SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(A) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission file number: 1-14626
COMPANHIA BRASILEIRA DE DISTRIBUICAO
(Exact Name of Registrant as Specified in its Charter)
Brazilian Distribution Company
(Translation of Registrant's Name into English)
Federative Republic of Brazil
(Jurisdiction of Incorporation)
Avenida Brigadeiro Luiz Antonio, no. 3,142
01402-901 Sao Paulo, SP, Brazil
(Address of Principal Executive Offices)
__________________________
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on
Preferred Shares, without par value* Which Registered:
American Depositary Shares (as evidenced by New York Stock Exchange**
American Depositary Receipts), each New York Stock Exchange
Representing 1,000 shares of Preferred Shares
___________________________
*The Preferred Shares are non-voting, except under limited
circumstances.
**Not for trading purposes, but only in connection with the listing on
the New York Stock Exchange of American Depositary Shares representing
those Preferred Shares.
___________________________
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
None.
_____________________________
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None.
_____________________________
The number of issued shares of each class of stock of COMPANHIA
BRASILEIRA DE DISTRIBUICAO as of December 31, 2003 was:
63,470,811,399 Common Shares, no par value per share
49,971,428,034 Preferred Shares, no par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No __
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 __ Item 18 |X|
Table of Contents
Page
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PART I
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS............2
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE..........................2
ITEM 3 KEY INFORMATION..................................................3
ITEM 4 INFORMATION ON THE COMPANY......................................10
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................26
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................38
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............45
ITEM 8 FINANCIAL INFORMATION...........................................50
ITEM 9 THE OFFER AND LISTING...........................................54
ITEM 10 ADDITIONAL INFORMATION..........................................59
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......74
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........80
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................80
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.............................................80
ITEM 15 CONTROLS AND PROCEDURES.........................................80
ITEM 16 [Reserved]......................................................80
PART III
ITEM 17 FINANCIAL STATEMENTS............................................82
ITEM 18 FINANCIAL STATEMENTS............................................83
ITEM 19 EXHIBITS........................................................83
1
INTRODUCTION
All references in this annual report (i) to "CBD," "we," "us" or "our"
are references to Companhia Brasileira de Distribuicao and its consolidated
subsidiaries, (ii) to the "Brazilian government" are references to the federal
government of the Federative Republic of Brazil, or Brazil, and (iii) to
"preferred shares" and "common shares" are references to our authorized and
outstanding shares of non-voting preferred stock, designated as acoes
preferenciais, and common stock, designated as acoes ordinarias, in each case
without par value. All references to "ADSs" are to American depositary shares,
each representing 1,000 preferred shares. All references herein to the "real,"
"reais" or "R$" are to Brazilian reais, the official currency of Brazil. All
references to "US$," "dollars" or "U.S. dollars" are to United States dollars.
At June 14, 2004, the commercial market rate for purchasing U.S.
dollars was R$3.165 to US$1.00.
We have prepared our consolidated financial statements included in this
annual report in conformity with generally accepted accounting principles in the
United States, or U.S. GAAP.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements, principally in
"Item 3D - Key Information - Risk Factors," "Item 4B - Information on the
Company - Business Overview" and "Item 5 - Operating and Financial Review and
Prospects." We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
affecting our business. These forward-looking statements are subject to risks,
uncertainties and assumptions including, among other things:
o our ability to sustain or improve our performance,
o competition in the Brazilian retail food industry,
o government regulation and tax matters,
o adverse legal or regulatory disputes or proceedings,
o credit and other risks of lending and investment activities,
o changes in regional, national and international business and economic
conditions and inflation, and
o other risk factors as set forth under "Item 3D - Key Information - Risk
Factors."
The words "believe," "may," "will," "estimate," "continue,"
"anticipate," "intend," "expect" and similar words are intended to identify
forward-looking statements. We undertake no obligation to update publicly or
revise any forward-looking statements because of new information, future events
or otherwise. In light of these risks and uncertainties, the forward-looking
information, events and circumstances discussed in this annual report might not
occur. Our actual results and performance could differ substantially from those
anticipated in our forward-looking statements.
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
2
ITEM 3 KEY INFORMATION
3A. Selected Financial Data
The following table presents our selected financial data as of the
dates and for each of the periods indicated. Our U.S. GAAP financial statements
as of December 31, 2003 and 2002 and for each of the three years in the period
ended December 31, 2003 appear elsewhere in this annual report, together with
the report of PricewaterhouseCoopers Auditores Independentes, Sao Paulo, Brazil,
independent auditors. The selected financial information at December 31, 2001,
2000 and 1999 and for each of the two years ended December 31, 2000 has been
derived from our U.S. GAAP financial statements, not included elsewhere in this
annual report.
3
At and for the Year Ended December 31,
2003 2002 2001 2000 1999
(millions of U.S. dollars, except share, per share and per
ADS amounts)
Statement of operations data
Net sales revenue.......................... $ 3,534.6 $ 3,257.6 $ 3,515.4 $ 4,190.0 $ 3,205.4
Cost of sales.............................. (2,538.1) (2,345.2) (2,506.8) (3,015.7) (2,321.5)
---------- ---------- ----------- ---------- ----------
Gross profit............................... 996.5 912.4 1,008.6 1,174.3 883.9
Selling, general and administrative
expenses................................... (695.3) (660.4) (743.7) (892.5) (643.8)
Depreciation and amortization.............. (115.5) (107.8) (146.2) (135.4) (87.3)
Other operating income, net............... 2.4 1.5 0.7 4.0 (0.7)
Operating income........................... 188.1 145.7 119.4 150.4 152.1
Financial income........................... 179.3 158.3 142.3 188.3 154.7
Financial expense.......................... (221.5) (222.9) (161.7) (172.5) (374.6)
Income (loss) before taxes................. 145.9 81.1 100.0 166.2 (67.8)
Income tax (expense) benefit:
Current.................................... (7.9) (11.8) (16.5) (9.2) (7.5)
Deferred................................... (25.1) (8.8) 17.2 3.2 25.7
---------- ---------- ----------- ---------- ----------
Net income (loss).......................... $ 112.9 $ 60.5 $ 100.7 $ 160.2 $ (49.6)
========== ========== =========== ========== ==========
Basic earnings (loss) per 1,000 shares (1).
Preferred.............................. 1.05 0.53 0.91 1.59 (0.60)
Common................................. 0.96 0.53 0.91 1.59 (0.60)
Diluted earnings (loss) per 1,000 shares...
Preferred.............................. 1.05 0.53 0.91 1.57 (0.60)
Common................................. 0.95 0.53 0.91 1.57 (0.60)
Earnings (loss) per ADS.................... 1.05 0.53 0.91 1.59 (0.60)
Dividends declared and interest on equity
per 1,000 shares (2)................. 0.18 0.19 - 1.07 0.11
Weighted average number of shares
outstanding (in thousands).....
Preferred............................. 49,725,151 49,596,794 46,912,582 38,095,701 29,134,774
Common................................ 63,470,811 63,470,811 63,168,975 62,858,755 53,626,937
Total 113,195,962 113,067,605 110,081,557 100,954,456 82,761,711
Balance sheet data
Cash and cash equivalents.................. $ 339.9 $ 315.7 $ 451.7 $ 456.2 $ 704.6
Property and equipment, net................ 1,384.0 1,062.7 1,342.0 1,435.4 1,128.9
Total assets............................... 3,171.2 2,527.7 3,056.4 3,305.7 2,840.3
Short-term debt (including current portion
of long-term debt)................... 613.3 460.9 555.8 519.2 524.5
Long-term debt............................. 230.0 385.1 381.6 425.9 397.1
Shareholders' equity....................... 1,237.9 932.6 1,396.7 1,404.7 1,220.1
Capital stock............................. $ 1,670.6 $ 1,498.2 $ 1,288.6 $ 1,180.8 $ 901.1
Number of shares outstanding (in
thousands):
Preferred shares..................... 49,971,428 49,715,328 49,590,328 44,513,279 34,402,519
Common shares........................ 63,470,811 63,470,811 63,470,811 62,858,755 62,858,755
Other financial information
Net cash provided by (used in):
Operating activities....................... 231.6 166.5 119.2 122.1 175.7
Investing activities....................... (207.6) (348.2) (274.6) (717.1) (464.7)
Financing activities....................... (61.3) 181.6 113.8 293.3 628.9
Capital expenditures....................... 185.2 348.4 275.2 720.5 464.7
------------------------
(1) Beginning in 2003, each preferred share shall receive a dividend 10%
higher than the dividend paid to each common share. Both preferred and
common shares effectively participate equally in earnings in 2002,
2001, 2000 and 1999. See "Item 8A - Financial Information -
Consolidated Financial Statements and Other Financial Information -
Dividend Policy and Dividends."
(2) In accordance with Brazilian corporate law, we can distribute a
notional, tax-deductible interest charge attributable to shareholders'
equity as an alternative form of payment to shareholders. Dividends
declared and interest on equity per 1,000 shares in reais were R$0.53
per 1,000 in 2003, R$0.55 in 2002, R$1.93 in 2000 and R$0.19 in 1999. A
dividend of R$0.51 per 1,000 preferred shares and R$0.46 per 1,000
common shares was approved and declared at our general shareholders'
meeting held on April 30, 2004.
4
At and for the Year Ended December 31,
2003 2002 2001 2000 1999
Operating Data
Employees at end of period (1).................... 55,557 57,898 52,060 50,106 39,642
Total square meters of selling area at end of
period............................................ 982,701 979,723 866,280 815,291 663,237
Number of stores at end of period:
Pao de Acucar.................................. 208 188 176 186 146
CompreBem Barateiro ........................... 172 148 150 111 83
Extra.......................................... 62 60 55 53 46
Extra Eletro................................... 55 54 62 66 74
Se and CompreBem (5)........................... -- 50 -- -- --
------- ------- ------- ------- -------
Total number of stores at end of period........ 497 500 443 416 349
Net sales revenues per employee (4)(6)(7):
Pao de Acucar.................................. $ 64,753 $ 67,262 $ 63,149 $ 61,536 $ 64,773
CompreBem Barateiro............................ 67,622 66,345 43,045 66,811 60,020
Extra.......................................... 86,576 82,829 75,246 75,147 74,086
Extra Eletro................................... 121,365 100,434 122,796 99,834 72,192
Se and CompreBem (5)........................... -- 20,325 -- -- --
Total net sales revenues per employee.......... $ 75,283 $ 68,619 $ 65,970 $ 70,048 $ 68,625
Net sales revenues by store format (2)(4):
Pao de Acucar.................................. $ 1,122 $ 977 $ 906 $ 828 $ 701
CompreBem Barateiro............................ 628 530 376 353 231
Extra.......................................... 1,702 1,527 1,344 1,262 934
Extra Eletro................................... 83 115 162 155 121
Se and CompreBem (5)........................... -- 109 -- -- --
------- ------- ------- ------- -------
Total net sales................................ $ 3,535 $ 3,258 $ 2,788 $ 2,598 $ 1,987
Average monthly net sales revenue per square meter (3)(4)(6):
Pao de Acucar.................................. $ 351.0 $ 372.7 $ 340.9 $ 330.1 $ 342.2
CompreBem Barateiro ........................... 276.8 258.5 181.0 243.7 237.3
Extra.......................................... 310.0 294.0 272.4 284.2 301.3
Extra Eletro................................... 202.8 246.5 328.6 313.7 259.0
Se and CompreBem (5)........................... -- 184.2 -- -- --
CBD average monthly net sales revenue per
square meter................................... $ 311.0 $ 282.8 $ 274.3 $ 292.2 $ 301.5
Average ticket amount (4)(6):
Pao de Acucar.................................. $ 6.3 $ 6.5 $ 6.0 $ 5.8 $ 5.8
CompreBem Barateiro............................ 4.9 4.8 4.1 4.1 4.2
Extra.......................................... 13.0 12.8 12.3 12.6 12.3
Extra Eletro................................... 91.1 94.2 101.2 86.3 75.7
Se and CompreBem (5)........................... -- 4.6 -- -- --
CBD average ticket amount...................... $ 8.0 $ 8.0 $ 7.9 $ 7.8 $ 7.8
Average number of tickets per month:
Pao de Acucar.................................. 14,882,404 12,590,382 12,646,836 11,999,308 10,131,503
CompreBem Barateiro............................ 10,694,314 9,206,964 7,600,350 7,178,567 4,547,207
Extra.......................................... 10,939,529 9,911,953 9,106,790 8,359,188 6,320,427
Extra Eletro................................... 76,068 101,326 133,445 148,940 133,391
Se and CompreBem (5)........................... -- 3,941,203 -- -- --
CBD average number of tickets per month........ 36,592,315 33,781,227 29,487,421 27,686,003 21,132,528
------------------------
(1) Based on the full-time equivalent number of employees calculated by
dividing total number of hours worked by all employees in the final
month of each period presented by 220 hours.
(2) In millions of U.S. dollars.
(3) Calculated using the average of square meters of selling area on the
last day of each of the months in the period; in U.S. dollars.
(4) The financial information for December 31, 2002, 2001, 2000 and 1999
has been translated at the average exchange rates used to translate the
December 31, 2002 financial information, thereby minimizing the effects
of the devaluation of the real. The real devaluated against the U.S.
dollar by 34.3% in 2002, 15.7% in 2001, 8.5% in 2000, and 32.4% in
1999. Had the financial information for the years ended December 31,
2003, 2002, 2001, 2000 and 1999 been translated at the average exchange
rates used to translate the December 31, 2003 financial information,
the analysis of results would not be significantly different from that
presented. For more information on foreign currency effects on our
financial results, see "Item 5 - Operating and Financial Review and
Prospects."
(5) These stores were converted into one of our formats during 2003.
(6) In U.S. dollars.
(7) Based on the average of the full-time equivalent number of employees
calculated by dividing total number of hours worked by all employees
at the end of each month by 220 hours.
5
Exchange Rates
There are two principal foreign exchange markets in Brazil:
o the commercial rate exchange market, or commercial market, and
o the floating rate exchange market.
Most trade and financial foreign-exchange transactions, including
transactions relating to the purchase or sale of preferred shares or the payment
of dividends with respect to preferred shares or ADSs, are carried out on the
commercial market at the applicable commercial market rate. Purchase of foreign
currencies in the commercial market may be carried out only through a Brazilian
bank authorized to buy and sell currency in that market. The floating market
rate generally applies to transactions to which the commercial market rate does
not apply. Prior to February 1999, the exchange rate in each market was
established independently, resulting in different rates during some periods.
Since February 1, 1999, financial institutions operating in the commercial
market have been authorized to unify their positions in the two different
markets, which caused a reduction in the difference between their respective
rates. These markets are now differentiated solely for regulatory purposes and
offer similar pricing and liquidity, despite the potential for distinct
treatment for regulatory purposes in the future. In both markets, rates are
freely negotiated but may be strongly influenced by Brazilian Central Bank
intervention.
Between March 1995 and January 1999, the Central Bank permitted the
gradual devaluation of the real against the U.S. dollar pursuant to an exchange
rate policy that established a band within which the real/U.S. dollar exchange
rate could fluctuate.
Responding to pressure on the real, on January 13, 1999 the Central
Bank widened the foreign exchange band. Because the pressure did not ease, on
January 15, 1999, the Central Bank allowed the exchange rate of the real to
float. Since January 1, 1999 and through December 31, 2003, the U.S. dollar
appreciated by 139.0% against the real, and as of December 31, 2003, the
commercial market rate for purchasing U.S. dollars was R$2.8892 to US$1.00. In
the first three months of 2004, the real depreciated by 0.7% to R$2.9086 to
US$1.00 at March 31, 2004, and as of June 14, 2004, the commercial market rate
for purchasing U.S. dollars was R3.165 to US$1.00, a depreciation of 8.1% since
March 31, 2004. We cannot assure you that the real will not devalue
substantially in the near future. See "Item 5A - Operating and Financial Review
and Prospects - Operating Results - U.S. GAAP Presentation and Reporting
Currency - Effects of Exchange Rate Variation and Inflation on Our Financial
Condition and Results of Operations."
The following table sets forth information on the commercial market
rate for U.S. dollars for the periods and dates indicated.
Exchange Rate of Brazilian Currency per US$1.00
Year Low High Average (1) Year-End
---- --- ---- ----------- --------
1999..................... 1.2078 2.1647 1.8514 1.7890
2000..................... 1.7234 1.9847 1.8348 1.9554
2001..................... 1.9357 2.8007 2.3532 2.3204
2002..................... 2.2709 3.9552 2.9983 3.5333
2003..................... 2.8219 3.6623 3.0600 2.8892
__________________
Source: Central Bank
(1) Represents the average of the exchange rates on the last day of each
month during the relevant period.
Month Exchange Rate of Brazilian
----- Currency per US$1.00
--------------------------
Low High
--- ----
December 2003................................... 2.8883 2.9434
January 2004.................................... 2.8022 2.9409
February 2004................................... 2.9042 2.9878
6
March 2004...................................... 2.8728 2.9410
April 2004...................................... 2.8743 2.9522
May 2004........................................ 2.9569 3.2051
__________________
Source: Central Bank
3B. Capitalization and Indebtedness
Not applicable.
3C. Reasons for the Offer and Use of Proceeds
Not applicable.
3D. Risk Factors
This section is intended to be a summary of more detailed discussions
contained elsewhere in this document. The risks described below are not the only
ones we face. Additional risks may impair our business operations. Our business,
results of operations or financial condition could be harmed if any of these
risks materializes and, as a result, the trading price of the ADSs could
decline.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political
and economic conditions have a direct impact on our business and the
market price of the preferred shares and the ADSs.
The Brazilian government frequently intervenes in the Brazilian economy
and occasionally makes drastic and sudden changes in policy. The Brazilian
government's actions to control inflation and effect other public policies have
involved high interest rate environments, currency devaluations and exchange
controls, tariffs and import quotas, electricity consumption controls, among
other things. These policies and macroeconomic conditions have had significant
effects on the Brazilian economy and on its securities markets, which are
illiquid and very volatile, and have at times affected the purchasing power and
confidence level of consumers. We may be adversely affected by changes in
policy, as well as factors such as:
o inflation,
o interest rate hikes,
o liquidity of domestic capital and lending markets,
o changes in tax laws,
o currency fluctuations, and
o other political, diplomatic, social and economic developments in
or affecting Brazil.
At the end of 2002, Brazil elected a new president from the Workers
Party, Luis Inacio Lula da Silva. In the period leading up to and following his
election, there was substantial uncertainty regarding the policies that the new
government would pursue, including the potential implementation of macroeconomic
policies that differed significantly from those of the prior administration.
This uncertainty resulted initially in a loss of confidence in the Brazilian
capital markets and the devaluation of the real. The new administration however
continued most of the former administration's economic and administrative
policies and the initial adverse market sentiment towards the new administration
has reversed during 2003. Accompanying this positive sentiment the real
appreciated 22.3% against the U.S. dollar in 2003. However, there remains
uncertainty over the possibility of different policies being adopted by the
government which may, once again, contribute to economic uncertainty in Brazil
and to heightened volatility in Brazilian securities. Any substantial negative
reaction to the policies adopted by the Brazilian
7
government from time to time could adversely affect our business, operations
and the market price of our preferred shares and ADSs.
Inflation, and certain governmental measures to curb inflation, may
contribute significantly to economic uncertainty in Brazil and to
heightened volatility in the Brazilian securities markets, which may
adversely affect our business.
Brazil has historically experienced extremely high rates of inflation.
Inflation itself, and some governmental measures to curb inflation, have in the
past had significant negative effects on the Brazilian economy. Since 1994,
Brazil's inflation rate has been substantially lower than in previous periods.
However, during this period there have been inflationary pressures and actions
taken to curb inflation which, together with public speculation about possible
future governmental actions, have contributed to economic uncertainty in Brazil
and to heightened volatility in the Brazilian securities market. For example, if
the Brazilian government implements measures to restrain domestic demand by
imposing credit restrictions on banks, credit card companies and retailers and
raises interest rates, we could be adversely affected if credit purchasers
become less attractive or if government policies curtail the extension of
consumer credit. According to the IPCA, the Brazilian government's official
consumer price index, the inflation rate was 8.7% in 2003, 12.5% in 2002 and
7.7% in 2001. If Brazil experiences significant inflation in the future, we may
be unable to increase our retail prices in line with inflation, and thus our
business may be adversely affected.
Fluctuations in the value of the real against the value of the U.S.
dollar may adversely affect the Brazilian securities market and could
lower the market value of the preferred shares and the ADSs.
The Brazilian currency has historically suffered frequent devaluations.
Although over the longer term, devaluations of the Brazilian currency generally
have correlated with the rate of inflation in Brazil, devaluations have resulted
in significant short- to medium-term fluctuations in the value of the Brazilian
currency. See "Item 3A - Selected Financial Data - Exchange Rates" for more
information on exchange rates.
The real devalued against the U.S. dollar by 15.7% in 2001 and 34.3% in
2002. In 2003, the appreciation of the real relative to the U.S. dollar totaled
22.3%. In the first three months of 2004, the real depreciated against the U.S.
dollar by 0.7%.
Further devaluations of the real relative to the U.S. dollar would
reduce the U.S. dollar value of distributions and dividends on the ADSs and may
also reduce the market value of the preferred shares and the ADSs. Further
devaluations of the real relative to the U.S. dollar also create additional
inflationary pressures in Brazil that may negatively affect us. They may curtail
access to foreign financial markets and may require government intervention,
including recessionary governmental policies.
The perception of risk in emerging economies may impede our access to
international capital markets, hinder our ability to finance our
operations and adversely affect the market price of our preferred
shares and the ADSs.
As a general rule, international investors consider Brazil to be an
emerging market economy. Consequently, economic conditions and the market for
securities of emerging market countries, especially those located in Latin
America, influence investors' perceptions of Brazil and their evaluation of
Brazilian companies' securities.
Since the end of 1997, economic problems in various emerging market
countries have resulted in investors' perception of greater risk from
investments in emerging markets. During periods of investor concern, Brazil has
experienced a significant outflow of U.S. dollars, and Brazilian companies have
faced higher costs for raising funds, both domestically and abroad, as well as
limited access to international capital markets. The prices of Brazilian
securities have been significantly negatively affected. This occurred, most
recently, to a significant degree, in 2002 following the default at the end of
2001 by Argentina in the payment of its foreign indebtedness.
The perception of risk in emerging economies may adversely affect our
ability to borrow funds at an acceptable interest rate or to raise equity
capital when and if there should be a need. We cannot assure you that
international capital markets will remain open to Brazilian companies or that
the perception of risk inherent in investing in Brazilian shares will not
increase and adversely affect the market price of our preferred shares and the
ADSs.
8
Risks Relating to CBD
We face significant competition, which may adversely affect our market
share and net income.
The retail food industry in Brazil is highly competitive. We face
intense competition from small food retailers that often can benefit from
inefficiencies in the Brazilian tax collection system. These small food
retailers also frequently have access to merchandise from irregular and informal
distribution channels at lower prices than those charged by manufacturers and
stores in the conventional supply chain of the organized retail food sector. In
addition, in our markets, and particularly in the Sao Paulo City area, we
compete with a number of large multinational retail food and general merchandise
chains, as well as local supermarkets and independent grocery stores. Some of
these international competitors have access to a broader range of financial
resources than we have.
We are controlled by a small group of shareholders.
The controlling shareholders, consisting of Mr. Abilio Diniz and some
members of his family, own or control 76.0% of our voting common shares.
Consequently, our controlling shareholders will continue to have the power to
control our company, including the power to:
o appoint the members to our board of directors, who, in turn, elect our
executive officers,
o determine the outcome of any action requiring shareholder approval,
including the timing and payment of any future dividends, and
o transfer control.
We engage in, and expect from time to time in the future to engage in,
commercial and financial transactions with our controlling shareholders or their
affiliates. We seek to avoid potential conflicts of interest by submitting any
related party transactions for approval by the majority of the independent
members of our board of directors.
Risks Relating to the Preferred Shares and ADSs
If you exchange the ADSs for preferred shares, as a result of Brazilian
regulations you may risk losing the ability to remit foreign currency
abroad.
The Brazilian custodian for the preferred shares must register with the
Central Bank of Brazil to remit U.S. dollars abroad. If you decide to exchange
your ADSs for the underlying preferred shares, you will be entitled to continue
to rely, for five business days from the date of the exchange, on the
custodian's registration. Thereafter, you may not be able to obtain and remit
U.S. dollars abroad unless you obtain your own registration. Obtaining your own
registration will result in expenses and may cause you to suffer delays in
receiving distributions. See "Item 10D - Additional Information - Exchange
Controls."
You might be unable to exercise preemptive rights with respect to the
preferred shares.
You will not be able to exercise the preemptive rights relating to the
preferred shares underlying your ADSs unless a registration statement under the
Securities Act of 1933 is effective with respect to those rights, or an
exemption from the registration requirements of the Securities Act is available.
We are not obligated to file a registration statement. Unless we file a
registration statement or an exemption from registration applies, you may
receive only the net proceeds from the sale of your preemptive rights by the
depositary or, if the preemptive rights cannot be sold, they will lapse and you
will not receive any value for them.
9
ITEM 4 INFORMATION ON THE COMPANY
4A. History and Development of the Company
We were incorporated in Brazil under the Brazilian corporate law on
November 10, 1981 as Companhia Brasileira de Distribuicao. Our principal
executive offices are located at Avenida Brigadeiro Luiz Antonio, no. 3,142, CEP
01402-901 Sao Paulo, SP, Brazil (telephone: 55-11-3886-0421). Our agent for
service in the United States is CT Corporation, 1633 Broadway, New York, New
York, 10019.
We have been a pioneer in the Brazilian retail food industry, opening
our first store, a pastry shop, in 1948 in Sao Paulo City under the name Pao de
Acucar. We established one of the first supermarket chains in Brazil, opening
our first supermarket in 1959, and opened the first hypermarket in Brazil in
1971.
Brazilian economic reforms implemented in 1994, including the
introduction of the real as the Brazilian currency and the drastic reduction of
inflation rates, resulted in an unprecedented growth in local consumer markets.
It has been estimated that more than 19 million people gained access to consumer
goods markets for the first time after 1994, as Brazilians, predominantly in
lower and middle-income households, generally experienced real income gains.
This increase in available income and the resulting increase in consumer
confidence broadened our potential customer base and provided us with growth
opportunities.
We responded to these changes by strengthening our capital structure,
increasing our logistics and technology investments and implementing an
expansion strategy focused on the different segments of the Brazilian
population. To support our expansion strategy, consisting of acquisitions and
organic growth, we defined the format of our stores in terms of the
expectations, consumption patterns and purchasing power of the different income
levels in Brazil.
