2004 Fixed-income funds - DI 473,759 -Exchange funds (US$) 8,651 23,715Foreign deposits 29,316 34,057Other investments 15,734 16,562 527,460 74,334


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The credit risk on accounts receivable is reduced due to the selectivity of customers, credit policy and dispersion of balances among various customers, without concentration of receivables on a few customers in the domestic market. Receivables from foreign customers are represented by traditional textile companies.

15. GOVERNMENT CONCESSIONS

The Company has equity interest in a consortium for an electric energy generation concession with the companies Companhia Energética de Minas Gerais - CEMIG and Companhia Vale do Rio Doce - CVRD, in equal percentages of 33.33%. For the management of this consortium, a legally independent entity was not established. Controls are maintained in each company’s accounting records, equivalent to each one’s interest.

In return for the granting of the concession, the Company, together with the other companies in the consortium, will pay installments to the federal government in different amounts over the course of the concession, as stated below.

Beginning of concession period: July 10, 1997 Concession period: 35 years Total amount of the concession: R$333,310 Monetary restatement: IGP-M (General Market Price Index)

Total annual installments of the concession:

5th to 15th year 16th to 25th year 26th to 35th year 2002 to 2012 2013 to 2022 2023 to 2032 Original amounts:

Minimum installment 120 120 120Additional installment - 12,510 20,449

Annual installment 120 12,630 20,569 Total installments 1,320 126,300 205,690Restated installments 3,135 299,926 488,448

For accounting purposes, the Company recognizes expenses incurred on the accrual basis, as a contra entry to long-term liabilities - Other, on the straight-line basis, based on its share in the total amount of the concession; 33.33%, discounted to present value, considering an interest rate of 4% per year, restated based on the IGP-M. As of December 31, 2005, this amount represents R$18,670 (R$10,754 in 2004).

The amounts recorded under property, plant and equipment (see note 6), related to this concession, consider the Company’s share in investments for the construction of the Porto Estrela Hydroelectric Plant, located on the Santo Antônio River, 270 km from Belo Horizonte, with an installed capacity of 112 MW. The plant began generation activities at the end of 2001 and, since May 2002, the Company has used its full share of the generated energy (33.33%) in its manufacturing units in the State of Minas Gerais.

The receivables and payables arising from this concession were an integral part of the capital contribution to COTEMINAS S.A., detailed in note 17 to the financial statements.


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16. INSURANCE

The Company and its subsidiaries maintain insurance coverage for property, plant and equipment, inventories and other assets exposed to risk. As of December 31, 2005, insurance coverage is as follows:

Effective period Amount of Insured Risk From To risk amount

Fire August 2005 August 2006 2,416,373 2,178,305Life August 2005 August 2006 256,114 256,114Other December 2005 December 2006 54,752 54,752 2,727,239 2,489,171

17. SUBSEQUENT EVENT

According to the Significant Event Notice of January 26, 2006, the combination of the operating assets related to household products of the Company and Springs Industries Inc. was completed, with the establishment of Springs Global Participações S.A., which controls COTEMINAS S.A., and Springs Global US, Inc., closely-held operating companies headquartered in Brazil and in the US, respectively, and which will be engaged in the production of bed linens and bath products previously manufactured by the Company and Springs.

The joint venture has created the world’s largest textile industrial complex of bed linens and bath products, with production units in the Americas, generating significant synergies as a result of production streamlining and the combination of the activities of the Company and Springs.

In addition to the contribution of operating assets by the Company and Springs, the new COTEMINAS S.A. assumed from the Company the debt arising from the recent issue of commercial promissory notes in the amount of R$570 million. The proceeds from this issue were maintained by the Company.

After the contractually established adjustments, in addition to the aforementioned funds, the Company is entitled to the payment of R$50 million. This payment was assumed by COTEMINAS S.A. as a private debenture.

The initial ownership structure of Springs Global Participações S.A. is as follows:

Common shares

Preferred shares

Total shares

Companhia de Tecidos Norte de Minas - COTEMINAS 16,323,690 3,098,032 19,421,722Springs’ shareholders 12,080,561 - 12,080,561Total 28,404,251 3,098,032 31,502,283 The preferred shares described above are convertible into common shares and may be acquired by Springs’ shareholders through call options that may be exercised in up to 11 months, beginning on January 24, 2006, for the price of US$53 million, plus financial charges. After this period, conversion will occur automatically.


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Springs Global Participações S.A. also issued call options of 1,145,097 shares that were granted to Springs Global US, Inc.’s directors, employees and service providers (in replacement of the options they held previously in the United States).

Considering the full exercise of this call option for preferred shares, as well as the exercise of call options granted to Springs Global US, Inc.’s directors, employees and service providers, the interest of the Company and Springs’ shareholders will each correspond to half of the voting capital of Springs Global Participações S.A.

In addition, on January 24, 2006, 4% of the Company’s total capital was repurchased, for a symbolic amount, authorized by the Brazilian Securities Commission (CVM). This capital was represented by preferred shares, to be maintained in treasury and subsequently cancelled.

The balance sheets below show in detail the Company’s financial position before and after the capital contribution on December 31, 2005:

ASSETS

Company’s balances as of

December 31, 2005 before capital

contribution

Amounts that make up the capital

subscription in COTEMINAS S.A.

Remaining balances in the

Company - 2005 CURRENT ASSETS Cash and cash equivalents 494,815 - 494,815 Accounts receivable 367,760 334,628 33,132 Inventories 339,552 339,552 - Advances to suppliers 99,494 79,663 19,831 Recoverable taxes 103,387 - 103,387 Other receivables 2,713 2,571 142 1,407,721 756,414 651,307 LONG-TERM ASSETS Escrow deposits 73,580 746 72,834 Advances to suppliers 42,758 42,758 - Subsidiaries 27,339 - 27,339 Affiliated companies 200 - 200 143,877 43,504 100,373 PERMANENT ASSETS Investments:

Subsidiaries 160,456 74,707 85,749 COTEMINAS S.A. - - 1,109,437 Other 2,956 - 2,956

Property, plant and equipment 1,027,306 976,371 50,935 Deferred charges 1,873 - 1,873 1,192,591 1,051,078 1,250,950 Total assets 2,744,189 1,850,996 2,002,630


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LIABILITIES AND SHAREHOLDERS’ EQUITY

Company’s balances as of

December 31, 2005 before capital

contribution

Amounts that make up the capital

subscription in COTEMINAS S.A.

Remaining balances in the

Company - 2005 CURRENT LIABILITIES Loans and financing 585,740 570,385 15,355 Suppliers 133,666 107,529 26,137 Taxes and payroll charges 33,603 24,957 8,646 Income and social contribution taxes 5,531 - 5,531 Dividends payable 33,201 - 33,201 Profit sharing 627 627 - Other payables 22,070 19,644 2,426 814,438 723,142 91,296 LONG-TERM LIABILITIES Loans and financing 89,504 - 89,504 Subsidiaries 32,134 - 32,134 Affiliated companies 6,998 - 6,998 Reserve for contingencies 67,067 - 67,067 Other 29,215 18,417 10,798 224,918 18,417 206,501 SHAREHOLDERS’ EQUITY Capital 870,000 809,890 870,000 Capital reserves 285,083 299,547 285,083 Profit reserves 549,750 - 549,750 1,704,833 1,109,437 1,704,833 Total liabilities and shareholders’ equity 2,744,189 1,850,996 2,002,630

RC0196*.*

Documents

COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS … · COMPANHIA DE TECIDOS NORTE DE MINAS - COTEMINAS CNPJ/MF No. 22.677.520/0001-76 ... (IBRACON) and our auditors. The decision