In order to raise funds for our investment needs, we conducted two
public offerings of our shares. Our initial public offering in October 1995,
which raised US$112.1 million, was the first issuance of preferred shares by a
food retailer to begin trading on the Sao Paulo Stock Exchange - BOVESPA. Our
public offering of May 1997, which raised US$172.5 million, resulted in the
first ADS listing on the New York Stock Exchange by a Brazilian retailer. In
August 1999, we entered into a strategic relationship with the Casino Guichard
Perrachon Group, or the Casino Group, a leading French retail organization with
net sales of EURO23.0 billion (equivalent to US$29.0 billion at December 31,
2003 exchange rate) in 2003 and a presence in 10 countries. The Casino Group
invested US$807.8 million in return for approximately 21.3% of our voting stock.
At the same time, the Casino Group acquired 2.5 billion of our common shares
representing another 2.7% of our common stock from our controlling shareholders.
The Casino Group may exercise 6.3 million warrants for our common shares
representing an additional 6.85% ownership of our common stock by August 31,
2004, resulting in a further capital investment of US$282.9 million.
In order to support our growth, we have also made substantial
investments in constructing distribution centers and redesigning our warehouse
and distribution logistics, in information technology, and we have reorganized
our purchasing and category management functions.
From 1999 through 2003 we invested approximately US$263.4 million in
technology, or about 13.2% of our total investments in the last five years. We
also implemented projects designed to improve operational logistics and margins.
In 1997, we began substituting our stores' autonomous operating model for a more
centralized system under which the responsibility for purchases was transferred
to our commercial division. Our distribution and other administrative functions
were also centralized to obtain economies of scale. These changes strengthened
our negotiating position with suppliers with respect to prices and payment
terms. In 2001, we finished implementing our new category management system,
under which our commercial division became responsible solely for purchases in
order to maximize bargaining power. However, we transferred category management
decisions, which relate to the pricing and mix of products, to each of our
banners, as they are in a better position to make these determinations for their
particular target customers. We have also sought to gain efficiencies through
improvements in our supply chain, in an effort to decrease stock-outs, breakage
and shrinkage, and packaging and labor costs, as well as to increase product
turn.
We also invested in the construction of websites for on-line shopping
by our Pao de Acucar and Extra Eletro customers. In 2000, we decided to
consolidate all of our on-line shopping for all our customers through one
10
website, amelia.com.br. In 2001, we discontinued on-line shopping through one
centralized website and resumed offering on-line shopping through
paodeacucar.com.br for food sales and extra.com.br for non-food sales. We
launched our Extra website in 2001.
Since 1999, we have acquired a total of 195 stores. When entering new
markets, we have generally sought to acquire local supermarket chains to benefit
from existing know-how of the geographic region. For expansion within urban
areas where we already have a presence, we have historically opened new stores.
We have tried to maintain a balance between acquisitions and organic growth.
Since 1999, we have also opened 65 new stores. Historically, our organic growth
and smaller acquisitions have generally been funded from our cash flow from
operations, and larger acquisition opportunities have required external funding
or capital increases. We expect to fund future organic growth from our cash flow
from operations. Our aggregate sales area has increased by 48.2% since 1999 as a
result of our acquisitions and our opening of new stores.
Also in response to the increased levels of income resulting with the
introduction of the real, we realized in 1998 that in order to take full
advantage of Brazil's economic growth, we needed to adjust the format of our
stores according to the expectations and needs of different segments of the
population. We refocused the Pao de Acucar format to cater specifically to the
high income classes and sought to target lower income classes with a
cost-oriented format, Barateiro, which we acquired in 1998. The acquisition of
the Barateiro chain represented a decisive step in carrying out our market
segmentation plans, as previous efforts to adapt the Pao de Acucar stores to
less affluent neighborhoods had not gained acceptance among those consumers. The
Barateiro format, by contrast, had a brand image and operational model focused
on costs. This enhanced flexibility benefited our business by allowing us to
build on Pao de Acucar's particular strengths, a brand image associated with
high level of services and quality products. At the same time, our Barateiro
format enabled us to service the increasingly important lower-income segments of
the Brazilian population. In 2001, the Barateiro format underwent some
operational changes, as the initial performance of the division had fallen short
of our management's expectations. We relaunched the Barateiro format to provide
a wider product assortment with a greater balance among leading brands, private
label products and lower priced products, and to offer greater services. Our
diversity of formats allows us to reclassify stores to a more appropriate format
within a market from time to time. Some Pao de Acucar stores, particularly in
the state of Sao Paulo, were converted into the Barateiro format in 2001, as
average income levels dropped in neighborhoods of these stores' original
locations.
In 2002, as part of our effort to increase sales of our Barateiro
stores, we launched a new store format known as CompreBem Barateiro in certain
regions of Brazil. This format, which responded to market research from the
target Barateiro audience, focused not only on reduced costs, but also on
personal service, organization and increased customer relations. Under the new
model, the stores offer new layouts, more modern equipment and a more pleasant
shopping environment with a variety of services. In addition, the CompreBem
Barateiro format attempts to emphasize the importance of family and community
connection, sponsoring community outreach activities such as local artwork
competitions and showcase of neighborhood children's artwork in the stores. Due
to the great consumer acceptance of this new format, which was evidenced by the
performance of CompreBem Barateiro stores as compared to Barateiro ones, we are
gradually converting the Barateiro stores into the CompreBem Barateiro format in
2003.
In June 2002, we acquired the Se Supermercados chain of supermarkets,
which, at the time of acquisition, was the seventh largest chain by sales in
Brazil. All of the 60 Se stores were located in the state of Sao Paulo.
In April 2003, we became part of a group of listed companies that
adhere to a new index, the IGC-Special Corporate Governance Share Index, created
by BOVESPA (the Sao Paulo Stock Exchange), which is a benchmark for portfolios
comprised of shares of companies that are part of the Special Corporate
Governance Program, or the Program. As part of the Program, we have to comply
with several requirements, in additional to those imposed by Brazilian law. The
Program seeks to promote strong corporate governance by reducing investor
uncertainties and enhancing information disclosure. For the past few years we
have been adopting principles relating to disclosure, minority shareholders and
availability of updated information as part of our corporate governance
initiatives.
In December 2003, we signed a letter of intent to enter into an
association with Sendas S.A., or Sendas. The association was named Sendas
Distribuidora S.A., or Sendas Distribuidora, and became operational in February
2004. Sendas Distribuidora's voting stock is held 50% by us and 50% by Sendas,
and we are responsible for the management of the company. Sendas has been
operating in the Brazilian retail market for 43 years, currently operating
exclusively in the State of Rio de Janeiro, through a network of 68 multiformat
stores comprised of 6
11
hypermarkets and 62 supermarkets. As we already operated 38 stores in the State
of Rio de Janeiro, comprised of 9 hypermarkets and 29 supermarkets, the
association with Sendas was an important strategic step towards growth and
leadership consolidation in the Brazilian market. Sendas Distribuidora has a
total of 106 stores. Besides the strong regional appeal achieved by the Sendas
brand in Rio de Janeiro, Sendas Distribuidora is enjoying the benefits from the
synergy with our corporate operations. Furthermore, this association is helping
us to increase our presence in other business including gas stations (which
Sendas had already 16) and drugstores (which Sendas had already around 40).
4B. Business Overview
The Brazilian Retail Food Sector
The Brazilian retail food sector represented approximately 5.8% of
Brazil's GDP in 2003. According to ABRAS (Brazil's supermarket association), the
food retail sector in Brazil had gross revenues of R$87.2 billion (equivalent at
the December 31, 2003 exchange rate to US$30.2 billion) in 2003, a 9.3% increase
over 2002. The Brazilian retail food sector is highly fragmented. However, as a
result of consolidation within the Brazilian retail food industry, the five
largest supermarket chains have accounted for an estimated 38.1 % of the retail
food sector in 2003, down from 39.6% in 1999. We believe this consolidation will
continue, and this is expected to favor large food retailers, such as us, that
can take advantage of better economies of scale in the provision of services,
implementation of cost-cutting and efficiency measures, and sourcing from
suppliers. According to ABRAS, our gross sales represented 14.7% of the gross
sales of the entire retail food sector in 2003.
Foreign ownership in the Brazilian food retail sector began with
Carrefour, a leading French retail chain, which opened its first hypermarket 29
years ago. In recent years, international chains such as Wal-Mart, Royal Ahold
and Sonae have also entered the Brazilian market, mostly through acquisitions of
domestic retail food chains, and competition in the industry has intensified. In
2003, foreign retailers in Brazil accounted for an estimated 24.2% of the food
retail industry.
In addition to the organized retail food sector, the Brazilian retail
food sector also consists of small food retailers which frequently avail
themselves of access to merchandise from irregular and informal distribution
channels. This merchandise usually has lower prices than those charged by
manufacturers and stores in the conventional supply chain of the organized
retail food sector.
Overall supermarket penetration in Brazil today, in terms of the number
of supermarkets relative to overall population and area, is estimated to be
below the levels common in the United States, many western European countries
such as France and some South American countries such as Chile. Management
believes that the population of Brazil is an important factor affecting the
potential growth in supermarket activity. According to the Brazilian Institute
of Geography and Statistics, or IBGE, the total population of Brazil was
approximately 177 million at the end of 2003, making Brazil the fifth most
populous country in the world, and the population is currently growing at a rate
of 1.4% per year. As approximately 78% of the population lives in urban areas,
and the urban population has been increasing at a greater rate than the
population as a whole, our business is particularly well positioned to benefit
from economies of scale deriving from Brazil's urban growth. Sao Paulo, with a
population of approximately 10.7 million, and Rio de Janeiro, with a population
of approximately 6.0 million, are the two largest cities in Brazil. Sao Paulo
State has a total population in excess of 38 million, representing approximately
21.9% of the Brazilian population. Sao Paulo State is the first and Rio de
Janeiro is the second largest consumer market in which we operate.
The Brazilian retail sector is perceived as essentially
growth-oriented, since retail margins are substantially more constrained
compared to other business sectors. We are therefore intrinsically dependent on
the growth rate of Brazil's urban population and its segmentation in terms of
income levels. While living expenses in Brazil are lower than those in North
America, Western Europe and Japan, Brazilian household income levels are also
substantially lower.
12
The following table sets forth the different income class levels of
Brazilian households, according to IBGE.
Annual Income Annual Income
Class Level (in reais) (in U.S. dollars)
--------------- ----------------------------- ----------------------------
A Above R$60,000 Above $20,767
B Between R$24,000 and R$60,000 Between $8,307 and $20,767
C Between R$9,600 and R$24,000 Between $3,323 and $8,307
D Below R$9,600 Below $3,323
Class A households account for only 5% of the urban population, and
class B households account for 8% of the urban population. Classes C and D
collectively represent 87% of all urban households. In recent years, the class C
and class D households have been increasing, and now have greater purchasing
power. Notwithstanding the low annual income earned by class D households,
studies have indicated that class D households direct approximately 34% of their
available income to food purchases. As a result, retailers have become
increasingly interested in targeting lower income households.
Current salary levels in Brazil have generally lagged compared to
increases in interest and exchange rates and price levels. We expect that
increased consumption by the lower income class levels will take place over time
as a result of gradual increments to salary levels and a steadily growing
population. As seen in the years immediately following the introduction of the
real, even small increments in purchasing power generally result in significant
increases in consumption in absolute terms, as well as increased expenditures in
premium priced food products and other non-food items, including home appliances
and consumer electronics.
Our Company
We are the largest food retailer in Brazil based on both gross revenues
and number of stores. In 2003, we had a market share of approximately 14.7% in
the Brazilian food retailing business according to ABRAS, with annualized gross
sales of R$12.8 billion (equivalent at the December 31, 2003 exchange rate to
US$4.4 billion). As of December 31, 2003, we operated 497 stores throughout
Brazil, of which 442 were retail food stores. Of our retail food stores, 328 are
located in Sao Paulo State, representing 67% of our net sales revenue from our
retail food stores in 2003. Sao Paulo State is Brazil's largest consumer market.
We are among the market leaders in the retail food stores in the cities of Sao
Paulo, Rio de Janeiro, Brasilia, Curitiba, Belo Horizonte, Salvador and
Fortaleza. We operate different store formats through four principal formats:
Pao de Acucar (208 supermarkets), CompreBem Barateiro (172 supermarkets), Extra
(62 hypermarkets) and Extra Eletro (55 home appliance stores).
The following table sets forth the number of our stores by region, as
of December 31, 2003:
South and Southeast
Greater Rest of (excluding States of
State of Sao State of Rio Sao Paulo and Rio de
Sao Paulo Paulo (1) de Janeiro Janeiro) (2) Northeast Center - West
------------- ------------ ------------ -------------------- --------- -------------
Pao de Acucar......... 72 63 11 11 39 12
Extra................. 30 9 9 4 5 5
CompreBem Barateiro... 122 32 18
Extra Eletro (3)...... 43 12
Total................. 267 116 38 15 44 17
_______________
(1) The rest of the state of Sao Paulo consists of 39 cities, including
Campinas, Ribeirao Preto and Santos.
(2) This area comprises the states of Minas Gerais and Parana.
(3) Our Extra Eletro stores, which make up our home appliance format, were
placed under the management of the Extra division in November 2002.
13
Our Competitive Strengths
Our main competitive strengths are our different retail food store
formats, our extensive network of distribution centers, our economies of scale,
our prime locations in densely populated urban areas and growing provincial
urban areas, and our high level of customer service.
Different retail food store formats
We conduct our retail food operations through three store formats, Pao
de Acucar, CompreBem Barateiro and Extra, each of which has a distinct
merchandising strategy and a strong brand name. We are the only food retailer in
Brazil that offers a variety of formats, which enables us to effectively target
different classes of consumers and thus earn their loyalty. This approach,
coupled with our intimate understanding of the Brazilian consumer permits us to
meet diverse customer needs without confusing consumers as to the marketing or
price focus of each format. Each of our brand concepts is clearly identified in
the marketplace for a combination of goods and services offered and relative
consumer wealth. For example, our Pao de Acucar format are positioned to serve
the higher income classes through a combination of store location, store design
and product and service offerings. Our second format, CompreBem Barateiro, is
targeted to middle and lower income consumer brackets. We originally acquired
Barateiro in 1998. Barateiro was a well known food retailer in the lower income
market. In 2002, as part of our effort to increase sales of our Barateiro
stores, we launched a new store model called CompreBem Barateiro in certain
regions of Brazil. This model, which responded to market research from the
target Barateiro audience, focused not only on reduced costs, but also on
personal service, organization and increased customer relations. Due to the
great consumer acceptance of this new model, which was evidenced by the
performance of CompreBem Barateiro stores as compared to Barateiro ones, in 2003
we are gradually converting the Barateiro stores into the CompreBem Barateiro
format, which we are positioning to be the premier food and service destination
brand for the middle and lower income groups. Our third food retail format,
Extra, is our hypermarket format which offers the widest assortment of any of
our store formats and allows us to target potential customers along the entire
income spectrum. Our hypermarket division has the additional advantage of
benefiting from the general lack of department stores and specialized stores in
Brazil. As a result, a food retailer such as an Extra store that also sells
non-food products such as household appliances, consumer electronic products,
general merchandise, clothing and textiles is particularly convenient to a
Brazilian consumer.
Extensive network of distribution centers
We operate distribution centers strategically located within the cities
of Sao Paulo, Brasilia, Fortaleza, Curitiba, Rio de Janeiro and Recife. Our
distribution centers have a total storage capacity of 316,000 square meters of
built-in area. Our management believes that our network of distribution centers
is the most extensive and technologically advanced product distribution center
network in the Brazilian retail food industry. We believe that our facilities
are capable of servicing substantially all of our distribution requirements,
both for our existing stores and for the stores that we currently plan to open
in the near future. Approximately 80% of our inventory in 2003 came directly
from a distribution center instead of a supplier, a substantial increase from
48% in 1998, resulting in higher bargain power with suppliers, lower lack of
inventory, lower shrinkage and improved working capital management. Many of the
functions of our distribution centers are automated, allowing for quicker and
more efficient handling of products. Our distribution centers are supported by
sophisticated systems which other Brazilian retailers lack, including pd@net, a
business-to-business technology platform which links our computer automated
ordering system, our suppliers and our distribution centers to automatically
replenish our inventory.
Economies of scale
We enjoy significant economies of scale resulting from our position as
the largest food retailer in Brazil. Our large scale gives us increased
bargaining power with suppliers, resulting in lower prices for consumers, higher
operating margins and more favorable payment terms. Our size permits us to
benefit from important marketing channels including prime time television
advertising, one of the most effective means to promote sales, which would be
prohibitive for smaller retail chains. Our scale also enables us to make major
operational investments, such as in technology, which generates attractive
returns. Our size and financial strength, compared to most other supermarket
chains in Brazil, has put us at the forefront of the Brazilian retail industry
in using information technology and in continually improving our sophisticated
management information systems.
14
Prime locations in densely populated urban areas and growing provincial
urban centers
Since we started our operations in 1959, we have been able to
accumulate store locations for our Pao de Acucar and Extra stores in prime sites
that offer significant competitive advantages. Our older stores in Sao Paulo and
Brasilia are located in high traffic residential neighborhoods and, as a result,
the average monthly sales per square meter in these stores is substantially
higher than that of the average supermarket in Brazil. Since prime real estate
in these urban areas in Brazil is scarce, new stores would be prohibitively
expensive for competitors. Our recent association with Sendas in the State of
Rio de Janeiro enabled us to add numerous high quality locations which would be
difficult to obtain independently at this time.
High level of customer service
All of our store formats offer a broad selection of quality products in
a pleasant shopping environment that emphasizes customer service. We believe
that our emphasis on employee training and our commitment to employee loyalty
lead to higher levels of customer service which differentiates us from our
competitors. We have also developed customer loyalty and recognition programs
which we believe enhance our competitive position. For our Pao de Acucar,
CompreBem Barateiro and Extra formats, we offer a preferred shopping card, which
customers present at checkout and which collects information on the shopping
patterns of our customers and offers credit products. Based on this information,
we also offer personalized discounts to our customers. We were also the first
Brazilian food retailer to appoint a customer liaison to voice opinions,
suggestions and complaints on behalf of customers. We have won several awards
from industry associates for our innovative service such as Premio SM Excelencia
no Varejo (the excellence in retail award) given by a group of industry
professionals.
Offering of additional products and services
In the past several years, we have begun to expand our range of
complementary products and services in an effort to enhance our customer
satisfaction and provide additional revenue sources. For example, with respect
to the Extra hypermarket format, we have begun to provide additional services
tailored to the specific needs of the division's broad base of customers, such
as gasoline stations within the parking area of Extra stores. In addition, we
have successfully test marketed and are currently initiating a program of
incorporating drugstores into our existing store formats. Our recent association
with Sendas has greatly expanded our presence in both gas station and drugstore
services.
Our Strategy
Our strategy focuses on our continued efforts to improve upon key
ingredients to our success which has led us to become the largest food retailer
in Brazil. These include our commitment to increasing profitability through our
focus on increasing productivity, reducing costs, technological advancements
and, most importantly, customer satisfaction and loyalty. This focus starts with
a philosophy of professionalism and pride in the organization which flows from
the top management levels through all of our employees. We believe that at all
levels of our company, we are committed to our customer, for they are the reason
for our existence and success. We strive to create the best possible shopping
experience which will feed a long and loyal relationship. In order to execute
our strategy, we intend to continue to expand our selling space through store
openings and acquisitions, further improve efficiencies, improve our margins,
offer new products to increase revenues, customer traffic without increasing our
fixed costs, and continued attention to improvements in corporate governance.
Expand our selling space
We seek to continue our expansion plan, which is designed to maximize
growth opportunities available to us and to capitalize on the economies of scale
afforded large chains in the Brazilian food retail industry. We believe
significant opportunities exist to profitably increase our selling space in
areas in which we currently operate and in other markets currently underserved
by supermarkets. Our objective is to increase our selling space by an average of
10% to 15% each year over the next five years. This range will vary depending on
the level of acquisitions during each year. In 2004, we plan to open
approximately 13 to 20 stores, including 3 to 5 hypermarkets and 10 to 15
supermarkets. Most of our organic growth will be in regions where we already
have a presence in order to increase our area of coverage and, as a result, to
achieve greater market penetration and economies of scale. We carefully evaluate
potential store sites based on market research, the ability of the relevant
geographic market to support a new store at the selected site, as well as our
ability to supply the site. We also evaluate a potential site's attractiveness
and the appropriate store format through analysis of demographic data covering
population and
15
income shifts, consumption patterns, traffic patterns and the proximity to one
of our distribution centers. We continually explore strategic acquisition
opportunities of supermarket chains or individual supermarkets for existing
markets or new geographic regions to add to or substitute for new store
openings. For example, our recent association with Sendas in the State of Rio de
Janeiro resulted in the association of 68 new stores and measurably increased
our presence in this market. When entering new markets, we have historically
sought to acquire local supermarket chains to benefit from their existing
know-how of the geographic region and to begin operating new stores more quickly
and in a more cost-efficient manner than through construction.
Further improve efficiencies
We continually seek to improve operating efficiencies in connection
with our supply chain. We were one of the first supermarket chains in Brazil to
equip its stores with a point of sale, or POS, system and utilize a computer
automated ordering system that automatically replenishes our inventory. We
intend to improve operating efficiencies in other stages of the supply chain,
particularly product outflow, by increasing the volume of merchandise going
through our distribution centers. In 2003, approximately 80% of our inventory
came directly from one of our distribution centers instead of a supplier. In the
past year, we combined our perishable and groceries divisions into one unit in
an effort to rationalize and reduce costs and we consolidated our non-food
product area and our flower division in order to achieve operating efficiency.
Also, as part of our strategy, we intend to substantially increase our
cross-docking capability, which should result in working capital savings and
lower inventory levels. We also intend to improve handling to further decrease
stock-outs, breakage and shrinkage and delivery costs. For example, we are
exerting pressure on suppliers to ship their products in amounts that are less
than a full pallet which we feel will result in cost savings through lower
levels of spoilage. We have already reduced our stock-out levels to
approximately 5% in 2003, down from roughly 20% in 1998. Similarly, shrinkage
levels were reduced to 1.3% in 2003, down from approximately 2.2% in 1997 and
3.1% in 1995.
Improve our margins
We have been increasing our focus on reductions and dilution of costs
to improve our operating and gross margins. We regularly examine our mix of
products and product brands in all of our store formats with a view to
increasing sales of higher margin products, and we believe that, as total net
sales increase, our negotiating position with suppliers will be further
strengthened, allowing us to obtain better prices for the products we purchase.
We also regularly monitor product layouts at our stores so as to use store space
more efficiently, decrease inventory space and make higher margin brands more
prominent. We also seek to offer more non-retail services that increase revenues
but do not require incurring additional costs, such as the payment of utilities
at checkout counters. We recently reevaluated and relaunched our private label
product line. We believe we may offer our private label products to customers at
approximately a 15% to 25% lower cost than leading brands, but at greater
margins in relation to average of each category. From 2001 to 2003, our sales of
private label products registered a 188% growth and the number of items
increased from 125 in 2001 to approximately 2.4 thousand in 2003.
Offer new products and services to increase revenues and customer
traffic without increasing fixed costs
We continue to implement measures to increase revenues and customer
traffic without increasing our fixed costs. We have begun to offer high-margin
products such as extended warranty policies on household appliances and
insurance on the payment of household appliances in the event of unemployment or
death. We also offer customers the ability to pay their utility bills at
checkout counters, for which we receive a fee. We also intend to continue
finding alternative uses of non-sales space at our stores, such as the area in
front of our checkout counters. Other initiatives include the addition of
commercial outlets inside some of our Extra hypermarkets which offer laundry
services, gasoline stations conveniently located in the parking lots of these
stores and the addition of drugstores inside the sales area. Our recent
association with Sendas greatly increased our presence in certain of these
non-core service and products offerings. We believe these additional features at
our stores increase revenues and customer traffic without increasing fixed
costs, and we intend to expand these services.
Continued attention to improvements in corporate governance
Our controlling shareholders and our senior management have for several
years now sought changes in our governance structure, procedures and documents
with a view towards delineating operating responsibilities, separating the
oversight and operational functions and enhancing disclosure to our shareholders
and the market at large. Our performance is based on transparency, efficiency
and security criteria when disclosing information. In order to strengthen our
growth strategy, we invest in the continuous improvement of our management
practices.
16
In our continuous transition from our roots as a family-owned regional
food retailer to a geographically dispersed multi-segment retailer, we continue
to enhance management's range of independence empowerment and authorization. For
example, in February 2003, our shareholders approved at a general shareholders'
meeting our corporate management structure reorganization. In connection with
this reorganization, our then controlling shareholders relinquished their
executive officer positions in order to become board members. The founding
shareholder, Mr. Valentim dos Santos Diniz, became the Honorary Chairman of the
board of directors. In March 2003, Abilio Diniz ceased being our Chief Executive
Officer and became the Chairman of the board of directors. Mr. Augusto Marques
da Cruz Filho, the former Administrative and Financial Vice President, assumed
the Chief Executive Officer position. The Administrative and Financial Vice
President position was eliminated and instead divided into two newly-created
positions - the Administrative Officer and the Financial and Controller Officer
positions.
In addition, as a result of this reorganization, three new committees
were created to support our management bodies: the executive committee, the
financial committee and the development and marketing committee. Furthermore, in
order to comply with international corporate governance standards, we created an
audit committee which will be comprised of fully independent members by July
2005. We also implemented an ethical committee in 2004, which revises updates
and ensures employees and management are in full compliance with our corporate
standards. We are also in the process of implementing our disclosure committee
which will adapt the information disclosure policy and management procedures
used by us according to the regulatory entities, our shareholders and the market
in general. In addition, in 2003, we implemented a working group to analyze
internal controls and procedures that may impact our results. This working group
is comprised of key employees from several of our areas and is focused on the
evaluation of eventual risks and non-conformity situations, which are treated
with specific plans aiming to improve internal process.
We will continue to study developments in corporate law and practice to
determine what other improvements in transparency, disclosure or governance we
should make.
Operations
The following table sets forth the number of stores, the total selling
area, the average selling area per store, total number of employees and the net
sales revenue as a percentage of our total net sales revenue for each of our
store formats at December 31, 2003:
Average Selling Total Number Percentage of
Store Number Total Selling Area Area Per Store (in of Our Net Sales
Format of Stores (in square meters) square meters) Employees(1) Revenues
------ --------- ------------------ ------------------ ------------ --------------
Pao de Acucar......... Supermarkets 208 273,016 1,313 16,286 31.7%
CompreBem Barateiro... Supermarkets 172 211,517 1,230 9,169 17.8%
Extra................. Hypermarkets 62 462,195 7,455 19,936 48.1%
Extra Eletro.......... Home appliance 55 35,973 654 703 2.4%
Stores
Head office &
distribution
center.............. ---
9,463
-------- ---------- --------- -------- -------
Total: 497 982,701 1,977 55,557 100.0%
-----------------------
(1) Full-time equivalent number of employees calculated by dividing
total number of hours worked by all employees in the month of December
2003 by 220 hours.
For a detailed description of net sales revenue for each of our store
formats, see "Item 5A - Operating and Financial Review and Prospects - Operating
Results - Certain Operating Data."
Pao de Acucar Division
The Pao de Acucar division operates convenient neighborhood stores. Our
Pao de Acucar stores are predominantly located in large urban areas (with over
one-third located in the greater Sao Paulo City area). We
17
believe this to be a significant competitive advantage since available sites in
those urban areas are scarce. The Pao de Acucar stores target the Brazilian
class A and class B household consumers, whose minimum annual household income
exceeds R$24,000. The stores are characterized by a pleasant shopping
environment, a broad mix of quality products, innovative service offerings and
a high level of personal service, with an average of six employees per 100
square meters of store space. Many of these stores feature specialty areas
such as perishables, baked goods, meat, cheese and seafood departments. Many
stores offer shopping advisors to assist customers with inquiries about
particular food needs, prices, special discounts and brand information. Pao de
Acucar stores also offer private label products, including the Goodlight brand
of health food products.
We had 208 Pao de Acucar stores at December 31, 2003. The Pao de Acucar
stores range in size from 331 to 4,730 square meters and averaged 1,313 square
meters of selling space at December 31, 2003. The sale of food products
represented 95% and non-food products represented 5% of this division's net
sales revenue in 2003. Pao de Acucar customers can also make purchases on-line
through paodeacucar.com.br, the Pao de Acucar website. This site is available to
customers in the cities of Sao Paulo, Rio de Janeiro, Brasilia and Curitiba.
Our Pao de Acucar Mais card, the first preferred shopper/fidelity card
in the Brazilian retail industry, is an important instrument that allows us to
respond better to consumer needs. The presentation of this card by the consumer
at the moment of purchase allows us to collect valuable information regarding
that consumer's shopping habits. The information eventually assists us in the
selection of merchandise for these stores and in the creation of
customer-specific sales promotions. We offer client-specific discounts at the
moment of purchase in order to promote customer loyalty and offer customers
certain credit products of a third-party financial institution. By the end of
2002, more than two million families had registered for this card, which allowed
us to identify approximately 60% of our Pao de Acucar sales.
We remodel our stores generally every four years to create a new
shopping atmosphere and, where possible, to improve operating efficiency. We
remodeled 13 Pao de Acucar stores in 2003 and 90 in the 1999 to 2003 period.
CompreBem Barateiro Division
We acquired the Barateiro chain of supermarkets in 1998. Barateiro was
targeted to middle and low-income consumer segments so we decided to use it for
supermarkets serving those segments. The Barateiro format, on which our
CompreBem Barateiro division is based, further served to strengthen and expand
our presence in the Brazilian market. The CompreBem Barateiro supermarkets offer
large volumes of basic products and a variety of brands at low prices. CompreBem
Barateiro stores target the Brazilian class C and class D household consumers,
whose annual household income is less than R$24,000 and which collectively make
up approximately 87% of all urban households. Accordingly, CompreBem Barateiro
stores are located in lower-income neighborhoods compared to Pao de Acucar
stores. Generally, CompreBem Barateiro stores offer more competitively priced
products than Pao de Acucar stores. In addition, these stores are characterized
by a lower level of personal service than Pao de Acucar stores, with an average
of 4.3 employees per 100 square meters of store space.
We relaunched the Barateiro chain in 2001, changing some operational
and product assortment decisions we made beginning in 2000. Having originally
developed the Barateiro format to be similar to a hard discount retailer,
offering many generic brands and private label products and very few leading
brands, market reaction indicated that this approach was not gaining acceptance.
As a result, we changed the product assortment of this division in order to
achieve a more competitive balance among leading brands, private label products
and lower priced products.
Another service innovation as part of the Barateiro relaunching was the
creation of the brand's own preferred shopper/fidelity card, the Clube CompreBem
card, which is currently used by more than 610,000 customers. This card, in
addition to assisting us in the collection of consumer shopping data, allows us
to offer customers credit products of a third-party financial institution. We
have also reevaluated our Barateiro private label product line. We reduced
sharply the number of Barateiro private label products, instead focusing on
those which we believe can be competitive with the leading brands. We currently
offer approximately 500 private label items. We strive to offer products with
the same quality as leading brands, but at a 20% to 25% lower price.
In 2002, as part of our effort to increase sales of our Barateiro
stores, we launched a new store format known as CompreBem Barateiro in certain
regions of Brazil. This format, which responded to market research from
18
the target Barateiro audience, focused not only on reduced costs, but also on
personal service, organization and increased customer relations. Under the new
model, the stores offer new layouts, more modern equipment and a more pleasant
shopping environment with a variety of services. In addition, the CompreBem
Barateiro format attempts to emphasize the importance of family and community
connection, sponsoring community outreach activities such as local artwork
competitions and showcase of neighborhood children's artwork in the stores.
We had 172 stores under the CompreBem Barateiro banner at December 31,
2003. CompreBem Barateiro's stores range in size from 300 to 5,092 square meters
and averaged 1,230 square meters of selling space at December 31, 2003. In 2003,
non-food items accounted for approximately 5% and food items accounted for
approximately 95% of net sales revenue of the CompreBem Barateiro division.
Extra Division
The Extra hypermarkets are the largest of our stores. We introduced the
hypermarket format to Brazil with the opening of our first 7,000 square meter
store in 1971. The Extra hypermarkets offer the widest assortment of products of
any of our store formats, with approximately 70,000 items and an average selling
area of 7,455 square meters at December 31, 2003. The Extra stores target the
Brazilian class B, class C and class D household consumers, whose annual
household income ranges from R$4,800 to R$60,000. At December 31, 2003, we had
62 Extra stores. The sale of food products represented 70% and non-food products
represented 30% of the Extra division's net sales revenue in 2003.
In 2002, we focused on making operational and product assortment
decisions for the Extra hypermarkets. We customized the product line of the
hypermarkets according to the region in which they are located to respond better
to regional tastes. We also presented new store layouts and changed the product
assortment of this division in order to achieve a better margin mix. In
addition, we have sought to increase customer traffic at our stores through
initiatives aimed at increasing customer loyalty and improving our knowledge of
consumer behavior patterns in the hypermarket segment. We have begun to provide
additional services tailored to the specific needs of the division's broad base
of customers. For example, we added gasoline stations within the parking areas
of some Extra stores, and we initiated a pilot project to operate drugstores
inside the Extra stores. We also added third parties commercial outlets inside
the Extra hypermarkets, which offer laundry, photo development, dining and
banking services for the convenience of the customer.
In 2003, we sought to offer more competitively priced products and
reduce our operational costs. We created a new model of compact hypermarket
called hipermercado compacto, which is smaller than the traditional hypermarket
stores and therefore has substantially lower costs of construction. We also
pursued the reduction of our Extra stores' energy costs and the number of
business hours of some of our 24 hours stores, which allowed us to manage more
efficiently our employees' working hours. We also focus on optimizing our
marketing initiatives and renegotiating our agreements with service providers,
including public utilities. One of our pilot projects allowed us to reduce the
use of computers and enabled our employees to be able to fix minor problems
occurring in our checkouts, which also resulted in a reduction of our maintaince
costs. We intend to establish more hipermercados compactos in 2004, as well as
to convert some stores associated with the Sendas format (Bon Marche banner)
into Extra stores.
We also offer customers the brand's own preferred shopper/fidelity
card, the Extra card. The Extra card is currently used by approximately 1.6
million customers, who benefit from the credit features and sales promotions in
connection with the card. In addition, the Extra card allows us to collect
valuable information about consumers' shopping habits.
Similar to our approach to the Barateiro private label line of
products, we also reorganized and updated the Extra division's private label
products line in 2001, based on extensive market research and customer surveys,
in order to offer products which we believed were competitive with leading
brands. As a result, we launched over 600 items in 2002 and 630 items in 2003,
and the Extra division presented an increase of 66% of the sales volume in 2003
if compared to 2002. Our Extra division has an on-line sales site through
extra.com.br. This site sells and delivers non-food products to all regions of
the country. These products include household appliances, consumer electronic
products, compact discs, toys, information technology products and sports and
entertainment items.
19
We have sought to strengthen the Extra division's presence recently
through organic growth in selected areas in Brazil. In 2003, we opened two
stores in the greater Sao Paulo metropolitan area, one in the state of Rio de
Janeiro.
Extra Eletro
The Extra Eletro stores are generally small showrooms which sell a
broad range of home appliances and consumer electronic products. These stores
had an average selling area of 654 square meters at December 31, 2003. Customers
place orders in the stores, and products are shipped from a central warehouse.
At December 31, 2003 we had 55 Extra Eletro stores, all of which are in the
state of Sao Paulo. Approximately 74% of the net sales of Extra Eletro stores in
2003 were credit sales, which make the products more accessible to lower-income
consumers. See "- Credit Sales."
Until November 2002, the operation of Extra Eletro stores had been
conducted as a separate division under the Eletro name. We placed the former
Eletro division under the management of the Extra division, with a view to
transmitting to the Eletro format the strong name of the Extra hypermarket
format. Additional benefits of this integration include enhanced category
management decisions, greater bargaining power with suppliers and diluted human
resources and marketing expenses. In 2003, our activities were focused on
enhancing consumer financings to our customers and improving the sales of
computer and telephone products, as well as reducing our expenses in general and
increasing the number of promotions.
Capital Expansion and Investment Plan
As part of our capital expansion and investment plan, we have invested
approximately US$2.0 billion in our operations since 1999. Our investments have
included:
Acquisitions of supermarket and hypermarket chains - Since 1999, we
have acquired 195 stores, consisting of numerous supermarket chains and
individual stores. Through our acquisition of the Barateiro chain in 1998, we
inaugurated a new store format targeted specifically to lower income consumers.
In addition, when entering new markets, we have generally sought to acquire
local supermarket chains to benefit from their existing know-how of the
geographic region. As a result, these acquisitions have enabled us to expand our
operations to locations outside of the state of Sao Paulo, particularly Rio de
Janeiro and some northeastern Brazilian states.
We acquired the Se Supermercados chain of supermarkets in 2002. The
purchase price was R$386.4 million (US$135.8 million at the acquisition date),
including the assumption of debt in the amount of R$124.4 million (US$43.7
million at the acquisition date). On January 23, 2003, we sold the Se tradename
for R$0.3 million (US$0.1 million), as requested by the Conselho Administrativo
de Defesa Economica (CADE), the principal Brazilian antitrust authority. We have
spent an aggregate of US$360.5 million on acquisitions since 1999.
The following table presents information regarding these acquisitions
and the regional distribution of the stores we acquired over the past five
years:
Number of
Year Chains Acquired Stores Geographic Distribution
---- --------------------------- --------- ------------------------
1999 Mogiano/Shibata (6 stores), 33 Sao Paulo: 13
rent of 2 Mappin Department Rio de Janeiro: 19
stores and leasing of 25 Paes Minas Gerais: 1
Mendonca stores for 15
years(1)
2000 Sao Luiz (9 stores), Nagumo 64 Ceara: 9
(12 stores), Reimberg (9 Sao Paulo: 38
stores), Parati (11 stores), Parana: 11
Rosado (13 stores), Boa Paraiba: 6
Esperanca (6 stores) and
other (4 stores)
20
2001 ABC Supermercados 26 Rio de Janeiro: 26
2002 Se Supermercados (60) and 72 Sao Paulo: 60
CompreBem (12) Pernambuco: 12
---------
Total 195
=========
________________
(3) We relinquished six of these Paes Mendonca stores and converted another
into a regional warehouse from the date we leased the stores through
December 31, 2003.
Opening of new stores - As part of our expansion strategy, we have
opened 65 new stores since 1999, including 16 Pao de Acucar stores, 21 Comprebem
Barateiro stores, 20 Extra stores and eight Extra Eletro stores. The total cost
of these new stores was US$543.0 million. We seek real estate properties for
constructing or renovating stores under one of our banners in regions where
there are no local supermarket chain acquisition opportunities which suits one
of our formats. We also tend to enter new regional markets with the construction
of a hypermarket.
Renovation of existing stores - We have remodeled 409 stores since
1999, including 108 Pao de Acucar stores, 223 Comprebem Barateiro stores, 43
Extra stores and 35 Extra Eletro stores. Our renovation program allows us to add
refrigeration equipment to our stores, create a more modern, customer-friendly
and efficient environment, and outfit our stores with advanced information
systems. The total cost of renovating these stores was US$498.4 million.
Improvements to information technology - We have been committed to
technology as an important component in our pursuit of greater efficiency and
security in the flow of information among stores, distribution centers,
suppliers and corporate headquarters. We implemented a computer automated
ordering system, which automatically replenishes our inventory based on
consumers' shopping habits. We have a proprietary technology system, the pd@net,
a B-2-B, or business to business, platform for the on-line integration of 6,000
suppliers. This Internet process enables information to be exchanged rapidly,
precisely and transparently among all participants in the supply chain. For more
information, see "- Technology." We have spent an aggregate of US$263.4 million
on information technology since 1999.
Expansion of distribution facilities - Since 1999, we have opened
distribution centers in the cities of Sao Paulo, Brasilia, Fortaleza, Rio de
Janeiro and Recife. The increase and improvement in storage space enables us to
further centralize purchasing for our stores and, together with improvements to
our information technology, improve the overall efficiency of our inventory
flow. We have spent an aggregate of US$111.4 million on our distribution
facilities since 1999.
The following table provides a summary description of our principal
capital expenditures disbursed for the last three years:
Year Ended December 31,
------------------------------------------
2003 2002 2001
----------- ----------- ------------
(millions of U.S. dollars)
Opening of new stores............... $45.5 $131.4 25.2
Acquisition of retail chains........ - 94.3 40.4
Purchases of real estate............ 10.3 15.8 50.2
Renovations......................... 91.9 73.2 71.1
Information technology.............. 33.9 29.8 49.4
Distribution centers................ 3.6 3.9 38.9
------ ------ ------
Total ....................... $185.2 $348.4 $275.2
====== ====== ======
In 2004, we intend to invest R$500.0 million in new projects
(equivalent at the December 31, 2003 exchange rate to US$173.1 million), which
includes R$200.0 million (equivalent at the December 31, 2003 exchange rate to
US$69.2 million) for the opening of new stores, R$140.0 million (equivalent at
the December 31, 2003 exchange rate to US$48.5 million) for store remodeling,
R$60.0 million (equivalent at the December 31, 2003
21
exchange rate to US$20.8 million) for technology and R$100.0 million
(equivalent at the December 31, 2003 exchange rate to US$34.6 million) for
other investments.
Supply and Distribution
Supply. We have centralized purchasing for our Pao de Acucar, CompreBem
Barateiro, Extra and Extra Eletro stores. We purchase substantially all of our
food products on a spot or short-term basis from unaffiliated suppliers. In the
aggregate, we purchase up to 131,000 products from approximately 6,000
suppliers. In 2003, no single supplier accounted for more than 6% of total goods
purchased. Our 10 largest suppliers in 2003 collectively accounted for less than
28% of our purchases, and we believe that we are not dependent on any single
supplier.
Distribution. In order to distribute perishable food products, grocery
items and general merchandise efficiently, we operate 11 distribution centers
strategically located within the cities of Sao Paulo, Brasilia, Fortaleza,
Curitiba, Rio de Janeiro and Recife, with a total storage capacity of 316,000
square meters of built-in area. We were the first retailer in Brazil to have a
centralized distribution center. The locations of our distribution centers make
it possible for us to make frequent shipments to stores, which reduce the need
of in-store stockroom space, and limits non-productive store inventories.
Approximately 80% of our inventory was delivered to the store from one of our
distribution centers instead of a supplier in 2003. Our inventory and
distribution management system, which manages inventory and coordinates
efficient distribution schedules, allows for direct orders from our stores,
which results in increased product turnover.
In 2003, we promoted some adjustments in our store supply operating
structure, which resulted in the reduction of product shortage levels at stores,
especially during promotional sales. As a result of a recessive economic
scenario, we also reduced inventories, which contributed to a more efficient
logistics operation through cost reduction.
As far as grocery products are concerned, the target was to improve
operating efficiency. The transportation to stores was rationalized, with the
revision of procedures such as: delivery frequency to stores, loadings,
preparation of truck itineraries that permitted us to reduce freight costs.
In 2003, we consolidated our non-food product area. Operating
efficiency was achieved with the consolidation of different product categories -
such as batteries, TV sets, textile products, etc. - in a single site. We also
consolidated our flower operation, through geographic expansion, becoming the
largest flower purchaser in the country.
Marketing
Our marketing strategy is to further enhance the quality image of our
stores and to emphasize our selection and service and our competitive and fair
prices. Each division executes its own marketing strategy designed to promote
its particular strengths and to appeal to its customer base. In 2002 and 2003,
we spent approximately US$74.2 million and US$65.8 million, respectively, on
advertising (approximately 1.9% of total net sales revenues in each year).
We spent 26.8% in 2002 and 20.9% in 2003 of our total marketing
expenditures on radio, newspaper and magazine advertising. In addition,
television accounted for 14.1% of advertising expenses in 2002 and 21.7% in
2003. We spent 59.1% in 2002 and 57.4% in 2003 on other promotional activities.
We centralize the purchasing of advertising time or space for all of
our divisions, which enables us to reduce marketing expenditures. We work with a
number of major Brazilian advertising agencies. While our primary advertising
focus is on specific brand name, price, and quality-related promotions, we also
regularly promote our store brands through sponsorships and sporting and
cultural events, endorsements and support of environmental activities.
We have further developed our marketing initiatives through the Pao de
Acucar Mais card, the first preferred shopper/fidelity relationship card in the
Brazilian retail industry, and the Clube CompreBem card. Through these programs
we continue to collect customer information in an effort to offer more
personalized services and products to shoppers who use our stores. We have also
developed a private label strategy pursuant to which our various divisions sell
high quality products at competitive prices. The principal advantages of this
private label
22
strategy have been improved brand loyalty to our brands and increased leverage
with our suppliers because our private label products are similar in quality to,
but more favorably priced than, leading brands.
Credit Sales
In 2003, 46.8% of our net sales revenue were represented by credit
sales in the form of credit card sales, installment sales, post-dated checks and
purchase vouchers. In 2002, 46.3% of our net sales revenue was represented by
credit sales.
Credit card sales. All our store formats accept payment for purchases
with MasterCard (Credicard), Visa, Diners Club, American Express or our
co-branded credit cards. Sales to customers using credit cards accounted for
33.8% of our net sales revenue in 2003. In 2002, sales through credit cards
accounted for 31.9% of our net sales revenue. An allowance for doubtful accounts
is not required as credit risks are substantially assumed by third parties.
Installment sales. Our Extra Eletro stores and Extra hypermarkets offer
attractive consumer financing to our customers who frequently purchase
electronic goods or home appliances, respectively, on an installment basis. The
consumer credit installment term in 2003 averaged 10 months, with fixed interest
payments averaging approximately 5.5% per month throughout 2003. We borrow funds
approximately equivalent to the consumer credit financing we extend through our
sales of electronics. The consumer financing is generally for a term of up to 24
months and is funded by our borrowing on a shorter-term basis at fixed rates. In
2003, installment sales accounted for 39.2% of the net sales revenue of Extra
Eletro stores, 2.0% of the Extra division's net sales revenues and 2.0% of our
total net sales revenue.
Post-dated checks. Post-dated checks are commonly used financial
instruments in Brazil to make purchases. Post-dated checks are executed by a
consumer with a future date (up to 60 days) instead of the date of the purchase.
The retailer typically deposits the check only as of this future date, and
interest for the time elapsed is included in the amount of the check. We
currently have post-dated check programs in which interest is computed on the
settlement amount based upon a fixed monthly rate of interest (to a lesser
extent, for certain promotional programs no interest is charged). We limit the
availability of post-dated checks to customers who meet our credit criteria and
who hold our identification card. Over 350,000 customers use the programs on at
least a monthly basis. Sales to customers using post-dated checks accounted for
4.1% of our net sales revenue in 2003 (4.8% in 2002).
As part of the credit approval process, we require each customer to
complete a credit application. The applicant must also provide a taxpayer's
identification number, identification card, proof of residential address and
current pay stub or other evidence of income as part of the application process.
We then run a credit check with local credit reporting services and with SPC and
SERASA, both of which are national credit reporting services, to determine a
credit limit. We also input the data regarding the client and any purchases into
our database.
Purchase vouchers. We accept as payment in our stores vouchers issued
by third party agents to participating companies who provide them to their
employees as a fringe benefit. Purchase vouchers accounted for 6.9% of our net
sales revenue in 2003. An allowance for doubtful accounts is not required as
credit risks are substantially assumed by third parties.
Technology
We have been at the forefront of the Brazilian retail industry in using
information technology. We were one of the first supermarket chains in Brazil to
equip its stores with a POS system and the first major food retailer in Brazil
to equip every one of its checkouts with this technology. We invested US$29.8
million in technology in 2002 and US$33.9 million in 2003. We have budgeted
approximately R$60.0 million (equivalent at the December 31, 2003 exchange rate
to US$20.8 million) for 2004 in order to continue our investment in our
management information systems.
In 2003, our information technology area performance was focused on
increasing productivity. Among the most important information technology actions
are the wireless technology expansion to other applications inside the stores,
which increases operating efficiency and improves services provided to
consumers; checkout counter technological improvements, in order to make the
operation simpler and more agile; platform expansion as part of the
Datawarehouse project, which improves management and inventory control;
conclusion of the Human Resources
23
Integrated project with the implementation of Peoplesoft to manage the human
resource area; and the restructuring of our internal portal, including new tools
and applications which expand even more the access to information and content.
Another important project developed in 2003 was the adoption of processes and
systems, which permits the implementation of negotiation and supplier
replacement alternative models, such as the SBT (Scan Based Trading).
In 2004, the Global Data Synchronization will be concluded and
implemented, which will contribute to make product itemization, purchase and
distribution more efficient. Also, two new projects are expected to provide us
with more profitability and the consumer with more convenience: the adoption of
a universal and standardized identification for FLV (frutas, legumes, verduras,
or fruits and vegetables products) and the possibility of recharging prepaid
cellular phones at stores' checkouts.
Competition
The Brazilian food retailing business is highly competitive and has
experienced consolidation in recent years. In 2003, the five largest food
retailers in Brazil accounted for 38.1% of the organized sector sales, which
consist of sales by companies enrolled in ABRAS, Brazil's supermarket
association. In 2003, we accounted for 14.7% of the organized sector sales
according to ABRAS. We believe that consolidation will continue to take place,
not only within the food retail market but also other segments of the retail
industry. For example, hypermarkets are expected to gain market share in
apparel, general merchandise, consumer electronics, furniture, home development
and other non-food categories because of a general lack of department stores and
specialized stores in Brazil. We have continued our growth strategy by focusing
on regions where we can reinforce our presence. As part of our expansion
strategy, we have also focused on the needs and expectations of various segments
of the Brazilian population by developing store formats that respond to
different household income levels. Although we operate stores in many regions
throughout Brazil, the size, wealth and importance of the Sao Paulo State has
led us to concentrate our stores in this particular market. In 2003, sales in
Sao Paulo State accounted for 68% of our total sales. In Sao Paulo State and
throughout Brazil, we compete principally on the basis of location, price,
image, quality and service. In the retail food market, our competition includes
hypermarkets, supermarkets and traditional wholesalers. Our principal
competitors are multinational retail food chains, local supermarkets and grocery
stores.
The main competitor of the Extra division, our hypermarket division, is
Carrefour, a leading French retail food chain, which at December 31, 2003
operated 329 retail stores principally in the southeast and south of Brazil. At
December 31, 2003, Carrefour accounted for 12.6% of the organized sector's sales
according to data from ABRAS. Wal-Mart, which as of December 31, 2003 operated
143 stores in Brazil, is also a competitor in the hypermarket format with a 6.2%
market share after the acquisition of Bompreco.
Our Pao de Acucar division has different competitors in each of the
markets where we operate. In Sao Paulo State, we compete principally with a
number of local supermarkets and grocery stores. The main competitor of Pao de
Acucar in Brasilia is Champion, the supermarket division of Carrefour. In the
state of Rio de Janeiro, our Pao de Acucar format competes with Supermercados
Mundial.
The CompreBem Barateiro division also faces different competitors
depending on the particular regional market. In the state of Sao Paulo,
CompreBem Barateiro division faces strong competition from a number of smaller
regional chains. The main competitor of CompreBem Barateiro division in the
state of Rio de Janeiro is Guanabara and Champion.
In addition, we face intense competition from small food retailers that
often can benefit from inefficiencies in the Brazilian tax collection system.
These small food retailers also frequently have access to merchandise from
irregular and informal distribution channels at lower prices than those charged
by manufacturers and stores in the conventional supply chain of the organized
retail food sector.
In other regional markets, we compete within the organized food retail
sector as well as against several medium and small chains and family-owned and
-operated food retail businesses, which are estimated to represent approximately
50% of overall food sales in Brazil. Other organized food retail chains among
our competitors include Sonae, a Portuguese supermarket chain, which operated
148 retail stores at December 31, 2003. Bompreco, owned by Royal Ahold, is our
main retail food competitor in the Northeast region of Brazil. On March 1, 2004,
Wal-Mart announced the acquisition of Bompreco which operated 118 retail stores
at December 31, 2003.
24
According to ABRAS, the market share held by Royal Ahold and Sonae was
4.3% and 3.9%, respectively, of all food sales in the Brazilian retail sector at
December 31, 2003.
The principal competitors of our Extra Eletro stores are Casas Bahia
and Ponto Frio (Globex), each of which operates in Sao Paulo State.
Other U.S. and international retailers may enter into the Brazilian
retail market, either directly, by forming joint ventures or by acquiring
existing chains. Some of these potential competitors may have greater financial
resources than us. Moreover, to the extent that other large international food
retailers enter the Brazilian market or the retail sector continues to
consolidate through the acquisition of local supermarket chains, our market
share may be adversely affected.
Regulatory Matters
We are subject to a wide range of governmental regulation and
supervision generally applicable to companies engaged in business in Brazil,
including federal, state and municipal regulation, such as labor laws, public
health and environmental laws. In order to open and operate our stores, we need
a business permit and site approval, an inspection certificate from the local
fire department as well as health and safety permits. Our stores are subject to
inspection by city authorities. We believe that we are in compliance in all
material respects with all applicable statutory and administrative regulations
with respect to our business.
Our business is primarily affected by a set of consumer protection
rules regulating matters such as advertising, labeling and consumer credit. We
believe we are in compliance in all material respects with these consumer
protection regulations.
As a result of significant inflation during long periods in the past,
it is commonly the practice in Brazil not to label individual items. Currently,
there exists uncertainty regarding the requirement for price labeling each
individual item. This uncertainty derives from a conflict between federal and
state laws on the subject. State laws allow other pricing methods, such as the
posting of signs and the placement of scanners for bar codes, which are the
prevailing commercial practices. If the conflict is not resolved in a manner
consistent with our current pricing practices and we are compelled to place
price tags on each individual item, we would lose flexibility in carrying out
our sales and may incur increased labor costs in connection with the affixing of
price tags. However, we do not believe that our business would be adversely
affected in a material way.
The Brazilian Congress is considering a bill requiring a prior
assessment of the impact of the construction of a hypermarket in excess of 1,000
square meters on the relevant neighborhood. The proposed regulation is intended
to protect traditional family-owned retailers which have increasingly lost
market share in Brazil to the larger chains and hypermarkets. Regulations of
this type already exist at the municipal level. For example, governmental
authorities in the city of Porto Alegre in the state of Rio Grande do Sul issued
a city ordinance in January 2001 prohibiting construction of food retail stores
with a selling area greater than 1,500 square meters. Other jurisdictions may
adopt similar laws, and, if the bill pending before the Brazilian Congress
becomes law, our future expansion and growth may be subject to significant
constraints.
4C. Organizational Structure
Companhia Brasileira de Distribuicao, which is the controlling and
principal operating company, conducts our operations. Our investments in
subsidiaries are effected primarily to acquire the share capital of other retail
chains from third parties. In most cases, the retail operations are transferred
to retail stores under existing banners or the stores acquired begin operating
under our banners. All our operations are conducted under the Pao de Acucar,
Comprebem Barateiro, Extra and Extra Eletro banners.
4D. Property, Plant and Equipment
We own 88 stores, eight warehouses and a part of our headquarters. The
remaining 409 stores and three warehouses we operate and the remainder of our
headquarters are leased. Leases are usually for a term of five to 25 years, and
provide for monthly rent payments based on a percentage of sales above an agreed
minimum value. We have 14 leases expiring in 2004 and 88 expiring in 2005. Based
on our prior experience and Brazilian law and
25
leasing practices, we do not anticipate any material change in the general terms
of our leases or any material difficulty in renewing them. As of December 31,
2003, we leased 23 properties from members of the Diniz family. Management
believes that these leases are on terms at least as favorable to us as we could
get from an unrelated party. See "Item 7B - Major Shareholders and Related Party
Transactions - Related Party Transactions - Leases."
The following table sets forth the number and total selling area of our
owned and leased retail stores by store format, the number and total storage
area of our owned and leased warehouses and the total office area of our
headquarters that is owned and leased as of December 31, 2003:
Owned Leased Total
----- ------ -----
Area Area Area
(in square (in square (in square
Number meters) Number meters) Number meters)
------ ---------- ------ --------- ------ ----------
Pao de Acucar............ 45 70,815 163 202,201 208 273,016
Extra.................... 31 267,501 31 194,694 62 462,195
Extra Eletro............. 3 3,624 52 32,349 55 35,973
CompreBem Barateiro...... 9 10,053 163 201,464 172 211,517
Warehouses............... 8 273,830 3 42,170 11 316,000
Headquarters............. 28,591 13,043 41,634
As of December 31, 2003, we owned 16 lots of property representing in
the aggregate approximately 946,466 square meters. We expect to develop many of
these lots, which are principally located in the state of Sao Paulo, into new
stores as part of our capital expansion and investment plan. We believe that all
of our facilities are in adequate condition for this purpose.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5A. Operating Results
The following discussion should be read in conjunction with our
financial statements as of December 31, 2003 and 2002 and for the three years in
the period ended December 31, 2003 appearing elsewhere in this annual report,
and in conjunction with the financial statements included under "Item 3A - Key
information - Selected Financial Data." Except as otherwise indicated, all
financial information in this annual report has been prepared in accordance with
U.S. GAAP and presented in U.S. dollars. For certain purposes, such as providing
reports to our Brazilian shareholders, filing financial statements with the
Comissao de Valores Mobiliarios, or CVM, the Brazilian securities commission,
and determining dividend payments and other distributions and tax liabilities in
Brazil, we have prepared and will continue to be required to prepare financial
statements in accordance with accounting practices adopted in Brazil, or
Brazilian GAAP.
Discussion of Critical Accounting Policies
In connection with the preparation of the financial statements included
in this annual report, we have relied on variables and assumptions derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operation often requires our management to make judgments regarding the effects
of inherently uncertain matters on the carrying value of our assets and
liabilities. Actual results may differ from those estimated under different
variables, assumptions or conditions. We provide below a summarized discussion
of the following significant accounting policies involving these management
judgments, including the variables and assumptions underlying the policies:
o goodwill, intangible assets and amortization, and
o deferred taxes.
26
Goodwill, Intangible Assets and Amortization
We have made acquisitions that included a significant amount of
goodwill and other intangible assets. The balance of these assets at December
31, 2003 was US$226.2 million. See notes 1 and 10 to our financial statements
included elsewhere in this annual report.
U.S. Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets," became effective for acquisitions after
June 30, 2001, and was applied in connection with our acquisition of the ABC
Supermercados S.A. supermarket chain in November 2001. We ceased to amortize
goodwill as from January 1, 2002; amortization expense related to goodwill and
intangible assets for the year ended December 31, 2001 was US$28.0 million.
The goodwill of our reporting units was aggregated and tested for
impairment in 2003, based on estimated fair values. Reassessment of lives of all
intangible assets and specific tests for impairment of intangible assets with
finite lives will continue to be performed annually to determine the need for
impairment provisions and whenever events or changes in circumstances indicate
that its carrying value may not be recoverable. Factors which could trigger an
impairment adjustment include the following:
o significant underperformance relative to expected historical or
projected future operating results of reporting units,
o significant changes in the manner we use the acquired assets or the
strategy for our overall business or use of tradenames, or
o significant negative industry or economic trends.
We performed the impairment test and determined that no goodwill
impairment existed at December 31, 2003.
In November 2001, we relaunched the Barateiro banner and in 2002
acquired the CompreBem and Se retail chains. Following a review of our strategy
in 2002, we reduced the life over which we are amortizing the Barateiro
tradename from 19 years to a remaining life of eight years.
Deferred Taxes
We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. We regularly review the deferred tax assets for
recoverability and establish a valuation allowance, as required, based on
historical taxable income, projected future taxable income, and expected timing
of the reversals of existing temporary differences. If we or one of our
subsidiaries operate at a loss or are unable to generate sufficient future
taxable income, or if there is a material change in the actual effective tax
rates or time period within which the underlying temporary differences become
taxable or deductible, we will evaluate the need to modify or record a valuation
allowance against our deferred tax assets.
Our valuation allowance at December 31, 2002 was US$22.9 million, which
was established in June 2002 at the time we acquired our interest in Se
Supermercados. Utilization of these losses in the future will be limited to 30%
of the annual taxable income generated by Se Supermercados. The valuation
allowance was reversed in 2003, because the future offset is considered to be
more likely than not. The reversal of valuation allowance recognized for the
deferred tax asset at the acquisition date was adjusted to reduce the goodwill
related to the acquisition.
Brazilian Economic Environment
As a Brazilian company with all of our operations in Brazil, we are
significantly affected by economic and social conditions in the country. In
particular, our results of operations and financial condition, as reported in
the financial statements included in Item 18, have been affected by the growth
rate of the Brazilian gross domestic product and the rate of Brazilian
inflation. Our results of operations and financial condition have also been
affected by the rate of depreciation of the Brazilian currency against the U.S.
dollar. See "- U.S. GAAP Presentation and
27
Reporting Currency - Effects of Exchange Rate Variation and Inflation on Our
Financial Condition and Results of Operations."
Gross Domestic Product
After several years of steady economic growth following the
introduction of the Real Plan in 1994, the Brazilian economy entered into a
downturn in late 1998 that was exacerbated by a significant currency devaluation
beginning in mid-January 1999. As a result, gross domestic product, or GDP, grew
in constant terms by only 0.2% in 1998. The economic slowdown resulted in
generally flat demand in the Brazilian retail industry as GDP grew by 0.8% in
1999.
The recovery of the economy in 1999, in the wake of the 32.4%
devaluation of the local currency against the U.S. dollar and the strong fiscal
adjustment produced by the public sector, led to strengthened consumer
confidence. In 2000, GDP grew by 4.4%. GDP increased by only 1.4% in 2001,
principally as a result of the electric energy shortage in Brazil, decreased
consumer confidence following the Argentina crisis and the September 2001
terrorist attacks. In 2002, GDP increased by only 1.5%, principally as a result
of the uncertainties relating to Brazil's own political and economic future, the
continued economic and political uncertainties in Argentina, the political
uncertainties in Venezuela and the global economic slowdown.
The social security system reform was implemented, which was considered
an essential element for restoring medium and long-term solvency of the
Brazilian public sector.
In the first half of 2003, the adjustment policies adopted by the
Brazilian government caused a decline in the level of economic activity in
Brazil. However, in the second half of the year, the changes in the monetary
policy caused a positive recovery of the level of economic activity. In 2003,
the total GDP decreased 0.2% on average in real terms.
Our business is directly affected by the macroeconomic trend of the
global economy in general and the Brazilian economy in particular. If interest
rates rise and the Brazilian economy enters a period of continued recession,
demand for our products and services is likely to be negatively affected.
Further, continuing depreciation of the Brazilian real against the U.S. dollar
and the consequent inflation would reduce the purchasing power of Brazilian
consumers, negatively affecting the ability of our customers to pay for our
products and services. Continuing real devaluations would also affect our profit
margins by increasing the carrying costs of our U.S. dollar and other foreign
currency denominated debt and our other costs and expenses based on the U.S.
dollar and other foreign currencies. If Brazil experiences significant inflation
rates, we may be unable to increase prices charged to our customers in amounts
that are sufficient to cover our increasing operating costs, and our business
may be adversely affected as a consequence.
Inflation and Devaluation
The Brazilian general price (IGP-M) and consumer price (IPCA) inflation
indices and the devaluation of the Brazilian currency against the U.S. dollar
are presented below:
Three months
ended Year ended December 31,
-----------------------------------------
March 31, 2004 2003 2002 2001 2000 1999
-------------- ---- ---- ---- ---- ----
Inflation - IGP-M (1)........................... 2.7% 8.7% 25.3% 10.4% 9.9% 20.1%
Inflation - IPCA (2)........................... 1.9% 8.7% 12.5% 7.7% 6.0% 8.9%
Nominal devaluation (appreciation) of the real
against the U.S. dollar..................... 0.7% (22.3%) 34.3% 15.7% 8.5% 32.4%
------------------
(1) Indice Geral de Precos - Mercado (general price index) compiled by the
Fundacao Getulio Vargas.
(2) Indice de Precos ao Consumidor Amplo (consumer
price index) compiled by IBGE, the Brazilian Institute of Geography and
Statistics.
28
U.S. GAAP Presentation and Reporting Currency
Accounting Presentation
Our functional currency is the real. However, we have elected to
present our financial statements in U.S. dollars as our reporting currency,
which requires us to translate amounts from reais to U.S. dollars. For this
purpose, amounts in Brazilian currency for all periods presented have been
remeasured into U.S. dollars in accordance with the methodology set forth in
SFAS No. 52, "Foreign Currency Translation."
We remeasure all assets and liabilities into U.S. dollars at the
current exchange rate at each balance sheet date and all accounts in the
statements of operations and cash flows (including amounts relative to local
currency indexation and exchange variances on assets and liabilities denominated
in foreign currency, which were not translated prior to 1998), at the average
rates prevailing during each period. The net translation loss resulting from
this remeasurement process is included in the cumulative translation adjustment
account of shareholders' equity. See "- Effects of Exchange Rate Variation and
Inflation on Our Financial Condition and Results of Operations."
Effects of Exchange Rate Variation and Inflation on Our Financial
Condition and Results of Operations
The devaluation of the Brazilian real has had and will continue to have
multiple effects on our results of operations. Our statements of operations
expressed in local currency are translated monthly to U.S. dollars at the
monthly average rate published by the Central Bank of Brazil for the
corresponding period. The current period's U.S. dollar amount in the statements
of operations will be reduced at the same rate as the real has devalued in
relation to the U.S. dollar over the period to which it is being compared.
The devaluation of the real against the U.S. dollar has had the
following effects on our results of operations:
o Exchange gains and losses arising from our transactions in U.S. dollars
(excluding transactions which are covered by cross-currency interest
rate swaps) are recorded directly in our statement of operations.
Significant foreign exchange losses arose from our U.S.
dollar-denominated loans at the time of the devaluation of the real in
early 1999. Since the adoption of our treasury policy in late 1999
designed to mitigate the effects of foreign currency variations, we
have generally consummated cross-currency interest rate swaps to cover
the foreign exchange and interest rate risk on virtually all U.S.
dollar-denominated loans, foreign currency exposures and a part of
capital lease agreements. We have excluded from this policy our import
financing. Our foreign currency gains (losses) were US$47.0 million in
2003, US$(24.5) million in 2002 and US$(8.0) million in 2001. The
devaluation (appreciation) of the real was (22.3)% in 2003, 34.3% in
2002 and 15.7% in 2001.
o Any appreciation or depreciation of the real against the U.S. dollar
will be reflected as a charge directly to shareholders' equity,
included in the cumulative translation adjustment account. Accordingly,
in our statement of changes in shareholders' equity for 2003, we
recorded a US$209.8 million gain directly to shareholders' equity and
a US$505.0 million charge in 2002, without affecting net income, to
reflect the higher/lower dollar value of our net assets over the year
as the real appreciated by 22.3% in 2003 and devalued by 34.3% in 2002.
Inflation and exchange rate variations have had, and may continue to
have, effects on our financial condition and results of operations. One
significant effect of inflation and exchange rate variations on us relates to
our costs and operating expenses. Substantially all our cash costs (i.e., other
than depreciation and amortization) and operating expenses are in reais and tend
to increase with Brazilian inflation because our suppliers and service providers
generally increase prices to reflect Brazilian inflation. As expressed in U.S.
dollars, however, these increases are typically offset at least in part by the
effect of the appreciation of the U.S. dollar against the real. If the rate of
Brazilian inflation increases more rapidly than the rate of appreciation of the
U.S. dollar, then, as expressed in U.S. dollars, our costs and operating
expenses may increase and (assuming constant U.S. dollar sales prices) our
profit margins decrease. If the rate of appreciation of the U.S. dollar exceeds
the rate of inflation, then, as expressed in U.S. dollars, our costs and
operating expenses may decrease and, assuming constant U.S. dollar and sales
prices, our profit margins may increase.
29
The devaluation of the real affects the amount available for
distribution when measured in U.S. dollars. Amounts reported as available for
distribution in our statutory accounting records prepared under Brazilian GAAP
will decrease or increase when measured in U.S. dollars as the real depreciates
or appreciates, respectively, against the U.S. dollar. In addition, the
devaluation of the real creates foreign exchange losses which are included in
the results of operations determined under Brazilian GAAP which affect the
amount of unappropriated earnings available for distribution.
Since late 1999, we have adopted a treasury policy designed to manage
financial market risk, principally by "swapping" a substantial part of our U.S.
dollar-denominated liabilities for obligations denominated in reais. Our
treasury policy has been to swap all foreign currency debt at fixed rates for
reais debt at a fixed percentage of a floating rate, except for import financing
and a part of capital lease agreements.
We engage in cross-currency interest rate swaps under which we enter
into an agreement typically with the same counter-party which provides the
original U.S. dollar-denominated financing. A separate financial instrument is
signed at the time the loan agreement is consummated, under which we effectively
are then liable for amounts in reais and interest at a percentage of an
interbank (Certificado de Deposito Interbancario - CDI) variable interest rate.
The term of the swap contract matches the term of the underlying obligation; we
have not terminated any of our contracts prior to maturity. The counter-parties
to these contracts are major financial institutions that have acceptable credit
ratings. We do not have significant exposure to any single counter-party.
We use these derivative financial instruments for purposes other than
trading and do so only to manage and reduce our exposure to market risk
resulting from fluctuations in interest rates and foreign currency exchange
rates. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," introduced as from 2001, establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities and to
measure those instruments at fair value. The unrealized gain and loss from
foreign currency and interest rate swaps are recorded on our balance sheet.
These swap instruments do not qualify for deferral, hedge, accrual or settlement
accounting and are marked to market, with the resulting gains and losses
reflected in the statement of operations under "Financial income" and "Financial
expense." The fair values of our cross-currency interest rate swaps were
estimated based on market prices; prior to adoption of SFAS No. 133, we
recognized our cross-currency interest rate swaps on the balance sheet at
contract value, and adjustments to contract value were recorded through income.
We record both the interest expense from the original loan and the net
realized and unrealized effect of the results of the cross-currency interest
rate swaps under "Financial expense - interest expense."
If the results of applying the variation of the U.S. dollar plus the
original fixed coupon, that is, the original characteristics of the financial
instrument, exceed the product of applying the CDI rate, we record this benefit
reducing our "Financial expense - interest expense" to reflect the gain accruing
as a result of our having opted to swap the currency and interest rate
components. If the inverse were to occur, an additional charge is recorded under
"Financial expense - interest expense" to reflect the loss accruing as a result
of our having opted to swap the currency and interest rate components.
Accordingly, if the real devalues against the U.S. dollar, the cross-currency
interest rate swaps assure that we mitigate the effects of the loss from the
devaluation.
Tax Environment
We are currently involved in tax proceedings as discussed in note 17 to
our financial statements. We have accrued our estimate of the costs for the
resolution of these claims when we consider the loss of our claim to be probable
and for existing tax obligations under dispute. The tax contingencies relate
primarily to taxes on revenue, social security contributions and income tax. We
have identified probable losses and existing tax obligations under dispute in
the amount of US$397.5 million at December 31, 2003 which have been provided as
liabilities on our financial statements. This estimate has been developed in
consultation with outside legal counsel handling our defense in these matters
and is based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. We do not believe these tax proceedings
will have a material adverse effect on our financial position. It is possible,
however, that future results of operations could be materiall affected by
changes in our assumptions and the effectiveness of our strategies with respect
to these proceedings. For more information on our tax proceedings, see "Item 8 A
- Financial Information - Consolidated Financial Statements and Other Financial
Information - Legal Proceedings."
30
Income taxes in Brazil generally include federal income tax and social
contribution. The composite tax rate is 34%, comprised of income tax (15% plus a
surtax of 10% on taxable income exceeding R$20,000 per month, or R$60,000 per
quarter, or R$240,000 per year) and social contribution tax (9%). In June 1990,
we filed an injunction seeking protection for non-payment of the social
contribution, which we claimed to be unconstitutional based on the fact that
this tax should have been enacted by a complementary law to the Brazilian
constitution. We obtained a favorable decision from the lower court in March
1991. Although no appeal was presented by the federal government, pursuant to
Brazilian law, this lawsuit was submitted to mandatory review of the Regional
Federal Court, which in February 1992 confirmed the lower court's decision. As a
result, we do not pay the social contribution based on this February 1992
decision. Based on the opinion of our legal counsel, we believe the federal tax
authorities have no further legal recourse available to collect this
contribution on a retroactive basis. Nevertheless, the federal government may
still try to collect the unpaid social contribution on profits or replace the
current one by establishing a new social contribution on profits. Accordingly,
we have provided no social contribution tax for the periods presented.
Seasonality
We have historically experienced seasonality in our results of
operations, principally due to traditionally stronger sales in the fourth
quarter holiday season. Sales revenues in December are typically around twice as
much as the average sales revenues in the other months.
2003 Business and Economic Environment
In 2003, the Brazilian economy suffered periods of recession.
Therefore, in 2003 retailers were presented with an adverse environment facing
an increase in unemployment levels; a decrease in consumption by the customers;
changes in consumption habits, resulting from lower consumer incomes, stimulated
sales of second line products and private label brands to the detriment of
discretionary and high value-added items. According to the Brazilian Supermarket
Association (ABRAS), 2003 was the worst year for the Brazilian food industry
since 1991. Successive interest rate reductions and credit expansion have been
key for non-food products to start increasing their sales performance in the
fourth quarter and show first signs of recovery.
Certain Operating Data
The following table presents in U.S. dollars the net sales revenue for
each of our store formats for the years ended December 31, 2001, 2002 and 2003.
From December 31, 2001 to December 31, 2002, the real devalued against the U.S.
dollar by 34.3%. This significantly impairs the comparability of our December
31, 2001 and December 31, 2002 results with its respective prior period. Our
functional currency is the Brazilian real, and the reporting currency is the
U.S. dollar. As a result, a comparison of the 2002 U.S. dollar results against
2001 U.S. dollar results do not accurately reflect actual changes in our
operations that occurred from one period to the next, as the case may be,
because the changes include the effects of the devaluation. To mitigate these
distortions when comparing our net sales revenue and to isolate the currency
effects from the trend analysis, the December 31, 2001 financial information in
the "constant dollars" column has been translated at the average exchange rates
used to translate the December 31, 2002 financial information. Had the financial
information for the year ended December 31, 2002 been presented in "constant
dollars" of 2003, the analysis of results would not be significantly different
from that presented.
Year Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
------------------- --------------- -------------------------------------
constant Dollars
2002 average
Actual Actual exchange rate Actual
------------------- --------------- ----------------- -------------------
(millions of U.S. dollars, except percentage amounts)
Net sales revenue by store format:
Pao de Acucar.............. $1,121.4 31.7% $976.8 30.0% $905.9 32.5% $1,142.2 32.5%
Extra..................... 1,701.6 48.1 1,526.7 46.9 1,344.0 48.2 1,694.5 48.2
Extra Eletro.............. 83.2 2.4 114.6 3.5 162.2 5.8 204.5 5.8
Comprebem Barateiro....... 628.4 17.8 529.9 16.3 376.1 13.5 474.2 13.5
Se and CompreBem(1)....... - - 109.6 3.3 - - - -
-------- ------ -------- ------ -------- ------ -------- ------
Total net sales revenue... $3,534.6 100.0% $3,257.6 100.0% $2,788.2 100.0% $3,515.4 100.0%
======== ====== ======== ====== ======== ====== ======== ======
_______________________
(1) We converted these stores into Pao de Acucar and CompreBem Barateiro store
formats during 2003.
31
Results of Operations for 2003, 2002 and 2001
The following table summarizes our historical results of operations for
the years ended December 31, 2001, 2002 and 2003. To mitigate the distortions of
the devaluation of the real described above when comparing our financial
information and to isolate the currency effects from the trend analyses, the
December 31, 2001 financial information in the "constant dollars" column has
been translated at the average exchange rates used to translate the December 31,
2002 financial information.
Year Ended December 31,
---------------------------------------------------------------------------
2003 2002 2001
---------------- ----------------- --------------------------------------
constant Dollars
2002 average
Actual Actual exchange rate Actual
----------------- ----------------- ------------------ ------------------
Net sales revenue...........$3,534.6 100.0% $3,257.6 100.0% $2,788.2 100.0% $3,515.4 100.0%
Cost of sales...............(2,538.1) (71.8) (2,345.2) (72.0) (1,988.2) (71.3) (2,506.8) (71.3)
------- ----- -------- ----- -------- ------ -------- ------
Gross profit................ 996.5 28.2 912.4 28.0 800.0 28.7 1,008.6 28.7
Selling, general and
administrative expenses (695.3) (19.7) (660.4) (20.3) (589.9) (21.2) (743.7) (21.2)
Depreciation and (115.5) (3.3) (107.8) (3.3) (116.0) (4.2) (146.2) (4.2)
amortization............
Other operating
income, net................ 2.4 0.1 1.5 0.1 0.6 0.1 0.7 0.1
--------- ------- -------- ------- -------- ------- --------- -------
Operating income............ 188.1 5.3 145.7 4.5 94.7 3.4 119.4 3.4
Financial income............ 179.3 5.1 158.3 4.9 112.9 4.0 142.3 4.0
Financial expense........... (221.5) (6.3) (222.9) (6.8) (128.2) (4.6) (161.7) (4.6)
Income before
income taxes............ 145.9 4.1 81.1 2.6 79.4 2.8 100.0 2.8
Income tax (expense)
benefit:
Current................. (7.9) (0.2) (11.8) (0.4) (13.1) (0.5) (16.5) (0.5)
Deferred................ (25.1) (0.7) (8.8) (0.3) 13.6 0.6 17.2 0.6
--------- ------- -------- ------- -------- -------- --------- -------
Net income.................. $112.9 3.2% $60.5 1.9% $79.9 2.9% $100.7 2.9%
========= ======= ======== ======= ======== ======== ========= =======
Year Ended December 31, 2003 (Actual) Compared to Year Ended December 31, 2002
(Actual)
Net Sales Revenue. Net sales revenue increased by 8.5% to US$3,534.6
million in the year ended December 31, 2003 from US$3,257.6 million in the year
ended December 31, 2002. Our Se and CompreBem stores were conveted into Pao de
Acucar and CompreBem Barateiro stores during 2003 and their sales are now
included within their new respective divisions. On a "same store" basis, our net
sales revenue increased by 0.4% from 2002 to 2003, as explained below by each of
our divisions.
The Pao de Acucar division's net sales revenue increased by 14.8% to
US$1,121.4 million in 2003 from US$976.8 million in 2002, due mostly from sales
of converted stores from other banners.
The Extra division's net sales revenue increased by 11.5% to US$1,701.6
million in 2003 from US$1,526.7 million in 2002, principally as a result of the
opening of new stores in late 2002 and 2003.
The CompreBem Barateiro division's net sales revenue increased by 18.6%
to US$628.3 million in 2003 from US$529.9 million in 2002, principally as a
result of sales from stores converted from other banners and to a lesser extent
due to the opening new stores.
The net sales revenue of Extra Eletro stores decreased by 27.4% to
US$83.2 million in 2003 from US$114.6 million in 2002. The performance of the
Extra Eletro stores was adversely affected by increased interest rates and the
lower confidence level of Brazilian consumers, which adversely affected sales of
household appliances and consumer electronic products in particular. In
addition, the net sales of Extra Eletro stores decreased as a result of the
closing of some stores during 2003.
32
Gross Profit. Gross profit increased by 9.2% to US$996.5 million in
2003 from US$912.4 million in 2002. The gross profit registered resulted from
the combination of efficient price management, gains of scale with suppliers,
besides an increase in sales of higher margin items, such as second line
products and private brands. Gross profit as a percentage of net sales revenue
increased slightly to 28.2% in 2003 from 28.0% in 2002, despite a more
aggressive pricing policy.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses include personnel, marketing, rent and other expenses.
Selling, general and administrative expenses increased by 5.3% to US$695.3
million in 2003 from US$660.4 million in 2002, principally as a result of the
increase in the number of our stores in late 2002 and in 2003. As a percentage
of net sales revenue, selling, general and administrative expenses was 19.7% in
2003 and 20.3% in 2002.
Depreciation and Amortization. Depreciation and amortization increased
by 7.1% to US$115.5 million in 2003 from US$107.8 million in 2002, principally
due to an increase in depreciation from the remodeling and re-equipping of some
existing stores in late 2002 and in 2003, the opening of new stores in late 2002
and in 2003 and our continued investment in information technology and
distribution centers.
Operating Income. Operating income increased by 29.1% to US$188.1
million in 2003 from US$145.7 million in 2002, as a result of the effects
described above.
Financial Income. Financial income increased by 13.3% to US$179.3
million in 2003 from US$158.3 million in 2002, principally due to increased
interest income on our cash equivalents balances and interest income on our
credit sales, despite the decrease of interest rates in the second half of 2003.
Financial Expenses. Financial expenses decreased by 0.6% to US$221.5
million in 2003 from US$222.9 million in 2002, resulting from lower funding
rates and the decrease of interest rates in the second half of 2003, and the
foreign exchange gain on our foreign exchange denominated loans by the
appreciation of the real in 2003, which were partially offset by the interest
expense from the fifth issue of debentures issued in late 2002.
Income Before Taxes. Income before taxes increased by 79.9% to US$145.9
million in 2003 from US$81.1 million in 2002 due to the effects described above.
Income Tax Benefits (Expense). In 2003, we had an income tax expense of
US$33.0 million as compared to an income tax expense of US$20.6 million for
2002. The increase is due to a higher taxable income in 2003 as compared to
2002. As a percentage of income before income taxes, income tax expense was
22.6% in 2003 and 25.4% in 2002. Our effective tax rate in 2003 was decreased by
the reversal of valuation allowances held against net operating loss
carryforwards of US$5.7 million which were no longer considered to be necessary
in 2003.
Net Income. Net income increased by 86.6% to US$112.9 million in 2003
from US$60.5 million in 2002.
Year Ended December 31, 2002 (Actual) Compared to Year Ended December 31, 2001
(Constant Dollars)
Net Sales Revenue. Net sales revenue increased by 16.8% to US$3,257.6
million in the year ended December 31, 2002 from US$2,788.2 million in the year
ended December 31, 2001. On a "same store" basis, our net sales revenue
increased by 4.3% from 2001 to 2002.
The Pao de Acucar division's net sales revenue increased by 7.8% to
US$976.8 million in 2002 from US$905.9 million in 2001, principally as a result
of the opening of new stores in 2002 and increased sales from stores we updated
and refurbished. The lower confidence level of Brazilian consumers in 2002 did
not negatively affect the sales of the division because of the relative
stability of its target public's consumption habits.
The Extra division's net sales revenue increased by 13.6% to US$1,526.7
million in 2002 from US$1,344.0 million in 2001, principally as a result of the
opening of new stores in 2002 and the inclusion in 2002 of full year sales
revenue of stores opened in late 2001. Despite the increase in net sales
revenue, the Extra division's performance was adversely affected by the economic
uncertainty in Brazil and the resulting increased interest rates and lower
consumer confidence level. As a result, Brazilian consumers avoided credit
purchases, which affected sales of household appliances and consumer electronic
products in particular.
33
The Comprebem Barateiro division's net sales revenue increased by 40.9%
to US$529.9 million in 2002 from US$376.1 million in 2001, principally as a
result of the inclusion in 2002 of full year sales revenue of the ABC
Supermercados stores we acquired in November 2001, increased sales in the
division's stores as a result of customers' positive response to the relaunching
in 2001 of this format, and the opening of new stores.
The net sales revenue of Extra Eletro stores decreased by 29.3% to
US$114.6 million in 2002 from US$162.2 million in 2001. The performance of the
Extra Eletro stores was adversely affected by increased interest rates and the
lower confidence level of Brazilian consumers, which adversely affected sales of
household appliances and consumer electronic products in particular. In
addition, the net sales of Extra Eletro stores decreased as a result of the
closing of some stores during 2002.
Gross Profit. Gross profit increased by 14.1% to US$912.4 million in
2002 from US$800.0 million in 2001. Gross profit increased as a result of
increased sales, economies of scale gains resulting from more favorable
negotiations with our suppliers, efficiency gains from the restructuring of our
category management operations begun in 2001 and a reduction in shrinkage. Gross
profit as a percentage of net sales revenue decreased slightly to 28.0% in 2002
from 28.7% in 2001 due to our investment in price competitiveness, which
resulted in stronger sales, a higher market share and a dilution of operational
expenses. Our price competitiveness was particularly evident in the last quarter
of 2002 when we celebrated the anniversary of the Extra division, during which
we offered special promotions.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses include personnel, marketing, rent and other expenses.
Selling, general and administrative expenses increased by 12.0% to US$660.4
million in 2002 from US$589.9 million in 2001, principally as a result of the
increase in the number of our stores, including the Se Supermercados stores we
acquired in June 2002, and an increase in expenses from the integration of the
Se chain. As a percentage of net sales revenue, selling, general and
administrative expenses was 20.3% in 2002 and 21.2% in 2001.
Depreciation and Amortization. Depreciation and amortization decreased
by 7.1% to US$107.8 million in 2002 from US$116.0 million in 2001, principally
due to the ceasing of amortizing goodwill on January 1, 2002 upon the adoption
of SFAS No. 142, despite an increase in depreciation from the remodeling and
re-equipping of some existing stores, the opening of new stores and our
continued investment in information technology and distribution centers. The
amortization of goodwill expense was US$20.3 million in 2001.
Operating Income. Operating income increased by 53.9% to US$145.7
million in 2002 from US$94.7 million in 2001, as a result of the effects
described above.
Financial Income. Financial income increased by 40.2% to US$158.3
million in 2002 from US$112.9 million in 2001, principally due to increased
interest income on our cash balances as a result of higher interest rates.
Financial Expenses. Financial expenses increased by 73.9% to US$222.9
million in 2002 from US$128.2 million in 2001, resulting from higher interest
rates, increased interest expense in connection with the assumption of debt
resulting from our acquisition of Se Supermercados and our issuance of
debentures in October 2002.
Income Before Taxes. Income before taxes increased by 21.4% to US$81.1
million in 2002 from US$79.4 million in 2001 due to the effects described above.
Income Tax Benefits (Expense). In 2002, we had an income tax expense of
US$20.6 million as compared to an income tax benefit of US$0.5 million for 2001.
Our effective tax rate in 2002 was increased by the deferred income tax expense
of US$8.8 million.
Net Income. Net income was US$60.5 million in 2002 against US$79.9
million in 2001 as a result of the foregoing.
5B. Liquidity and Capital Resources
We have funded our operations and capital expenditures principally from
operating cash flows, loans obtained from the Brazilian National Bank for
Economic and Social Development, or BNDES and issuances of
34
debentures. At December 31, 2003, we had US$339.9 million in cash and cash
equivalents. We have a policy of maintaining substantial cash and cash
equivalents in order to be in a position to respond immediately to liquidity
requirements. In addition, we borrow funds from local Brazilian banks
approximately equivalent to the consumer credit financing we extend through our
Extra Eletro and Extra formats and our post-dated check programs for Pao de
Acucar, Comprebem Barateiro and Extra and we also securitize receivables. Our
fixed rate consumer financing through the Extra Eletro and Extra formats is
generally for a term of up to 24 months (with the average term being
approximately 10 months at December 31, 2003.) Our post-dated check programs
provide our customers with financing for up to 60 days (with an average of 45
days at December 31, 2003). In 2003, we noted that customers tended to use
principally credit cards as a method of credit purchase instead of installment
sales and post-dated checks.
Our principal cash requirements include:
o the servicing of our indebtedness,
o capital expenditures, including the construction and remodeling of new
stores and investments in our infra-structure,
o consumer credit,
o acquisitions of other supermarket chains, and
o distributions of dividends and interest attributed to equity to
shareholders.
Our primary sources of liquidity have historically been cash flows from
operating activities and borrowings. Net cash from operating activities were
US$231.6 million in 2003, US$166.5 million in 2002 and US$119.2 million in 2001.
Net cash provided by (used in) financing was US$(61.3) million in 2003 (after
payment of US$20.6 million of dividends), US$181.6 million in 2002 (after
payment of US$21.2 million of dividends) and US$113.8 million in 2001 (after
payment of US$59.1 million in interest attributed to equity to shareholders). In
2003, these cash flows were primarily used for investments in the capital
expenditures program totaling US$185.2 million.
At December 31, 2003, our total outstanding debt was US$843.3 million,
consisting of:
o US$383.3 million of real-denominated loans,
o US$433.5 million of U.S. dollar-denominated debt, and
o US$26.5 million of debt linked to a basket of foreign currencies to
reflect BNDES' funding portfolio, plus an annual spread.
At December 31, 2003, of the US$433.5 million of U.S.
dollar-denominated debt, approximately US$428.9 million was covered by swaps
into reais, of which US$228.3 million has been treated on a combined basis
pursuant to EITF No. 02-02, "When Separate Contracts that Meet the Definition of
Financial Instruments Should Be Combined for Accounting Purposes," as if these
loans had been originally denominated in reais and accrued an interbank variable
rate (CDI). In addition, we have US$26.5 million of debt to BNDES that is linked
to a basket of foreign currencies, for which we have swap agreements to mitigate
foreign currency risk. Since late 1999, we have adopted a treasury policy to
manage financial market risk, principally by entering into swaps into reais for
a substantial part of our U.S. dollar-denominated liabilities. We engage in
cross-currency interest rate swaps under which we enter into an agreement
typically with the same counter-party which provides the original U.S.
dollar-denominated financing. A separate financial instrument is signed at the
time the loan agreement is consummated, under which we effectively are then
liable for amounts in reais and interest at a percentage of an interbank
variable interest rate (CDI). The reference amounts and maturity periods of
these swaps normally correspond to the original U.S. dollar-denominated loan.
This policy protects us against losses resulting from currency devaluations.
We may in the future enter into cross-currency swap agreements and
other swap transactions designed to manage our remaining exposure to foreign
currency liabilities, namely our import-finance credit lines.
35
Total debt at December 31, 2003 decreased by US$2.6 million from
US$845.9 million at December 31, 2002. Our most significant debt was incurred in
connection with the acquisition and construction of new stores and the
remodeling of existing stores. Our cash interest expense was US$149.0 million in
2003, US$122.3 million in 2002 and US$102.6 million in 2001. The US$26.7 million
increase in cash interest expense in 2003 related directly to the exchange
effects by the appreciation of the real against the U.S. dollar in 2003 which
offset the decrease of interest rates in the second half of 2003.
Several banks provide us short-term financing; of these, five banks,
ABN, Citibank, Rabobank, Safra and Santander, individually represent greater
than 10% of the total amount of short-term debt outstanding as of December 31,
2003. Although we have no committed lines of credit with these banks, our
management believes we are in good standing with our lenders and have sufficient
available credit for our needs. These short-term U.S. dollar-denominated
financings are guaranteed by our controlling shareholders by signing a
promissory note as guarantors.
Our long-term debt net of current portion aggregated US$230.0 million
and US$385.1 million at December 31, 2003 and 2002. The balance consists
primarily of long-term expansion program loans from BNDES, working capital loans
from Brazilian banks and debentures we issued.
We have entered into nine lines of credit agreements with BNDES, which
are either denominated in reais and subject to indexation based on the TJLP plus
an annual spread or are denominated based on a basket of foreign currencies to
reflect BNDES' funding portfolio, plus an annual spread. Amortizations will be
in monthly installments after a grace period. BNDES has been historically an
important source of financing for new stores and the acquisition of supermarket
chains. For more information regarding our lines of credit with BNDES, see note
13(i) to our financial statements.
In the event the TJLP, or Taxa de Juros de Longo Prazo, a nominal
long-term interest rate that includes an inflation factor, exceeds 6% per annum,
the surplus is added to the principal. In 2003 and 2002, US$5.9 million and
US$5.2 million, respectively, were added to the principal.
We cannot offer any assets as collateral for loans to other parties
without the prior authorization of BNDES and must comply with the following
negative covenants measured in accordance with Brazilian GAAP: (i) maintain a
capitalization ratio (shareholders' equity/total assets) equal to or in excess
of 0.40 and (ii) maintain a current ratio (current assets/current liabilities)
equal to or in excess of 1.05. The controlling shareholders provided sureties
with respect to the amount drawn down.
We issued a number of convertible and non-convertible debentures
between 1997 and 2002, some of which have since been converted to our non-voting
preferred shares. At December 31, 2003, the fourth and fifth issues were still
outstanding in part.
In 2000, we issued the fourth issue of convertible debentures due
August 2005. At December 31, 2003, we had 99,908 convertible debentures
outstanding from our fourth issue, totaling US$28.4 million. Only 92 of the
convertible debentures from our fourth issue have been converted into preferred
shares of our capital stock. We received proceeds equivalent to US$52.5 million,
net of commissions of US$0.4 million. The debentures are indexed to the TJLP and
accrue annual interest at 3.5% which is payable annually. The portion of TJLP
exceeding 4.5% will be capitalized and added to the nominal value of debentures
on the dates of interest payment. The debentures may be converted into preferred
shares, at the option of the debentureholder, based on the following ratios: (i)
September 1, 2000 to August 30, 2003 at 12,821 shares per R$1,000 principal
amount, (ii) August 31, 2003 to August 30, 2004 at 8,552 shares per R$1,000
principal amount and (iii) August 31, 2004 to August 31, 2005 at 4,282 shares
per R$1,000 principal amount, all subject to adjustment for stock dividends,
stock splits and reverse splits.
On October 4, 2002, the shareholders approved the fifth issue and
public placement of debentures. We received proceeds equivalent to US$112.8
million, net of commissions of US$1.6 million, for 40,149 non-convertible
debentures issued as the first series of this fifth issue. The debentures are
indexed to the average rate of CDI and accrue an annual spread of 1.45% which is
payable semi-annually. The remuneration of the first series may be renegotiated
or a put may be exercised in October 2004. The debentures mature on October 1,
2007. At December 31, 2003, we had 40,149 non-convertible debentures outstanding
from the first series of our fifth issue, totaling US$145.5 million. We are
required to comply with the following negative covenants measured in accordance
with Brazilian GAAP: (i) net debt (debt less cash and cash equivalents and
accounts receivable) no
36
higher than the balance of shareholders' equity; and (ii) maintenance of a ratio
between net debt and EBITDA less than or equal to four.
For more information on our convertible and non-convertible debentures,
see note 13(ii) to our financial statements.
On September 19, 2003, we concluded the structure of "Pao de Acucar
Fundo de Investimento em Direitos Creditorios" (or "PAFIDC"), a receivables
securitization fund. The PAFIDC has duration of five years, renewable for one
additional five-year period, beginning from the date of the first subscription
of quotas. The capital structure of the PAFIDC is composed of 80% senior quotas
and 20% subordinated quotas. Senior quotas will be divided in two series: Series
A for which the benchmark remuneration (i) was 103% of CDI (Certificado de
Deposito Interbancario), an interbank variable interest rate, during the period
beginning on the date of the first subscription of quotas and ending on February
20, 2004 and (ii) is 105% of CDI as from February 21, 2004; and Series B for
which the benchmark remuneration is 101% of CDI. The holders of senior quotas
series B will redeem both on June 23, 2006 and June 23, 2007, the principal
amount of US$ 24.8 million, and will redeem the remaining balance at the end of
the fund's duration. The series A quotaholders will redeem their quotas at the
end of the fund's duration. Upon consolidation of PAFIDC, senior quotas are
recorded as mandatory redeemable equity interest in securitization fund.
Subordinated quotas have a single series. Beginning in February 2004, the quotas
are nominative and could be listed for negotiation the over-the-counter market.
We hold a retained interest of 20% (subordinated quotas) and will redeem the
subordinated quotas only after the redemption of senior quotas (or at the end of
the PAFIDC's duration). Subordinated quotas are non-transferable and nominative.
Once the senior quotas have been remunerated, the subordinated quotas receive
the balance of the PAFIDC's net assets after absorbing any default on the credit
rights transferred to PAFIDC and any losses attributed to the PAFIDC.
In October 2003, we invested US$ 34.9 million in subordinated quotas of
PAFIDC and transferred credit rights to the securitization fund and received US$
158.3 million in cash. From October through December 31, 2003, we transferred to
PAFIDC customer credit financing, post-dated check credit sales and accounts
receivable from credit card companies, in securitization transactions totaling
US$ 440.8 million, the outstanding balance of these receivables at December 31,
2003 was US$ 155.7 million. For all securitizations, we retained servicing
responsibilities and subordinated interests. The delinquent credits will be
collected by the PAFIDC's administrator which will be assisted by our collection
department, for which we do not receive fees for such service. The quotaholders
of senior quotas have no recourse to our other assets for failure of debtors to
pay when due. As defined in the agreement between us and the PAFIDC, the
transfer of credit rights is irrevocable, non-retroactive and the transfer is
definitive and not enforceable against us.
PAFIDC is an investment fund that is a variable interest entity (VIE)
as defined under FASB Interpretation No. 46R, "Consolidation of Variable
Interest Entities, (revised December 2003)" and has been consolidated in our
financial statements. At December 31, 2003, our retained interest in
subordinated quotas, in the amount of US$ 36.2 million, represents our maximum
exposure to loss under the securitization transactions.
We continue to implement our capital expansion and investment plan and
currently intend to invest approximately R$500.0 million in new projects
(equivalent at the December 31, 2003 exchange rate to US$173.1 million), which
includes R$200.0 million (equivalent at the December 31, 2003 exchange rate to
US$69.2 million) for the opening of new stores, R$140.0 million (equivalent at
the December 31, 2003 exchange rate to US$48.5 million) for store remodeling,
R$60.0 million (equivalent at the December 31, 2003 exchange rate to US$20.8
million) for technology and R$100.0 million (equivalent at the December 31, 2003
exchange rate to US$34.6 million) for other investments.
In 2003, our capital expenditures were US$185.2 million. These
investment projects were financed primarily from our operating cash flow and, to
a lesser extent, by third parties. Our capital expenditures were US$348.4
million for 2002 and US$275.2 million for 2001. For specific use of our capital
expenditures in 2003, see "Item 4B - Information on the Company - Business
Overview - Capital Expansion and Investment Plan."
We believe that existing resources and operating income will be
sufficient to complete the capital expansion and investment program described
above and meet our liquidity requirements. However, our capital expansion and
investment plan is subject to a number of contingencies, many of which are
beyond our control, including the continued growth and stability of the
Brazilian economy. We cannot assure you that we will successfully complete all
of or any portion of our capital expansion and investment plan. In addition, we
may
37
participate in acquisitions not budgeted in the capital expansion and investment
plan, and we may modify these plans.
5C. Research and Development, Patents and Licenses, Etc.
We do not have any significant research and development policies.
5D. Trend Information
The trends which influence our sales are primarily the patterns of
consumer purchases through the year and the effects on consumer disposable
incomes of such factors as economic conditions, consumer confidence, level of
employment and credit conditions.
5E. Off-balance sheet arrangements
We do not maintain any off-balance sheet transactions, arrangements,
obligations or other relationships with unconsolidated entities or others that
are reasonably likely to have a material current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
5F. Tabular disclosure of contractual obligations
The following table summarizes significant contractual obligations and
commitments at December 31, 2003 that have an impact on our liquidity:
Payment Due by Period
---------------------
Less than One to Three to After five
Contractual Obligations Total one year three years five years years
----------------------- ----- --------- ----------- ---------- ---------
(in millions of U.S. dollars)
Long-term debt...................... $600.9 $370.9 $192.2 $37.8 $--
Taxes, other than on income......... 52.3 15.0 9.0 8.7 19.6
Capital lease obligations........... 15.9 9.3 6.6 -- --
Operating leases.................... 360.2 66.5 117.5 92.1 84.1
Other............................... 2.7 -- 2.7 -- --
Total contractual obligations... $1,032.0 $461.7 $328.0 $138.6 $103.7
In addition, we have made provisions for total accrued liability for
legal proceedings related to some of our unpaid taxes of US$397.5 million at
December 31, 2003. Furthermore, see "Item 5B - Liquidity and Capital Resources"
for more information on the mandatory redeemable equity interest in
securitization fund (PAFIDC).
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A, 6B and 6C. Directors and Senior Management, Compensation and Board
Practices
We are managed by our Conselho de Administracao, or board of directors,
and our Diretoria, or board of executive officers.
In February 2003, our shareholders approved our corporate management
structure reorganization at a general shareholders' meeting. As a result of the
reorganization, three new committees were created to support the management
bodies: the executive committee, the financial committee and the development and
marketing committee, all of which are described more fully below.
38
In connection with this reorganization, our then controlling
shareholders relinquished their executive officer positions in order to become
board members. The founding shareholder, Mr. Valentim dos Santos Diniz, became
the Honorary Chairman of the board of directors. In March 2003, Abilio Diniz
ceased being our Chief Executive Officer and became the Chairman of the board of
directors. Mr. Augusto Marques da Cruz Filho, the former Administrative and
Financial Vice President, assumed the Chief Executive Officer position. The
Administrative and Financial Vice President position was eliminated and instead
divided into two newly-created positions - the Administrative Officer and the
Financial and Controller Officer positions.
At our general shareholders' meeting on February 28, 2003, our
shareholders appointed new members to our board of directors and renewed the
mandate of existing board members. On the same date, our directors appointed new
executive officers and renewed the mandate of existing officers.
As a result of our general shareholders' meeting held on April 30,
2004, our board of directors currently consists of fifteen members and one
honorary member.
Board of Directors
Our board of directors generally meets at least six times per year. The
members of our board of directors are appointed at general shareholders'
meetings, serve for three-year terms and are required to be our shareholders.
The board's responsibilities include leading the corporate governance process,
electing our executive officers and supervising our management. Although our
by-laws allow for up to 18 Directors, our board of directors currently consists
of one honorary member and fifteen members, consisting of four controlling
shareholders, eight external non-executive counselors, two representatives of
our minority shareholder the Casino Group and the President of our company, all
of whose term of office ends in 2006. Our board of directors is currently made
up of the following members:
--------------------------------------------------- ---------------------------
Name Position Since
Valentim dos Santos Diniz(1) Honorary Chairman 2003
Abilio dos Santos Diniz(2) Chairman 2003
Ana Maria Falleiros dos Santos Diniz D'Avila Director 2002
Joao Paulo Falleiros dos Santos Diniz Director 1999
Pedro Paulo Falleiros dos Santos Diniz Director 2003
Augusto Marques da Cruz Filho Director 1995
Arthur Antonio Sendas Director 2004
Christian Pierre Couvreux Director 1999
Fernao Carlos Botelho Bracher Director 1995
Gerald Dinu Reiss Director 1995
Jose Roberto Mendonca de Barros Director 1999
Luiz Carlos Bresser Goncalves Pereira Director 1999
Mailson Ferreira da Nobrega Director 1995
Maria Silvia Bastos Marques Director 2003
Pierre Bruno Charles Bouchut Director 1999
Roberto Teixeira da Costa Director 1995
_______________
(1) Valentim dos Santos Diniz had been our Chairman since 1995 until his
appointment as our Honorary Chairman in 2003.
(2) Abilio dos Santos Diniz had been a director of our board of directors from
1995 until 1999 when he became Vice-Chairman and in 2003 he became
Chairman of our board.
Executive Officers
Our executive officers are responsible for the execution of decisions
of our board of directors and our day-to-day management. Each executive officer
also has individual responsibilities that are determined pursuant to our
by-laws.
39
The responsibilities of our executive officers include adopting plans
and rules related to our management and operations, reporting to stockholders
each fiscal year on the status of our business activities and presenting the
year-end balance sheets and other legally required financial statements,
submitting investment programs and budgets to our board of directors.
Our executive officers are elected by our board of directors for
three-year terms, although any executive officer may be removed by our board of
directors before the expiration of his or her term. The current term of all our
executive officers ends in 2006. At our board of director' meeting held on
February 4, 2004, two members of our executive officers were appointed, Mr.
Eneas Cesar Pestana Neto and Mr. Leonardo de Paiva Rocha. Our executive officers
are currently as follows:
Name Position
Augusto Marques da Cruz Filho Chief Executive Officer
Caio Racy Mattar Investment and Construction Officer
Cesar Suaki dos Santos Supply Chain Officer
Eneas Cesar Pestana Neto Administrative Officer
Fernando Queiroz Tracanella Investor Relations Officer
Hugo A. Jordao Bethlem Commercial Officer
Jean Henri A. Duboc(1) Hypermarket Division Officer
Jose Roberto C. Tambasco Supermarket Division Officer
Leonardo de Paiva Rocha(2) Chief Financial Officer and Controller Officer
Maria Aparecida Fonseca Human Resources Officer
_______________
(1) Although Jean Henri A. Duboc was indicated for the position of officer
in 2003, he officially became our Hypermarket Division Officer on May
12, 2004, since his definitive appointment depended on the approval by
the Brazilian authorities of his permanent working visa.
(2) Leonardo de Paiva Rocha was removed from his position in June 2004.
Board of Auditors
Under the Brazilian corporate law and our by-laws, we are not required
to, and currently do not, maintain a permanent board of auditors (conselho
fiscal). However, we are required to establish a board of auditors upon the
request of shareholders who, in the aggregate, hold at least 10% of the common
shares or 5% of the preferred shares. Any such board of auditors would consist
of three to five members and an equal number of alternates. The members of the
board of auditors would be elected, at the maximum, for one-year terms, but
could be reelected. Holders of preferred shares, voting as a class, would be
entitled to elect one member (and his or her alternate) by majority vote of the
shareholders present at the meeting at which members of the board of auditors
are elected, and holders of common shares would be entitled to elect the other
members (and their respective alternates).
Audit Committee
On June 13, 2000, our board of directors approved the creation of an
audit committee (comite de supervisao), whose responsibilities are consistent
with the U.S. Blue Ribbon Committee and the rules and regulations of the New
York Stock Exchange. The primary responsibility of the audit committee, which is
independent of our management (except for Mr. Augusto Marques da Cruz Filho who
is our chief executive officer) and of our independent auditors, is to review
our financial statements and report on them to our shareholders. Our audit
committee is comprised of three to five members, which are elected by the board
of directors for a period of three years. The audit committee charter requires
that one member be independent. Our audit committee is composed by Gerald Dinu
Reiss, as President, Roberto Teixeira da Costa, as Vice-President, and Augusto
Marques da Cruz Filho, as member, appointed on June 23, 2003 for a period of
three years ending on June 23, 2006.
Consulting Committee
Our by-laws provide for an ad hoc consulting committee of up to 13
members, whose purpose is to make recommendations to our board of directors on
certain matters. The current term of all members of our consulting committee is
three years. Our consulting committee was elected by our shareholders on
February 28, 2003 and is
40
comprised of the following members: Manuel Carlos Teixeira de Abreu, Jose Luiz
Bulhoes Pedreira Neto, Candido Botelho Bracher, Luiz Felipe Chaves D'Avila and
Luiz Marcelo Dias Sales.
Executive Committee
The executive committee was created in February 2003 as part of the
reorganization of our corporate management structure. The executive committee
meets on a monthly basis, and its duties include preparing, together with the
executive officers, our annual budget and annual capital expansion and
investment plan, and subsequently presenting them to the board of directors,
presenting the proposed compensation of our administrators to the board of
directors, and reviewing, together with the executive officers, our financial
statements. According to our by-laws, the committee must have between four to
seven members, as well as a coordinator, all of whom are elected by the board
and serve for a three-year term. Our executive committee currently consists of
Abilio Diniz, who is the coordinator of the committee, Ana Maria Diniz D'Avila,
Candido Botelho Bracher, Francis Mauger, Gerald Dinu Reiss, Joao Paulo Diniz,
Luiz Carlos Bresser G. Pereira and Maria Silvia Bastos Marques.
Financial Committee
The financial committee was also created in connection with the
reorganization of our corporate management structure. The financial committee
will meet bi-monthly to review and analyze the financial situation of our
company by examining indicators such as cash flow, capital investments and the
average cost of our capital structure. The committee also oversees, in
conjunction with the executive officers, the implementation of our annual
capital expansion and investment plan. According to our by-laws, the committee
must have between four to seven members, as well as a coordinator, all of whom
are elected by the board and serve for a three-year term. Our financial
committee currently consists of Ana Maria Diniz, who is the coordinator of the
committee, Abilio Diniz, Joao Paulo Diniz and Pedro Paulo Diniz.
Development and Marketing Committee
The development and marketing committee was the third committee created
as part of the reorganization of our corporate management structure. This
committee meets bi-monthly to examine, create and implement, together with the
executive officers, marketing methodologies and strategies. According to our
by-laws, the committee must have between four to seven members, as well as a
coordinator, all of whom are elected by the board and serve for a three-year
term. Our development and marketing committee currently consists of Joao Paulo
Diniz, who is the coordinator of the committee, Abilio Diniz, Ana Maria Diniz,
Pedro Paulo Diniz and Luiz Salles.
Biographical Information
Mr. Valentim dos Santos Diniz is the Honorary Chairman of our board of
directors. Mr. Diniz founded the Pao de Acucar Group in 1948 and currently is
the Chairman of PAIC.
Mr. Abilio dos Santos Diniz is the Chairman of our board of directors.
Mr. Abilio Diniz was one of the founders of Sao Paulo's supermarket association,
and was also a founder of ABRAS. He is a former member of the Brazilian National
Monetary Council. Mr. Abilio Diniz holds a bachelor's degree in Business
Administration from Fundacao Getulio Vargas and has attended Columbia University
in New York and the University of Ohio at Dayton. Mr. Abilio Diniz is the son of
Mr. Valentim dos Santos Diniz.
Mrs. Ana Maria Falleiros dos Santos Diniz D'Avila is a member of our
board of directors. She has a bachelor's degree in Business Administration from
Fundacao Armando Alvares Penteado (FAAP) and post-graduate degree in Marketing
from Fundacao Getulio Vargas and from FAAP. Mrs. Diniz D'Avila is the daughter
of Mr. Abilio Diniz.
Mr. Joao Paulo Falleiros dos Santos Diniz is a member of our board of
directors. Mr. Joao Paulo Diniz began his career with us in 1985. He was an
executive officer in charge of our associated companies and our International
Division. Mr. Joao Paulo Diniz has a bachelor's degree in Business
Administration from Fundacao Getulio Vargas and has attended the London Business
School. Mr. Joao Paulo Diniz is the son of Mr. Abilio Diniz.
41
Mr. Pedro Paulo Falleiros dos Santos Diniz is a member of our board of
directors. Mr. Pedro Paulo Diniz began his career with us in 2003. Mr. Pedro
Paulo Diniz is a businessman and the president of PPD Sports. Mr. Pedro Paulo
Diniz is the son of Mr. Abilio Diniz.
Mr. Augusto Marques da Cruz Filho is a member of our board of directors
and our Chief Executive Officer. He has been employed by us since September
1994. Mr. Marques da Cruz Filho is a former Finance Director of Tintas Coral
S.A. of the Bunge Born Group. Mr. Marques da Cruz Filho was also a member of the
board of directors of Arafertil ISF - Ipiranga Serrana de Fertilizantes. He has
a degree in Economics from Universidade de Sao Paulo - USP.
Mr. Arthur Antonio Sendas is a member of our board of directors. He is
also the president of Grupo Sendas, which has been operating in the Brazilian
retail market for 43 years. Mr. Sendas is the president of the board of
directors of Agencia de Desenvolvimento da Cidade do Rio de Janeiro - Agencia
Rio and president of the Development Council of the Ponticia Universidade
Catolica do Rio de Janeiro. He is also the former president of several
supermarkets associations, including Associacao dos Supermercados do Rio de
Janeiro and Associacao Brasileira dos Supermercados.
Mr. Caio Racy Mattar is our Investment and Construction Officer. He
previously served as a member of the executive office of Reune Engenharia e
Construcoes Ltda. He is also a member of the board of directors of Paramount
Lansul S.A. Mr. Mattar has an Engineering degree from Instituto de Engenharia
Paulista and has attended the London Business School.
Mr. Cesar Suaki dos Santos is our Supply Chain Officer. Mr. dos Santos
previously served as the person-in-charge of one of the business units of Grupo
Ultra and was responsible for the acquisition and logistical division of Grupo
Martins. Mr. dos Santos has a degree in Engineering from Universidade de Sao
Paulo - USP where he earned a master's degree.
Mr. Christian Pierre Couvreux is a member of our board of directors.
Mr. Couvreux is the President of the board of directors and Officer-President of
the Casino Group. Mr. Couvreux was the President of La Ruche Meridionale in
France as well as the Commercial Attache in the French embassies in Norway and
Saudi Arabia. He has a master's degree in Business Administration from Hautes
Etudes Commerciales - HEC in France and has attended INSEAD.
Mr. Eneas Cesar Pestana Neto is our Administrative Officer. He was the
Vice-President of Laboratorio Delboni Auriemo and has worked at GP Investimentos
and Carrefour. Mr. Pestana Neto holds a degree in Accounting from Pontificia
Universidade Catolica de Sao Paulo - PUC.
Mr. Fernao Carlos Botelho Bracher is a member of our board of
directors. Mr. Bracher was a director of Banco da Bahia S.A. and of Banco
Central do Brasil (Central Bank) and was the former Executive Vice-President of
Atlantica Companhia Nacional de Seguros and of Banco Brasileiro de Descontos
S.A. (Bradesco). Mr. Bracher is also a former Chairman of Banco Central do
Brasil and Special Counselor for Brazilian external debt affairs, and former
Chairman of Banco BBA Creditanstalt S.A. (BBA). Mr. Bracher has a degree in Law
from Universidade de Sao Paulo - USP and has attended Freiburg University and
Heidelberg University in Germany.
Mr. Fernando Queiroz Tracanella is our Investor Relations Officer. Mr.
Tracanella worked at Uniao de Bancos Brasileiros S.A. (Unibanco), Banco Frances
e Brasileiro - BFB and Deutsche Bank. Mr. Tracanella holds a degree in Business
Administration from Pontificia Universidade Catolica de Sao Paulo - PUC.
Mr. Gerald Dinu Reiss is a member of our board of directors. Mr. Reiss
is a partner in the Brazilian consulting firm Reiss & Castanheira Consultoria e
Empreendimentos Industriais. He was the former Planning Manager of Metal Leve
S.A. and Executive Vice-President of Cevekol S.A. Mr. Reiss has a degree in
Electrical Engineering from Escola Politecnica da Universidade de Sao Paulo -
USP and has earned MBA and Ph.D. degrees from the University of California at
Berkeley.
Mr. Hugo A. Jordao Bethlem is our Commercial Officer. Mr. Bethlem was
the Commercial Officer of DiCicco, Jeronimo Martins, Parque Tematico Play Center
and Carrefour. Mr. Bethlem has a degree in Business Administration from
Faculdades Metropolitanas Unidas - FMU and has a post-graduate degree in
Administration from Cornell University.
42
Mr. Jean Henri A. Duboc is our Hypermarket Division Officer. He was a
former executive officer of TAM and chairman of Carrefour Brazil.
Mr. Jose Roberto Coimbra Tambasco is our Supermarket Division Officer.
Mr. Tambasco, who has worked for us since 1979, has a degree in Business
Administration from Fundacao Getulio Vargas.
Mr. Jose Roberto Mendonca de Barros is a member of our board of
directors. Mr. Mendonca de Barros was the Secretary of Economic Policy of the
Ministry of Agriculture and Executive Secretary of the Foreign Chamber of
Commerce. He is the managing partner at Mendonca de Barros Associados S/C, where
he resumed his activities in January 1999. He has a doctoral degree in Economics
from the University of Sao Paulo and has done post-doctoral work at Yale
University.
Mr. Leonardo de Paiva Rocha was our Chief Financial Officer and
Controller Officer. He previously served as a member of the executive office of
Telefonica International S/A and Telecomunicacoes de Sao Paulo S/A. Mr. Rocha
has an Engineering degree from Instituto Militar de Engenharia and has a
post-graduate degree in Administration from Pontificia Universidade Catolica
from Rio de Janeiro.
Mr. Luiz Carlos Bresser Goncalves Pereira is a member of our board of
directors. Mr. Pereira is an economics professor at the Fundacao Getulio Vargas
in Sao Paulo and an editor of Revista de Economia Politica (Economic Policy
Magazine). He was the Minister of Science and Technology, Minister of Finance,
Secretary of the State of Sao Paulo and President of the Bank of Sao Paulo -
BANESPA. He is also the author of several books. He has a law degree from the
University of Sao Paulo, from where he also has a doctoral degree in Economics.
In addition, he has a master's degree in Business Administration from Michigan
State University.
Mr. Mailson Ferreira da Nobrega is a member of our board of directors.
Mr. Ferreira da Nobrega was the Finance Minister of Brazil from 1988 to 1990. He
was the chief of the Brazilian delegation for the Paris Club in the negotiation
of the Brazil/Japan bilateral treaty and a former member of the Committee of the
International Finance Corporation in Washington, D.C. Mr. Ferreira da Nobrega
has a degree in Economics from Centro de Ensino Unificado de Brasilia.
Mrs. Maria Aparecida Fonseca is our Human Resources Officer. Mrs.
Fonseca has a degree in Mathematics and a post-graduate degree in Finance from
Universidade Sao Judas Tadeu. She also has a post-graduate degree in Human
Resources from Universidade Federal de Pernambuco.
Mrs. Maria Silvia Bastos Marques is a member of our board of directors.
Mrs. Marques is a member of the board of directors of the Anglo American PLC and
partner in the Brazilian consulting firm MS & CR2 Financas Corporativas. She was
the former President of the Instituto Brasileiro de Siderurgia, Officer-Director
of Companhia Siderurgica Nacional, Municipal Secretary of Finance of the City of
Rio de Janeiro and Director of Banco Nacional de Desenvolvimento Economico e
Social - BNDES. Mrs. Marques has a degree in Public Administration from Fundacao
Getulio Vargas, where she earned a master's degree and a doctoral degree.
Mr. Pierre Bruno Charles Bouchut is a member of our board of directors.
Mr. Bouchut is the Superintendent and a member of the board of directors of the
Casino Group. He was a consultant at McKinsey, a Vice President at Bankers Trust
in France and a Vice President at Citibank in Paris. He has a degree in Business
Administration with a concentration in finance and banking from Etudes
Commerciales - HEC and a post-graduate degree in Economics from Paris IX -
Dauphine.
Mr. Roberto Teixeira da Costa is a member of our board of directors.
Mr. Teixeira da Costa was the first Chairman of the CVM, the Brazilian
securities commission. He is the former Investment Vice-President of Banco de
Investimentos do Brasil and Uniao de Bancos Brasileiros S.A. (Unibanco). Mr.
Teixeira da Costa is a member of the board of directors of many Brazilian
companies such as Brasmotor S.A., Solvay do Brasil S.A. and Sao Paulo Alpargatas
S.A. He is also the Chairman of the Brazilian chapter of the Counsel of
Executives of Latin America and a member of the Permanent Entrepreneurial
Committee of the Brazilian Foreign Relations Ministry and of the board of
directors of the Fernand Braudel Institute of World Economics. Mr. Teixeira da
Costa has a degree in Economics from Faculdade Nacional de Ciencias Economicas
da Universidade do Brasil.
For the year ended December 31, 2003, the aggregate compensation paid
in cash to all of our directors and executive officers and members of our
committees as a group was approximately US$3.2 million. Other non-cash
43
benefits in 2003 included reimbursements of medical expenses to our executive
officers and the use of our cars during working hours. There are no outstanding
loans granted by us to our executive officers or members of our board of
directors. We are not required under Brazilian law to disclose on an individual
basis the compensation of our directors and executive officers, and we do not
otherwise publicly disclose this information.
6D. Employees
Our workforce at December 31, 2003 consisted of 55,557 employees
(calculated on a full-time employee equivalent basis). Virtually all of our
employees are covered by union agreements. The agreements are renegotiated
annually as part of industry-wide negotiations between a management group
representing the major participants in the retail food industry, including our
management, and unions representing employees in the retail food industry. We
believe we compensate our hourly employees on a competitive basis, and we have
developed incentive programs to motivate our employees and reduce employee
turnover. Our management considers our relations with our employees and their
unions to be good. We have not had a strike in our history.
The following table sets forth the number of our employees at December
31, for each of the five years ended December 31, 2003:
At December 31(1)
-----------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operational...................... 46,094 47,623 42,599 43,204 34,624
Administrative................... 9,463 10,275 9,461 6,902 5,018
------ ------ ------ ------ ------
Total....................... 55,557 57,898 52,060 50,106 39,642
(1) Based on the full-time equivalent number of employees calculated by dividing
total number of hours worked by all employees in the final month of each period
presented by 220 hours.
6E. Share Ownership
Stock Option Plan
In 1997, our shareholders approved a compensatory stock option plan for
our management and certain employees. Our stock option plan is designed to
obtain and retain the services of executives and certain employees. Only options
covering preferred shares are granted.
Our stock option plan is administered by a committee elected by our
board of directors. This committee periodically grants share options setting the
terms thereof and determining the employees to be included. In addition to
managing our stock option plan, the committee is responsible for selecting the
manager and employee beneficiaries who are entitled to benefit from the option
plan as well as establishing the specific terms and conditions of each option
agreement (including the quantity of shares to be acquired) applicable to each
of the beneficiaries. The exercise price shall not be lower than 60% of the
weighted average market price of our shares on the Sao Paulo Stock Exchange
during the four business days preceding the date of the option agreement.
When share options are exercised, we can grant new shares or transfer
treasury shares to the new shareholder. Our stock option plans are accounted for
as variable plans as the indexed exercise price of the options is adjusted by
dividends declared from the grant date through the exercise date. Our stock
option plan stipulates that 50% of the options granted vest and can be exercised
at the end of three years and the remaining 50% vest and can be exercised at the
end of five years. The exercise term expires after a period of three months
after the vesting dates. In 1999, our board of directors approved a new grant of
options convertible into an additional 3.4 billion preferred shares to be
granted under our stock option plan. On March 31, 2000, we granted 305,975
thousand stock options with an exercise price of US$34.34 per 1,000 shares. On
April 2, 2001, we granted 361,660 thousand stock options with an exercise price
of US$29.65 per 1,000 shares. On March 15, 2002, we granted 412,600 thousand
stock options with an exercise price of US$19.96 per 1,000 shares. On May 16,
2003, we granted 499,840 thousand stock options with an exercise price of
US$13.45 per 1,000 shares.
44
Share options (thousands)
---------------------------------------
2003 2002
------------------ ------------------
Options outstanding at beginning of year 1,395,960 1,362,385
Options granted
Series 6 (granted March 15, 2002) 412,600
Series 7 (granted May 16, 2003) 499,840
Options exercised
Series 3 - April 10, 2002 - capital increase of U.S.$ 26 (3,400)
Series 2 - December 19, 2002 - capital increase of U.S.$ 684 (120,900)
Series 3 - December 19, 2002 - capital increase of U.S.$ 4 (700)
Series 3 - December 17, 2003 - capital increase of U.S.$ 1,916 (256,100)
Options forfeited (200,360) (254,025)
----------------- ------------------
Outstanding options granted at end of year 1,439,340 1,395,960
================== ==================
Share options available at end of year for future grants 2,335,999 2,635,479
================== ==================
US$
--------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Range of year-end exercise prices for outstanding
options at balance sheet date exchange rates
(US$ per thousand shares) 13.87-32.84 10.69-24.50 5.43-27.58
Weighted average grant-date exercise price of
options (US$ per thousand shares) 22.94 19.30 17.05
Weighted average grant-date quoted market price
of shares (US$ per thousand shares) (based
on quoted market value at date granted) 24.61 22.02 20.82
Year-end quoted market price of shares at balance
sheet exchange rates (based on quoted market
value at the end of each year)
(US$ per thousand shares) 24.37 15.42 21.33
Compensation cost recognized for the year ended
December 31 1,250 912 1,853
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. Major Shareholders
The following table sets forth information as of December 31, 2003 with
respect to holdings of our capital stock:
Common Shares Preferred Shares (1) Total
------------- -------------------- -----
Number of Number of
Common Percentage Preferred Percentage Number of Percentage
Shareholder Shares of Total Shares of Total Shares of Total
----------- --------- --------- ---------- ---------- --------- ----------
PAIC (2)............... 38,334,430,500 60.40% 7,332,819,981 14.67% 45,667,250,481 40.26%
Valentim dos Santos
45
Diniz.................. 2,280,975,580 3.59 -- -- 2,280,975,580 2.01
Peninsula
Participacoes Ltda. (3) 6,458,266,960 10.17 7,746,144 0.02 6,466,013,104 5.70
Abilio dos Santos Diniz... 253,726,605 0.40 -- -- 253,726,605 0.22
Joao Paulo F. dos Santos
Diniz.................. 10 -- 8,900,000 0.02 8,900,010 0.01
Ana Maria F. dos Santos
Diniz D'Avila.......... 10 -- 40,500,000 0.08 40,500,010 0.04
Pedro Paulo F. Dos Santos
Diniz.................. 360,850 -- -- -- 360,850 --
Lucilia Maria Diniz....... 894,094,860 1.41 1,072,391 -- 895,167,251 0.79
Casino Group.............. 15,218,575,935 23.98 13,622,650,344 27.26 28,841,226,279 25.42
Others (4)................ 30,380,089 0.05 28,957,739,174 57.95 28,988,119,263 25.55
-------------- ------ -------------- ------ --------------- -------
Total..................... 63,470,811,399 100.00% 49,971,428,034 100.00% 113,442,239,433 100.00%
============== ====== ============== ====== =============== =======
________________________
(1) In August 1999 and September 2000, we issued the equivalent of R$303
million and R$100 million, respectively, of principal amount of
debentures which are convertible into preferred shares. Some of these
debentures have already been converted into preferred shares. See "Item
5B - Operating and Financial Review and Prospects - Liquidity and
Capital Resources" and note 13 to the financial statements included in
this annual report. The authorized share capital (the number of shares
up to which the board of directors can issue shares without the
approval of a shareholders' meeting) at December 31, 2003 is 150
billion shares. The balance of unissued shares in relation to the
authorized share capital relates to unissued common and preferred
shares.
(2) Pao de Acucar S.A. Industria e Comercio-PAIC is controlled by Mr.
Abilio dos Santos Diniz and Peninsula Participacoes. Other shareholders
include Mr. Valentim dos Santos Diniz and Mrs. Lucilia Maria Diniz.
(3) Peninsula Participacoes Ltda. is controlled by Mr. Abilio dos Santos
Diniz and his children. Upon the death of Mr. Abilio dos Santos Diniz,
his children, Ana Maria Falleiros dos Santos Diniz D'Avila, Mr. Joao
Paulo Falleiros dos Santos Diniz, Mrs. Adriana Falleiros dos Santos
Diniz Abrao and Mr. Pedro Paulo Falleiros dos Santos Diniz, will own
and control 100% of Peninsula Participacoes' voting quotas (ownership
units).
(4) Comprises the shares held by the members of our board of directors,
except for shares held by Mr. Valentim dos Santos Diniz, Mr. Abilio dos
Santos Diniz, Mrs. Ana Maria Falleiros dos Santos Diniz D'Avila, Mr.
Joao Paulo Falleiros dos Santos Diniz and Mr. Pedro Paulo Falleiros dos
Santos Diniz.
Subscription Warrants
In 1999, we issued 12,571,751 common share warrants (the proceeds from
which totaled US$181.9 million) and 4,127 preferred share warrants (the proceeds
from which totaled US$47,000). Each warrant provides the right to purchase 1,000
shares. The amount paid for the warrants cannot be applied against the purchase
price of the future shares to be issued. The exercise price per share under the
common share warrants is the greater of (i) R$82.13 per 1,000 shares, adjusted
for the higher of the IGP-M (general price index) variation or the variation of
the real to the U.S. dollar (price in U.S. dollars equal to US$45.00), or (ii)
the average between the variation of the IGP-M or of the real with respect to
the U.S. dollar and the trading price of our shares in the five days prior to
the exercise. Preferred share warrants are exercisable at R$65.70 per 1,000
shares, adjusted for IGP-M.
On August 31, 2003, 6,285,876 common share warrants and 2,064 preferred
share warrants were not exercised and were forfeited. The remaining 6,285,875
common share warrants may be exercised through August 31, 2004. The ratio will
be adjusted proportionately in the event of any reverse splits, splits or
distribution of stock dividends. The common subscription warrants were acquired
by the minority shareholder, the Casino Group, while the preferred subscription
warrants were acquired by the public.
Shareholders' Transactions
In September 1999, the Casino Group purchased 2,500,000,000 of our
common shares from PAIC and another 12,571,750,000 of our then issued shares of
common stock, representing, in the aggregate, an ownership interest of
approximately 24.0% of total common stock.
The Casino Group also had the right to purchase an aggregate of 2.5
billion common shares from PAIC, Peninsula Participacoes and Abilio dos Santos
Diniz at the higher of US$45.00 or the average of the market price
46
and US$45.00 per 1,000 shares. Of these 2.5 billion common shares, the Casino
Group had the option to purchase up to 1.25 billion common shares until August
31, 2003, which option was not exercised and the Casino Group continues to have
the option to purchase up to 1.25 billion common shares from August 31, 2002
through August 31, 2004. The Casino Group will be required to purchase a portion
of these 2.5 billion common shares if it exercises any of its common share
warrants. If the Casino Group exercises the common share warrants described
above and exercises its right to purchase the additional 1.25 billion common
shares, the Casino Group may increase its ownership interest in us to
approximately 32.6% of our total issued and outstanding common shares. In 1999,
our controlling shareholders also sold 1.5 billion shares of preferred stock to
the Casino Group.
On October 17, 2000, we issued 100,000 convertible debentures due
August 2005, 41,962 of which were subscribed by the Casino Group in November
2000.
Shareholders' Agreements
The Casino Group
Our controlling shareholders, Mr. Abilio dos Santos Diniz, Peninsula
Participacoes and PAIC, are party to a shareholders' agreement dated August 9,
1999 with the Casino Group, a copy of which has been filed previously with the
Commission.
Pursuant to this agreement, the Casino Group:
o is assigned preemptive rights with respect to issuances of convertible
debt or preferred stock to achieve a participation of up to a 35.5%
ownership interest on a fully diluted basis,
o has the right to appoint two directors to our board of directors,
o has the right to appoint a person to serve both as a member of our
executive committee and a member of our board of executive officers,
o has the right to veto major corporate decisions, including amendments
to the annual investment program; some types of related party
transactions; changes to provisions in our by-laws regarding business
purpose, capital stock and issuance of securities, corporate governance
and dividends; mergers, spin-offs and other corporation
reorganizations; and assumption of financial debt or acquisitions of
businesses or assets beyond certain thresholds,
o is subject to limitations on the purchase of shares of preferred stock
on the open market,
o has tag-along rights with respect to offers of shares or convertible
securities by our controlling shareholders to third parties, with
special price terms in the event of offers resulting in a change of
control of our company, and
o has the right to be assigned the controlling shareholders' preemptive
rights with respect to any offer for securities issued by certain of
our affiliates.
Under the shareholders' agreement, the Casino Group has the right to
sell its shares (including warrants) under certain circumstances. If our
controlling shareholders sell their shares or convertible securities, the Casino
Group has the option to sell, totally or partially, its shares and convertible
securities to the acquiring party with terms similar to those offered to our
controlling shareholders. In addition, if the sale of the shares held by our
controlling shareholders results in a change of control, the acquiring party has
the option to buy all shares and convertible securities held by the Casino
Group.
Both the Casino Group and our controlling shareholders have the right
of first offer with respect to shares or convertible securities to be disposed
of by any of the parties under the shareholders' agreement.
Our controlling shareholders and the Casino Group have also agreed
pursuant to the shareholders' agreement not to compete with each other in the
food retailing business in Mercosul (Brazil, Argentina, Uruguay and Paraguay)
and in Colombia, as long as they remain our shareholders. They also agreed not
to engage in the food
47
retailing business in Brazil through any Brazilian retailer other than us, as
long as this shareholders' agreement remains in force.
Except for some provisions governing the transfer of equity interests
in us, the shareholders' agreement will terminate and cease to be in effect upon
the occurrence of the following events:
o Mr. Jean-Charles Naouri or his successor ceases to hold majority voting
rights in the Casino Group, and
o the new controlling shareholder of the Casino Group is a competitor of
ours whose net sales revenues equal or exceed 20% of ours.
Alternatively, except for some provisions governing the transfer of
equity interests in us, the agreement will terminate upon the occurrence of the
following events:
o the current ownership interest of the controlling shareholder of the
Casino Group is diluted to the benefit of a competitor of ours whose
net revenues from its operations in Brazil equal or exceed 3% of ours,
o the ownership interest of that competitor equals 5% or more of the
voting rights in the Casino Group, and
o a shareholders' agreement with that competitor grants full access to
information on us or one vacancy in the board of directors of the
Casino Group.
If our equity ownership changes as a result of the events described in
the immediately preceding two paragraphs and the net sales of the new
shareholder are less than 20% of our net operating sales, or the conditions
referred to in the immediately preceding paragraph are not fulfilled, then this
new shareholder, together with the Casino Group, our controlling shareholders
and us, must, on a best efforts basis, merge or combine the operations of the
Brazilian subsidiary owned by the new shareholder with our operations.
If we do not reach an agreement to merge or combine our operations
within six months, the shareholders' agreement will terminate and the parties
will use their best efforts to sell the Casino Group's interest in us. If this
sale is not effected within one year from the termination of the shareholders'
agreement, we will be required to list our common shares on a stock exchange and
conduct a public offering of our common shares.
The Sendas Association
We and our controlling shareholders, Mr. Abilio dos Santos Diniz,
Peninsula Participacoes and PAIC are parties to a shareholders' agreement dated
February 29, 2004 with Sendas and its direct and indirect controlling
shareholders Sendas Empreendimentos e Participacoes Ltda. and Mr. Arthur Antonio
Sendas, a copy of which is being filed as an exhibit to this annual report. The
purpose of the shareholders' agreement is to regulate our relations with Sendas
as shareholders of Sendas Distribuidora, a joint participation of which we hold
50% of the voting stock and Sendas holds the remaining 50% of the voting stock.
Pursuant to this agreement:
o as long as we and Sendas continue to own shares representing
50% of the joint participation (defined under the
shareholders' agreement as the sum of ours and Sendas equity
interests in the voting capital of Sendas Distribuidora), we
and Sendas are entitled to separately appoint four members and
two alternates of the board of directors of Sendas
Distribuidora, while the remaining four members are jointly
indicated by mutual agreement;
o two directors appointed by us or two directors appointed by
Sendas can veto specific business decisions of Sendas
Distribuidora, including certain transactions involving
amounts greater than R$20 million, the performance by the
Sendas Distribuidora of activities outside its corporate
purpose or the approval or review of the Sendas
Distribuidora's annual investment programs;
48
o Sendas Distribuidora must have four board committees with
specific functions related to the supervision of tasks
performed by the board of executive officers. Each of these
committees must consist of an equal number of members
indicated by us and by Sendas, but we are entitled to appoint
the coordinators of the executive and audit committees while
Sendas is entitled to appoint the coordinators of the finance
and development and marketing committees;
o we have the right to appoint all executive officers of Sendas
Distribuidora, who must be professionals with high reputations
and renowned competence, which enables us to be fully
responsible for the operating and administrative management of
Sendas Distribuidora and to have complete freedom in
connection with the day-to-day operational decisions; and
o as long as we and Sendas continue to own fifty percent of the
joint participation, our resolutions as shareholders of
Sendas Distribuidora must be taken by consensus. However, if
the equity participation of any of us falls below fifty
percent of the joint participation, the shareholders'
resolutions will have to be decided by a simple majority vote,
having the minority shareholder in this case the right to veto
certain major corporate decisions, such as changes to
provisions in the by-laws of Sendas Distribuidora regarding
its capital stock, issuance of securities and dividends
policies, as well as the mergers, spin-offs and other
corporate reorganizations, among others. This veto right will
be valid provided that the minority shareholder continues to
own more than twenty five percent of the joint participation.
The shareholders' agreement also establishes certain rights relating to
the transfer to third parties of Sendas Distribuidora's shares owned by us or by
Sendas as described below:
o we and Sendas have rights of first refusal in connection with
the offer of shares (or respective subscription rights) to
third parties, except when such offer is made to our or
Sendas' controlling shareholders or controlled companies or
when it involves the transfer of one share to each director
appointed by us or by Sendas; and
o in addition to offering the right of first refusal described
above, we and Sendas, as the case may be, are also required to
offer a tag along right to the other shareholder if the
proposed sale involves common shares representing more than
10% of the joint participation. In this case, such shareholder
has the right to sell the same amount of Sendas
Distribuidora's shares being offered by the other shareholder
at the same terms and conditions.
In addition, if our controlling shareholders decide to transfer, either
direct or indirectly, our own equity control, Sendas will be entitled, pursuant
to the shareholders' agreement, to exercise a put option right against the
prospective purchaser and therefore to sell the totality of its Sendas
Distribuidoras' shares to such purchaser at the price fixed by the shareholders'
agreement. On the other hand, if Sendas' controlling shareholder receives from a
third party an offer for Sendas' control, we are entitled to either exercise a
right of first refusal and acquire the shares at the terms an conditions offered
by such third party or to acquire, at the price fixed under the shareholders'
agreement, the totality of shares in the capital stock of Sendas Distribuidora
owned by Sendas.
The shareholders' agreement also provides that Sendas may at any time
as of February 1, 2007 exercise the right to exchange the totality or a portion
of its paid-in shares in Sendas Distribuidora for preferred shares representing
our capital stock. In such case, we can alternatively (i) carry out the share
exchange; (ii) purchase in cash, at the price fixed under the shareholders'
agreement, the shares upon which the right of share exchange has been exercised;
or (iii) accomplish the exchange transaction through several corporate
procedures such as capital increases, mergers of shares and others. In addition
to the cash or shares received, as the case may be, Sendas would also have the
right, in case all its shares in Sendas Distribuidora were exchanged for our
preferred shares, to subscribe to one class A common share that would be issued
by Sendas Distribuidora. This special share would allow it to appoint, in a
separate voting procedure, one member of the Sendas Distribuidora's board of
directors. However, if Sendas transferred more than seventy five percent of our
preferred shares following the exchange, it would be required to sell back such
share to us and therefore it would cease to have the special rights provided
therein. In addition, Sendas would also be subject to limitations in the amount
of our preferred shares which it could sell in the open market.
49
We and Sendas have also agreed pursuant to the shareholders' agreement
not to compete, either independently or jointly with third parties, with Sendas
Distribuidora in the food retailing business in the state of Rio de Janeiro and,
in the future, in the state of Espirito Santo, for so long as the shareholders'
agreement is in effect.
7B. Related Party Transactions
From time to time we have entered into transactions with our
controlling shareholders and other related parties for the provision of certain
services. In the past, we and our shareholders have advanced funds to each other
and may do so in the future. If our shareholders advance funds to us, or if we
advance funds to our shareholders, the transaction will be conducted on the same
terms applied to third parties. The following discussion summarizes certain of
the significant agreements and arrangements among us and certain of our
affiliates.
Leases
We currently lease properties from some members of the Diniz family,
some of whom are our shareholders. These properties include one store from Mr.
Valentim dos Santos Diniz and two stores from Mr. Abilio dos Santos Diniz, who
are among our controlling shareholders, six stores from Mr. Arnaldo dos Santos
Diniz, five stores from Mrs. Vera Lucia dos Santos Diniz and nine stores from
Mrs. Sonia Maria dos Santos Diniz Bernandini, all children of Mr. Valentim dos
Santos Diniz. Aggregate payments in 2003 under those leases equaled
approximately US$4.9 million. We believe that all such leases are on terms at
least as favorable to us as those which could be obtained from unrelated parties
on an arm's-length basis.
Related Party Financing
In November 2000, the Casino Group subscribed 41,962 convertible
debentures from our fourth issue out of a total of 100,000 convertible
debentures. Interest expense related to the debentures was US$2.1 million in
2003, and the loan in the amount of US$11.9 million was outstanding at December
31, 2003. See note 18 to the financial statements.
7C. Interests of Experts and Counsel
Not applicable.
ITEM 8 FINANCIAL INFORMATION
8A. Consolidated Financial Statements and Other Financial Information
The information included in Item 18 of this annual report is referred
to and incorporated by reference into this Item 8A.
Legal Proceedings
We are party to administrative proceedings and lawsuits that are
incidental to the normal course of our business described below. These include
general civil, tax and employee litigation and administrative proceedings. We
believe that our provisions for legal proceedings are sufficient to meet
probable and reasonably estimable losses in the event of unfavorable court
decisions and that the ultimate outcome of these matters will not have a
material effect on our financial condition or results of operations. We cannot
estimate the amount of all potential costs that we may incur or penalties that
may be imposed on us other than those amounts for which we have provisions. See
note 17 to the financial statements.
The following probable losses and existing tax obligations under
dispute have been identified based on the advice of outside legal counsel and
have been provided as liabilities in our financial statements:
50
2003 2002
------------- -------------
(millions of U.S. dollars)
Taxes:
Taxes on revenues.............................. $262.7 $151.1
Social security................................ 94.1 66.7
Income tax..................................... 26.4 16.0
Tax on bank account transactions and other..... 7.6 32.3
Labor claims....................................... 6.7 3.6
------------- --------
Total accrued liabilities for legal proceedings..... $397.5 $269.7
============= ========
Taxes on Revenues
We are questioning the constitutionality of the increase of the tax
rate of the PIS and the COFINS taxes, which accrue on revenues, as well as the
expansion of their tax basis as of February 1, 1999 because we believe these
changes could only be introduced by a law complementary to the Federal
Constitution. On September 1999, the lower court issued a ruling in our favor.
The federal government appealed the decision and is awaiting a final judgment.
At December 31, 2003, we had a provision of US$262.7 million that we believe
corresponds to the amount of PIS and COFINS we did not collect, based on the
lower court decision, and this provision is monetarily updated.
Social Security Taxes
We are challenging the constitutionality of some social security
contributions, such as the contributions for education allowance (salario
educacao) and for worker's compensation insurance (SAT), as well as our right to
offset the amount we believe was overpaid with other social security
contributions. Based on preliminary orders issued in our favor by the lower
courts, we have not been collecting some of these contributions and/or we have
been offsetting overpaid contributions with other social security contributions.
The lower courts provided a favorable decision in both lawsuits. The federal
government appealed these decisions and is awaiting a final judgment. Since it
is probable that we will not prevail in these lawsuits, as of December 31, 2003,
we had a provision of US$94.1 million that we believe corresponds to the amount
of the social security contributions we did not collect, based on the
preliminary orders, and this provision is monetarily updated.
Following judicial precedent in decision which were unfavorable for
other tax payers in similar lawsuits, we decided to withdraw certain claims and
legal actions, opting to join the Special Installments Program (Parcelamento
Especial - PAES) pursuant to Law 10,680/2003 and pay the amount of US$88.8
million of social security contributions in installments.
Income Tax
In January 1995, we filed an injunction to obtain a judicial
authorization to adjust our 1989 balance sheet using a rate relating to the
inflationary index for January and February 1989 (70.3%), which generated an
additional tax-deductible depreciation charge. In July 2000, a lower court
issued a ruling, which was partially favorable to us, acknowledging our right to
use a tax inflation index for the month of January 1989 of 42.7% for purposes of
determining the depreciation charge. We appealed the decision and asserted the
right to adjust our 1989 balance sheet according to the inflationary index of
6.3% for February 1989. The federal government also appealed the decision and is
awaiting a final judgment. Since it is probable that we will not prevail in this
lawsuit, as of December 31, 2003, we had a provision of US$11.6 million that we
believe corresponds to the difference between the 42.7% inflationary index for
January 1989 and the 6.3% inflationary index for February 1989 and the 70.3%
rate. These assessments are supported by our outside legal counsel.
We were challenging a limitation on tax loss offsets imposed by
Brazilian law. Federal income tax regulations determine that tax losses
available for offsetting income are limited to 30% of annual income before tax.
We were challenging this limitation on the grounds that it is unconstitutional,
and have obtained a legal injunction providing protection against possible
fines. We had a provision of US$13.4 million at December 31, 2003 and the amount
of US$9.6 million is recorded as recoverable deferred taxes.
51
Tax on Bank Account Transactions
On June 15, 1999, we filed an injunction seeking protection for
non-payment of the Contribuicao Provisoria sobre Movimentacao Financeira, or
CPMF, a tax levied on banking account transactions and redemption of financial
operations on the grounds that the tax is unconstitutional. We obtained a
preliminary order and the lower court issued a decision in our favor on
September 10, 1999. Since the federal government appealed the decision, we
presented appeals to the Superior Justice Court and to the Supreme Federal
Court, all of which are pending judgment. Since it was probable that we would
not prevail in this lawsuit, as of December 31, 2002, we had a provision of
US$28.5 million that we believed corresponded to the amount of CPMF that the
banks did not withhold based on the lower court decision, and this provision was
indexed for inflation. Based on an unfavorable decision rendered by the court on
February 19, 2003, we filed a request on March 13, 2003 to pay the amount
provided on that date in installments. At December 31, 2003, the amounts of
US$3.8 million and US$32.7 million are recorded as Taxes, other than on income,
in our current liabilities and long-term liabilities, respectively.
Labor Claims
We are party to numerous lawsuits involving disputes with our
employees, primarily arising from layoffs in the ordinary course of our
business. At December 31, 2003, we had a provision of US$6.7 million for labor
related loss contingencies, since it is probable that we will not prevail in
these lawsuits and the damages are reasonably estimable.
Dividend Policy and Dividends
General
Pursuant to the Brazilian corporate law, shareholders of a Brazilian
corporation have the right to receive, as a mandatory dividend for each fiscal
year, a part of the corporation's net profits as established under its by-laws
or, if not provided under such by-laws, an amount equal to that established
pursuant to the Brazilian corporate law. Currently, the Brazilian corporate law
generally requires that each Brazilian corporation distribute as a mandatory
dividend an aggregate amount equal to at least 25% of the adjusted net profits,
i.e. 25% of the net profits decreased or increased by (a) any amounts
attributable to the legal reserve, (b) any amounts attributable to the
contingency reserve and (c) any amounts attributable to the reserves of retained
earnings, as more fully described below. In accordance with the Brazilian
corporate law, a Brazilian corporation is required to maintain a legal reserve,
to which it must allocate a minimum of 5% of its net profits for each fiscal
year until such reserve reaches an amount equal to 20% of its capital stock
(calculated in accordance with the Brazilian corporate law). In addition to
deducting amounts for the legal reserve, under the Brazilian corporate law, net
profits may also be adjusted by deducting amounts allocated to two other
reserves. One is a contingency reserve against future losses. The other is a
reserve for specified categories of earnings that are required to be recognized
currently, but will be realized in subsequent periods. Those reserves are not
mandatory and may only be established if they are proposed by the board of
directors or board of executive officers at a shareholders' meeting and a
resolution creating those reserves is adopted at that shareholders' meeting.
Accordingly, under our by-laws, the mandatory dividend has been fixed at an
amount equivalent to not less than 25% of the adjusted net profits.
Pursuant to the Brazilian corporate law, in addition to the mandatory
dividend, the board of directors may recommend to the shareholders payment of
dividends from other funds legally available therefore. See "Item 10B -
Additional Information - Memorandum and Articles of Association - Allocation of
Net Profits and Distribution of Dividends - Distribution of Dividends." In
addition, any payment of interim dividends or payments of interest on equity
charges will be netted against the amount of the mandatory dividend for that
fiscal year. Under the Brazilian corporate law, if the board of directors of a
Brazilian company determines prior to the annual shareholders' meeting that
payment of the mandatory dividend for the preceding fiscal year would be
incompatible in view of that company's financial condition, the company would
not be required to pay the mandatory dividend. This determination must be
reviewed by the board of auditors, if any, and reported to the CVM. The amount
of mandatory dividends not distributed as a consequence of the Brazilian
corporation's financial condition will be registered on a special account and,
if not netted against future losses, in subsequent years, will be distributed as
mandatory dividend as soon as the corporation's financial condition so permits.
In addition, the Brazilian corporate law establishes that the holders
of the preferred shares will be entitled to priority in receiving a fixed or
minimum annual preferred dividend and/or reimbursement of capital, with or
52
without a premium. Accordingly, under our by-laws, the preferred shares are
entitled to: (i) priority in receiving a minimum non-cumulative annual preferred
dividend equal to R$0.15 per 1,000 preferred shares, (ii) priority in
reimbursement of capital, without premium, in case of liquidation, (iii)
participation on equal terms with common shares in the distribution of bonus
shares resulting from capitalization of reserves of retained earnings and (iv)
receipt of the mandatory dividend after common shares are assured a dividend
equal to the minimum non-cumulative annual preferred dividend equal to R$0.15
per 1,000 shares. However, upon the first issuance of new preferred shares that
occurs after the date of approval of our new by-laws on February 28, 2003,
holders of the preferred shares will be entitled to the same advantages and
preferences as established above, except that, in respect of item (iv), holders
of preferred shares will be entitled to participate in the mandatory dividend
that will be distributed for the common shares and the preferred shares so that
each preferred share receives a dividend that is 10% higher than the dividend of
each common share, including, for purposes of this calculation, in the sum of
the total dividend amount paid to the preferred shares, the amount paid as a
minimum non-cumulative annual preferred dividend equal to R$0.15 per 1,000
preferred shares. This new dividend will apply to all of our preferred shares,
including existing preferred shares and newly issued preferred shares. In
addition, pursuant to the Brazilian corporate law and our by-laws, the preferred
shares will acquire the right to vote in the event that the minimum
non-cumulative annual preferred dividend equal to R$0.15 per 1,000 shares is not
paid for a period of three consecutive years, which voting right will cease upon
the payment of such minimum non-cumulative annual preferred dividend equal to
R$0.15 per 1,000 shares.
Consequently, under our by-laws, to the extent funds are available
therefore, dividends and/or interest on equity are paid in the following order:
(i) a minimum non-cumulative annual preferred dividend in respect of the
preferred shares in the amount of R$0.15 per 1,000 preferred shares and (ii)
after common shares are assured a dividend equal to the minimum non-cumulative
annual preferred dividend equal to R$0.15 per 1,000 shares, dividends in respect
of the preferred shares and our common shares in equal amounts per share up to
(or, if determined by the shareholders, in excess of) the mandatory dividend
and, upon the first issuance of new preferred shares that occurs after the date
of approval of our new by-laws on February 28, 2003, dividends so that each
preferred share receives a dividend that is 10% higher than the dividend of each
common share, as described above, including, for purposes of this calculation,
the amount paid as a minimum non-cumulative annual preferred dividend equal to
R$0.15 per 1,000 preferred shares, subject to any determination by our board of
directors that such distribution would be incompatible in view of our financial
condition. We are authorized, but not required, to distribute a greater amount
of dividends.
Pursuant to the Brazilian corporate law, Brazilian corporations are
required to hold an annual shareholders' meeting by April 30 of each year at
which an annual dividend may be declared. Additionally, interim dividends may be
declared by the board of directors. Under the Brazilian corporate law, dividends
generally are required to be paid to the holder of record on the date of the
annual shareholders' meeting at which the dividend was declared, within 60 days
following the date the dividend was declared, unless a shareholders' resolution
sets forth another date of payment, which, in either case, must occur prior to
the end of the fiscal year in which such dividend was declared. A shareholder
has a three-year period from the dividend payment date to claim dividends in
respect of its shares, after which the Brazilian company has no liability for
such payment. Brazilian companies are not required to adjust the amount of the
dividend for inflation for the period from the date of declaration to the
payment date.
Payments of cash distributions by us on preferred shares underlying the
ADSs, if any, will be made in Brazilian currency to the custodian on behalf of
the depositary, which will then convert these proceeds into U.S. dollars and
will cause these U.S. dollars to be delivered to the depositary for distribution
to you. Dividends paid to shareholders, including holders of the ADSs, are
currently not subject to Brazilian withholding tax. See "Item 10E - Additional
Information - Taxation - Brazilian Tax Considerations."
Dividend Policy and History of Dividend Payments
The following table sets forth the distributions paid to holders of our
common shares and preferred shares since 1999:
53
Total amount in
R$ per 1,000 dividends and
First pament preferred R$ per 1,000 interest on equity
Period Description date shares common shares (in R$ millions)
----- ----------- ------------ ---------------- ----------------- --------------------
1999.......... Dividends June 2000 0.1880 (1) 0.1880 (1) 15.9
2000.......... Dividends and June 2001 1.8161 1.8161 195.0
interest on equity
2001.......... Dividends June 2002 0.5375 0.5375 60.8
2002.......... Dividends June 2003 0.5252 0.5252 59.4
2003.......... Dividends June 2004 (2) 0.5088 0.4626 54.8
_______________
(1) Each 1,000 shares newly issued to the Casino Group during the year were
entitled to receive R$0.05469.
(2) The proposed dividend was approved at the annual shareholders' meeting
on April 30, 2004. According to Brazilian corporate law, we must pay
declared dividends within 60 days after the approval.
Shareholders who are not residents of Brazil must generally register
with the Central Bank to have dividends and/or interest on equity, sales
proceeds or other amounts with respect to their shares eligible to be remitted
in foreign currency outside of Brazil. See "Item 10E - Additional Information -
Taxation - Brazilian Tax Considerations - Registered Capital." The preferred
shares underlying the ADSs are held in Brazil by the custodian, as agent for the
depositary, the registered owner on the records of the registrar for the
preferred shares underlying the ADSs. The current registrar is Banco Itau S.A.
Payments of cash dividends and distributions, if any, will be made in
Brazilian currency to the custodian on behalf of the depositary, which will then
convert the payments in Brazilian currency into U.S. dollars and thereafter will
cause the U.S. dollars to be delivered to the depositary for distribution to
holders of ADSs as described above. In the event that the custodian is unable to
convert immediately the Brazilian currency received as dividends and/or interest
on equity attributable to shareholders into U.S. dollars, the amount of U.S.
dollars payable to holders of ADSs may be adversely affected by devaluations of
the Brazilian currency that occur before the distributions are converted and
remitted. See "Item 3A - Key Information - Selected Financial Data - Exchange
Rates." Dividends and interest on equity in respect of the preferred shares paid
to shareholders, including holders of ADSs, are exempt from Brazilian
withholding tax in respect to profits accrued as of January 1, 1996. See "Item
10E - Additional Information - Taxation - Brazilian Tax Considerations."
8B. Significant Changes
We are not aware of any significant changes bearing upon our financial
condition since the date of the consolidated financial statements included in
this annual report.
ITEM 9 THE OFFER AND LISTING
9A. Offer and Listing Details
Our preferred shares are traded on the Sao Paulo Stock Exchange -
BOVESPA under the trading symbol PCAR4. Our preferred shares in the form of
American depositary shares, or ADSs, also trade on the New York Stock Exchange
under the trading symbol "CBD" and on the Luxembourg Stock Exchange. We became a
U.S. registered company listed on the New York Stock Exchange in May 1997.
Each ADS represents 1,000 preferred shares, without par value. The ADSs
are evidenced by American depositary receipts, or ADRs, issued by The Bank of
New York, as depositary.
At December 31, 2003, there were:
o an aggregate of 49,971,428,034 preferred shares issued and
outstanding and 63,470,811,399 common shares issued and
outstanding, and
54
o 18,178,522,000 preferred shares held by foreign investors (to our
knowledge based in each case on their addresses only as indicated
in our records for the shares in our custody), representing 36.4%
of the total of preferred shares outstanding.
The following table sets forth, for the period indicated, the reported
high and low sales prices for the preferred shares on the Sao Paulo Stock
Exchange, in reais and U.S. dollars:
Calendar Period
---------------
High Low High Low
------ ----- ------ ------
R$ per 1,000 US$ per 1,000 R$ Average Daily
Preferred Shares Preferred Shares (1) Trading Volume
----------------- ------------------- -----------------
1999.............................................. 64.00 14.00 35.77 8.13 1,651,607
2000.............................................. 73.30 50.50 37.49 25.83 2,535,200
2001.............................................. 75.43 33.25 32.51 14.33 2,362,045
2002:
1st quarter.................................... 56.00 48.51 24.75 20.88 1,823,999
2nd quarter.................................... 56.70 46.60 19.93 16.38 1,652,448
3rd quarter.................................... 53.00 40.00 13.61 10.27 1,955,149
4th quarter.................................... 60.00 44.62 16.98 12.63 1,718,373
2003:
1st quarter.................................... 55.20 40.00 16.46 11.93 1,177,199
2nd quarter.................................... 48.50 41.02 16.89 14.28 2,211,580
3rd quarter.................................... 60.10 44.00 20.56 15.05 3,152,337
4th quarter.................................... 71.00 53.40 24.57 18.48 3,636,630
2004:
1st quarter.................................... 77.47 56.60 26.63 19.46 2,572,387
Share prices for the most recent six months are as follows:
December 2003..................................... 71.00 65.01 24.57 22.50 3,379,444
January 2004...................................... 77.47 67.37 26.34 22.91 2,555,237
February 2004..................................... 69.23 63.70 23.76 21.86 2,575,416
March 2004........................................ 64.95 56.60 22.33 19.46 2,585,676
April 2004........................................ 63.20 50.50 21.46 17.15 2,052,026
May 2004.......................................... 52.85 42.94 16.89 13.72 3,362,089
______________
(1) Converted into U.S. dollars at the U.S. dollar-Brazilian real exchange
rate in effect at the end of each period presented. There was a
significant devaluation of the Brazilian real as from mid-January 1999,
and another devaluation in early 2001 and 2002. See "Item 3A - Key
Information - Selected Financial Data - Exchange Rates."
On June 14, 2004, the closing sale price for the preferred shares on
the Sao Paulo Stock Exchange was R$47.85 per 1,000 preferred shares, equivalent
to US$15.12 per ADS translated at the exchange rate of R$3.165 per US$1.00, the
commercial market rate on such date.
The following table sets forth, for the periods indicated, the reported
high and low sales prices for our ADSs listed on the New York Stock Exchange, in
U.S. dollars and reais:
55
High Low High Low
---- --- ---- ---
US$ Average Daily
Calendar Period US$ ADSs R$ ADSs Trading Volume
--------------- ------------------- ---------------- ----------------------
1999............................... 35.00 9.31 62.62 16.03 2,292,423
2000............................... 39.31 27.63 76.87 54.03 3,616,927
2001............................... 38.88 12.50 90.22 29.01 3,601,605
2002:
1st quarter..................... 24.67 19.60 57.32 45.54 1,904,674
2nd quarter..................... 25.05 16.60 71.25 47.22 1,967,985
3rd quarter..................... 18.20 11.84 70.89 46.12 1,825,255
4th quarter..................... 16.80 11.48 59.36 40.56 1,635,857
2003:
1st quarter.................. 16.25 11.44 54.49 38.36 1,264,833
2nd quarter.................. 16.46 13.04 47.27 37.45 2,402,446
3rd quarter.................. 20.29 15.50 59.32 45.31 3,191,037
4th quarter.................. 25.15 18.71 72.66 54.06 2,589,283
2004:
1st quarter.................. 27.74 19.30 80.68 56.14 3,527,041
Share prices for the most recent six months are as follows:
December 2003...................... 25.15 22.55 72.66 65.15 2,554,686
January 2004....................... 27.74 22.99 81.58 67.61 3,671,543
February 2004...................... 23.98 21.80 69.87 63.52 4,311,946
March 2004......................... 22.78 19.30 66.26 56.14 2,752,986
April 2004......................... 22.00 17.80 64.78 52.41 2,266,406
May 2004........................... 18.02 13.37 56.39 41.84 4,309,203
9B. Plan of Distribution
Not applicable.
9C. Markets
Trading on the Brazilian Stock Exchanges
On January 27, 2000, the Sao Paulo Stock Exchange, the Rio Stock
Exchange and their respective affiliated clearinghouses entered into a
memorandum of understanding relating to a restructuring of each of their trading
systems, clearinghouse services and corporate structures to establish a single,
national stock exchange under the management of the Sao Paulo Stock Exchange.
The memorandum of understanding also describes changes in the corporate
organization of the Sao Paulo Stock Exchange designed to facilitate access to
membership by brokers in the Rio Stock Exchange. On April 28, 2000, the Rio
Stock Exchange ceased to operate. The Sao Paulo Stock Exchange has entered into
similar memoranda of understanding with several other regional exchanges.
Settlement of transactions is effected three business days after the
trade date. Delivery of and payment for shares are made through the facilities
of separate clearinghouses for each exchange, which maintain accounts for member
brokerage firms. The seller is ordinarily required to deliver the shares to the
clearinghouse on the second business day following the trade date. The
clearinghouse for the Sao Paulo Stock Exchange is Companhia Brasileira de
Liquidacao de Custodia, or CBLC, which is wholly owned by that exchange.
At April 30, 2004, the aggregate market capitalization of the 364
companies listed on the Sao Paulo Stock Exchange was equivalent to approximately
US$210 billion and the ten largest companies listed on the Sao Paulo Stock
Exchange represented approximately 46% of the total market capitalization of all
listed companies. Although any of the outstanding shares of a listed company may
trade on a Brazilian stock exchange, in most cases fewer than half of the listed
shares are actually available for trading by the public, the remainder being
held by small groups of controlling persons, governmental entities or one
principal shareholder.
56
Trading on Brazilian stock exchanges by non-residents of Brazil is
subject to certain limitations under Brazilian foreign investment and tax
legislation.
Regulation of the Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM, the
Brazilian securities commission, which has authority over stock exchanges and
the securities markets generally, the Conselho Monetario National-CMN, the
national monetary council, and the Central Bank, which has, among other powers,
licensing authority over brokerage firms and regulates foreign investment and
foreign exchange transactions.
Under the Brazilian corporate law, a company is either public, a
companhia aberta, such as we are, or private, a companhia fechada. All public
companies are registered with the CVM, and are subject to reporting
requirements. A company registered with the CVM may have its securities traded
either on the Brazilian stock exchanges or in the Brazilian over-the-counter
market. The shares of a public company may also be traded privately, subject to
certain limitations. To be listed on a Brazilian stock exchange, a company must
apply for registration with the CVM and with a stock exchange. Once this stock
exchange has admitted a company to listing and the CVM has accepted its
registration as a public company, its securities may, under certain
circumstances, be traded on all other Brazilian stock exchanges.
Trading in securities on the Brazilian stock exchanges may be suspended
at the request of a company in anticipation of a material announcement. Trading
may also be suspended on the initiative of a Brazilian stock exchange or the
CVM, based on or due to, among other reasons, a belief that a company has
provided inadequate information regarding a material event or has provided
inadequate responses to inquiries by the CVM or the relevant stock exchange.
The Brazilian securities law, the Brazilian corporate law and the laws
and regulations issued by the CVM, the CMN, and the Central Bank provide for,
among other things, disclosure requirements applicable to issuers of traded
securities, restrictions on insider trading and price manipulation, and
protection of minority shareholders. However, the Brazilian securities markets
are not as highly regulated and supervised as the U.S. securities markets or
markets in certain other jurisdictions.
Corporate Governance Practices
As a Brazilian company listed on the Nivel 1 das Praticas Diferenciadas
de Governanca Corporativa da Bolsa de Valores de Sao Paulo (Level 1 of the
Differentiated Practices of Corporate Governance of the Sao Paulo Stock Exchange
or "Level 1") we must comply with the corporate governance standards set forth
in the Brazilian corporate law, the rules of the CVM and the Regulamento de
Praticas Diferenciadas de Governanca Coporativa da Bolsa de Valores de Sao Paulo
(the Differentiated Practices of Corporate Governance of the Sao Paulo Stock
Exchange or the "Level One Regulation"), as well as our own bylaws.
On November 4, 2003, the SEC approved the new corporate governance
rules established by the NYSE. Pursuant to these rules, foreign private issuers
that are listed on the NYSE, such as we are, must disclose any significant ways
in which its corporate governance practices differ from those followed by US
domestic companies under the listing rules of the NYSE.
The significant differences between our corporate governance practices
and the NYSE corporate governance standards are as follows:
Independence of Directors and Independence Tests
The Brazilian corporate law and our bylaws require that our directors
be elected by our shareholders at a general shareholders meeting. Fourteen of
our directors are appointed by our controlling shareholder, and the remaining
two directors are appointed by representatives of our minority shareholders.
Neither our board of directors nor our management test the independence
of the directors before such elections are made. However, both the Brazilian
corporate law and CVM establish rules in relation to certain qualification
requirements and restrictions, investiture, compensation, duties and
responsibilities of the companies'
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executives and directors. Although we believe these rules provide adequate
assurances that our directors are independent, we believe such rules would
permit us to have directors that would not otherwise pass the independence tests
established by the NYSE.
Executive Sessions
According to the Brazilian corporate law, up to 1/3 of the members of
the board of directors can be elected into executive positions. The remaining
non-management directors are not expressly empowered to serve as a check on
management and there is no requirement that those directors meet regularly
without management. Notwithstanding, our board of directors consists only
fifteen of non-management directors and as such we believe we are in compliance
with this standard.
Committees
We are not required under applicable Brazilian corporate law to have,
and accordingly we do not have, a Nominating Committee, Corporate Governance
Committee and Compensation Committee. Pursuant to our bylaws our directors are
elected by our shareholders at a general shareholders meeting. Compensation for
our directors and executive officers is established by our shareholders.
Audit Committee and Audit Committee Additional Requirements
Under the Brazilian corporate law and our by-laws, we are not required
to, and currently do not, maintain a permanent board of auditors (conselho
fiscal). The board of auditors operates independently from our management and
from our external auditors. Its main function is to examine the financial
statements of each fiscal year and provide a formal report to our shareholders.
We do not maintain a permanent board of auditors, however we must install one
upon the vote of 1/10 of our common shares shareholders or 5% of the holders of
our shares with voting rights. In order to comply with the requirements of the
Sarbane-Oxley Act and the rules and regulations of the NYSE, we are starting to
implement an independent audit committee composed by a majority of independent
members of our board, which we expect to be fully independent by July 2005.
Shareholder Approval of Equity Compensation Plans
Our board of directors is responsible for voting on the issuance of new
equity in connection with our existing stock option plans, provided that the
limit of our authorized capital is respected. However, any issuance of new
shares that exceeds such authorized capital is subject to shareholder approval.
Corporate Governance Guidelines
We have not adopted any corporate governance guidelines in addition to
the rules imposed upon us by applicable Brazilian corporate law. We believe the
corporate governance guidelines applicable to us under Brazilian corporate law
are consistent with the guidelines established by the NYSE. We have adopted and
observe the Policy of Disclosure of Acts or Relevant Facts and the Preservation
of Confidentiality of CBD, which deals with the public disclosure of all
relevant information as per CVM's guidelines. Also, we comply with the CVM rules
relating to transactions involving the trading by our management of our
securities.
Code of Business Conduct and Ethics
Although the adoption of a code of ethics is not required by Brazilian
corporate law, we implemented our Code of Ethics in 2000 to regulate our
employee's conduct with us and our customers, suppliers, competitors and the
public at large. In order to comply with the requirements of the Sarbanes-Oxley
Act and New York Stock Exchange rules, we later implemented rules applicable to
our managers' conduct in connection with the registration and control of
financial and accounting information and their access to privileged and
non-public information and data. For more information about our Code of Ethics,
see "Item 16B - Code of Ethics".
In addition to complying with the rules of corporate governance
applicable to us under Brazilian law, we intend to gradually comply with
substantially all of the new rules established by the NYSE and the SEC
applicable to domestic US companies.
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9D. Selling Shareholders
Not applicable.
9E. Dilution
Not applicable.
9F. Expenses of the Issue
Not applicable.
ITEM 10 ADDITIONAL INFORMATION
10A. Share Capital
Not applicable.
10B. Memorandum and Articles of Association
Set forth below is a brief summary of certain significant provisions of
our by-laws and Brazilian corporate law. This description does not purport to be
complete and is qualified by reference to our by-laws (an English translation of
which has been filed with the Commission) and to the Brazilian corporate law.
Objects and Purposes
We are a publicly held corporation with principal place of business and
jurisdiction in the City of Sao Paulo, Brazil, governed mainly by Brazilian laws
(including the Brazilian corporate law), CVM regulations and our by-laws.
Our main business purpose is to sell manufactured, semi-manufactured
and natural products of both national and foreign origin, of any and all kind
and description, nature or quality, provided that they are not forbidden by law.
We may also engage in other activities set forth in article 2 of our by-laws.
Preferred Shares and Common Shares
General
Pursuant to the Brazilian corporate law and our by-laws, each common
share entitles the holder thereof to one vote at meetings of our shareholders.
Holders of common shares are not entitled to any preference relating to our
dividends or other distributions or any preference upon our liquidation.
Pursuant to the Brazilian corporate law, each preferred share is
non-voting, except under limited circumstances, and is entitled to (i) priority
in the receipt of fixed or minimum dividend, (ii) priority in the reimbursement
of capital, with or without premium, and (iii) cumulative preferences and
advantages established in items (i) and (ii). Furthermore, the preferred shares
will only be admitted for trading on the Brazilian stock exchanges if they are
entitled to at least one of the following preferences: (i) right to participate
in the distribution of the mandatory dividend of 25% of net profits decreased or
increased by (a) any amounts attributable to the legal reserve, (b) any amounts
attributable to the contingency reserve and (c) any amounts attributable to the
reserves of retained earnings, pursuant to the following criteria: (a) priority
in the receipt of dividends corresponding to at least 3% of the shares' book
value, and (b) right to participate in the profit distribution together with the
common shares under equal conditions, after the common shares have received
dividends as set forth in (a) above, (ii) right to receive dividends in an
amount per share at least 10% higher than the amount per share paid to holders
of common shares, or (iii) tag-along right of at least 80% of the price paid to
the controlling shareholder in case of transfer of control.
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In this sense, our by-laws set forth that the preferred shares are
entitled to the following advantaged and preferences:
(a) priority in receiving a minimum non-cumulative annual
preferred dividend equal to R$0.15 per lot of 1,000 preferred
shares;
(b) priority in the reimbursement of capital, without premium, in
the event of our liquidation;
(c) participation, under equal conditions, with common shares in
the distribution of bonus shares resulting from capitalization
of reserves of retained earnings; and
(d) receipt of the mandatory dividend after common shares are
assured a dividend equal to the minimum non-cumulative annual
preferred dividend equal to R$0.15 per 1,000 shares.
However, in order to adjust to the Brazilian corporate law, we had to
alter the rights of our preferred shares until March 1, 2003. In order to comply
with this provision, we approved at the general meeting of our shareholders on
February 28, 2003, that, upon the first issuance of new preferred shares that
occurs after the date of approval of our new by-laws on February 28, 2003,
holders of the preferred shares will be entitled to the same advantages and
preferences as established under items (a) through (d) above, except that, in
respect of item (d), holders of preferred shares will be entitled to participate
in the mandatory dividend that will be distributed for the common shares and the
preferred shares so that each preferred share receives a dividend that is 10%
higher than the dividend of each common share, including, for purposes of this
calculation, in the sum of the total dividend amount paid to the preferred
shares, the amount paid as a minimum non-cumulative annual preferred dividend
equal to R$0.15 per 1,000 preferred shares. This new dividend will apply to all
of our preferred shares, including existing preferred shares and newly issued
preferred shares.
Under the Brazilian corporate law, amendments reducing the rights of
preferred shares entitle the holders of those shares to withdrawal rights. See
"- Other Changes Implemented Under the Brazilian Corporate Law" for a
description of other changes.
Allocation of Net Profits and Distribution of Dividends
Allocation of Net Profits
The allocation of our net profits is proposed by our management and is
subject to approval by our shareholders at a general shareholders' meeting. The
discretion of our management and our shareholders to determine the allocation of
our net profits, however, is limited by certain rules that determine whether
such net profits should be distributed as dividends or allocated to certain
profit reserves or carried forward to future fiscal years, as follows:
Mandatory dividends. Our shareholders are generally entitled to receive
mandatory dividends each year, in an amount equivalent to 25% of our adjusted
net profits. Adjusted net profits is net profits following the addition or
subtraction of:
o amounts allocated to the formation of a legal reserve account, and
o amounts allocated to the formation of a contingency reserve account
and the return of any amounts in any contingency reserve accounts
deposited in previous years.
The payment of our mandatory dividends may be limited to the profits
actually realized in the fiscal year, if the portion of the profits not realized
is allocated to the unrealized income reserve account (as described below).
If our board of directors determines prior to a general shareholders'
meeting that payment of mandatory dividends with respect to the preceding fiscal
year would not be advisable in view of our financial condition, our shareholders
would decide at the shareholders' meeting whether or not to make that
distribution. If our shareholders decide at the shareholders' meeting not to
make that distribution, the board of auditors, if it is convened, must issue an
opinion on the recommendation of the board of directors, and our management must
report to the CVM within five days from the date of the shareholders' meeting
that approved it.
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Legal reserve account. We are required to maintain a legal reserve to
which we must allocate 5% of our net profits for each fiscal year until the
amount of the reserve equals 20% of our paid-in capital. The allocation of a
portion of the net profits to the legal reserve account is mandatory, even
though it must be submitted to the approval by the shareholders voting at the
general shareholders' meeting and may be transferred to our capital account or
used to offset accumulated losses. The legal reserve account is not available
for the payment of dividends.
Discretionary reserve accounts. We are permitted to provide for the
allocation of part of our net profits to discretionary reserve accounts set
forth in our by-laws. Currently, our by-laws provide for an expansion reserve
which shall be made of up to 100% of the net profits after (i) the allocations
to the legal reserve, (ii) the amounts allocated to contingency reserves and/or
unrealized income reserve account, and (iii) the payment of the mandatory
dividend. The total amount of this reserve may not exceed the amount
corresponding to our share capital. Our shareholders may amend our by-laws in
order to establish one or more other discretionary reserves. The allocation of
our net profits to discretionary reserve accounts may not be made if it prevents
the distribution of our mandatory dividends.
Contingency reserve account. A portion of our net profits may also be
allocated to a contingency reserve for an anticipated loss that is deemed
probable in future years. Any amount so allocated in a prior year must either be
reversed in the fiscal year for which the loss was anticipated if the loss does
not occur or be charged off if the anticipated loss occurs.
Retention of our net profits based on a capital expenditure budget. A
portion of our net profits may be retained for discretionary appropriations for
capital expenditure projects, the amount of which is based on a capital
expenditure budget previously presented by our management and approved by our
shareholders. If a project relating to this approved capital expenditure budget
has a term exceeding one year, the budget relating to the project must be
submitted to the general shareholders' meeting each fiscal year until the
relevant investment is completed. The allocation of our net profits to
discretionary reserve accounts and to investment project reserve accounts may
not be made if it prevents the distribution of our mandatory dividends.
Unrealized income reserve account. The portion of the mandatory
dividends that exceeds the net profits actually realized in that year may be
allocated to the unrealized income reserve account. Unrealized income is that
resulting from the equity pick up result and/or the profits of earnings of any
transaction, the financial satisfaction of which takes place in the subsequent
fiscal year.
The unrealized income reserve account must be used first to offset
accrued losses and the remaining portion must be used for the payment of
mandatory dividends.
The balance of the profits reserve accounts, except for the contingency
reserve account and unrealized income reserve account, may not exceed the share
capital. If this happens, a shareholders' meeting must resolve whether the
excess will be applied to pay in the subscribed and unpaid capital, to increase
and pay in the subscribed share capital or to distribute dividends.
Distribution of Dividends
Under the Brazilian corporate law and our by-laws, we may pay dividends
only from:
o our net profits earned in a given fiscal year - that is, our
after-tax income reduced by:
o our losses carried forward from prior fiscal years, and
o distributions to holders of founders' shares and to managers
pursuant to profit-sharing arrangements (the latter two,
participacoes estatutarias). Our by-laws authorize a profit
sharing plan for management and employees as well as a stock
option plan. The amount to be paid is set by our board of
directors and must not exceed an amount equal to 15% of
after-tax income, net of accumulated losses in any fiscal
year. Under Brazilian corporate law, this profit sharing may
only be paid to management with respect to a fiscal year in
which the mandatory dividend has been declared to the
shareholders;
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o our net profits accrued in previous fiscal years or in any
six-month and/or quarterly interim periods of a fiscal year; or
o our profit reserves set aside in previous fiscal years or in
the first six months of a fiscal year. In this case, "profit
reserves" means any discretionary reserve account, contingency
reserve account, amounts allocated to our capital expenditure
budget approved by our shareholders' resolution or unrealized
income reserve account, not including any legal reserve
account.
Under our by-laws, our preferred shares are entitled to a minimum
non-cumulative annual preferred dividend of R$0.15 per 1,000 shares, as
described above. The minimum non-cumulative annual preferred dividend of R$0.15
per 1,000 shares must be paid in each fiscal year in which there are amounts to
be distributed. The minimum non-cumulative annual preferred dividend of R$0.15
per 1,000 shares is accounted for as a portion of the mandatory dividends. The
possibility of not paying the mandatory dividends is based on our financial
condition (see "- Mandatory Dividends"). Consequently, under our by-laws, to the
extent funds are available therefor, dividends and/or interest on equity are to
be paid in the following order: (i) a minimum non-cumulative annual preferred
dividend in respect of the preferred shares in the amount of R$0.15 per 1,000
preferred shares and (ii) after common shares are assured the dividend equal to
the minimum non-cumulative annual preferred dividend equal to R$0.15 per 1,000
shares, dividends in respect of the preferred shares and our common shares in
equal amounts per share up to (or, if determined by the shareholders, in excess
of) the mandatory dividend and, upon the first issuance of new preferred shares
that occur after the date of approval of our new by-laws on February 28, 2003,
dividends so that each preferred share receives a dividend that is 10% higher
than the dividend of each common share, as described above, including, for
purposes of this calculation, the amount paid as a minimum non-cumulative annual
preferred dividend equal to R$0.15 per 1,000 preferred shares, subject to any
determination by our board of directors that such distribution would be
incompatible in view of our financial condition. We are authorized, but not
required, to distribute a greater amount of dividends.
Dividends are generally to be declared at general shareholders'
meetings in accordance with the recommendation of the board of directors. Our
board of directors may declare interim dividends out of the accrued profits
recorded in our financial statements most recently approved by our shareholders
or out of the accrued profits of the first six months of the fiscal year in
which the declaration of dividends will be made. Further, we may pay dividends
out of the net profits accounted for in our quarterly financial statements.
These quarterly interim dividends may not be greater than the amounts accounted
for in our capital reserve accounts. Any payment of interim dividends may be set
off against the amount of mandatory dividends relating to the net profits earned
in the year the interim dividends were paid.
Distributions of interest on our net worth may constitute an
alternative form of payment to shareholders. These payments may qualify as part
of the mandatory dividend at their net value. Please see "Item 10E - Taxation
- Brazilian Tax Considerations."
Dividends are generally required to be paid within 60 days after the
date the dividends were declared to the holder of record on the declaration
date, unless a shareholders' resolution sets forth another date of payment. This
date must, in either case, be prior to the end of the fiscal year in which the
dividend is declared.
A shareholder has a three-year period following the dividend payment
date to claim a dividend in respect of its shares, after which we have no
liability for such payment. We are not required to adjust the amount of the
dividend for inflation for the period from the date of declaration to the
payment date.
Our calculation of "net profits" and allocations to reserves for any
fiscal year are determined on the basis of financial statements prepared in
accordance with Brazilian GAAP. The financial statements included herein have
been prepared in accordance with U.S. GAAP and, although our allocations to
reserves and dividends will be reflected in those financial statements,
investors will not be able to calculate these allocations or required dividend
amounts from the financial statements.
Other Matters Relating to Our Shares
Our by-laws do not provide for the conversion of preferred shares into
common shares. In addition, the preferred shares have priority in reimbursement
of capital in the event of our liquidation and there are no redemption
provisions associated with the preferred shares. In accordance with our by-laws,
our shareholders may at any time
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convert shares from common into preferred, provided that they are paid up and
that the limit of two-thirds mentioned above (see "- Preferred Shares and Common
Shares - General") be observed. Requests for conversion shall be submitted in
writing to our executive board and, after being accepted, shall be ratified at
the next general meeting that is held.
Interest on Shareholders' Equity
We are allowed to pay interest on net worth as an alternative form of
payment to shareholders. This interest is limited to the daily pro rata
variation of the TJLP, the Brazilian long-term interest rate, and the expense
referred to this distribution cannot exceed, for tax purposes, the greater of
(i) 50% of net income (after deduction of social contribution on profits and
before taking such distribution and any deduction for corporate income tax) for
the year in respect of which the payment is made or (ii) 50% of the sum of
retained earnings and profit reserves for the year prior to the year in respect
of which the payment is made. Distribution of interest on net worth may also be
accounted for as our tax deductible expense, and any payment of interest on
preferred shares to shareholders, whether Brazilian residents or not, including
holders of ADSs, is subject to Brazilian withholding tax at the rate of 15%. See
"Item 10E - Taxation - Brazilian Tax Considerations - Interest Attributed to
Shareholders' Equity." The amount paid to shareholders as interest on net worth,
net of any withholding tax, may be included as part of the mandatory
distribution. We are required to distribute to shareholders an amount sufficient
to ensure that the net amount received by the shareholders, after the payment by
us of applicable withholding taxes in respect of the distribution of interest on
net worth, is at least equal to the mandatory distribution. To the extent we
distribute interest on net worth in any year, which distribution is not
accounted for as part of the mandatory distribution, a Brazilian withholding tax
would apply and we would not be required to make a gross-up.
Voting Rights
Each common share entitles the holder thereof to one vote at meetings
of our shareholders. Preferred shares do not entitle the holder to vote.
The Brazilian corporate law provides that non-voting or restricted
voting shares (such as the preferred shares) entitled to fixed or minimum
dividends acquire unrestricted voting rights beginning when a company has failed
for three consecutive fiscal years (or for any shorter period set forth in a
company's constituent documents) to pay any fixed or minimum dividend to which
such shares are entitled and continuing until payment thereof is made. Our
by-laws do not set forth any such shorter period.
Any change in the preferences or advantages of the preferred shares, or
the creation of a class of shares having priority over the preferred shares,
would require the approval of holders of a majority of the outstanding preferred
shares, voting as a class at a special meeting of holders of preferred shares.
This meeting would be called by publication of a notice on at least three
occasions in the Diario Oficial do Estado de Sao Paulo, as well as in a
newspaper of wide circulation in Sao Paulo, our principal place of business, at
least 15 days prior to the meeting but would not generally require any other
form of notice. We have designated Folha de Sao Paulo for this purpose.
In any circumstance in which holders of preferred shares are entitled
to vote, each preferred share will entitle the holder thereof to one vote.
Shareholders' Meetings
Under the Brazilian corporate law, at a general meeting of
shareholders, or a general meeting, convened and held in accordance with such
law and our by-laws, the shareholders are empowered to decide all matters
relating to our business purposes and to pass such resolutions as they deem
necessary for our protection and our well-being.
Pursuant to the Brazilian corporate law, shareholders voting at a
general meeting have the power, among others, to:
o defining our directives and overall objectives,
o amend our by-laws,
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o elect or dismiss members of our board of directors (and members
of the board of auditors) at any time,
o receive the yearly accounts by management and accept or reject
management's financial statements, including the allocation of
net profits and the distributable amount for payment of the
mandatory dividend and allocation to the various reserve
accounts,
o suspend the rights of a shareholder,
o accept or reject the valuation of assets contributed by a
shareholder in consideration for issuance of capital stock,
o pass resolutions to reorganize the legal form of, merge,
consolidate or split our company, to dissolve and liquidate
our company, to elect and dismiss our liquidators and to
examine their accounts, and
o authorize management to declare our company insolvent and to
request a concordata (a procedure involving protection from
creditors similar in nature to reorganization under the U.S.
Bankruptcy Code).
In addition, our by-laws also establish that a general meeting of our
shareholders shall have the following duties:
o to approve or alter the annual investment plan,
o to resolve the ratification, within 15 days of the date of
execution of the respective agreements, of the purchase, sale and
encumbrance of business or fixed assets, when the individual
value or the aggregate annual value exceeds (i) 5% of our
shareholders' equity or an aggregate value of (ii) US$100
million, provided that the lesser of (i) and (ii) will prevail,
o to enter into and amend any agreement or contract directly or
indirectly between our company and/or our affiliates and any
of our controlling shareholders or their relatives or
connections or any of their controlling or affiliate
companies, except in the event of inter-company loans, which
will be contracted on an arm's-length basis,
o to resolve any cancellation of listing of our shares for trading
on a stock exchange or requests for new listings, and
o to resolve any change in our dividend distribution policy.
Preemptive Rights on Increase in Preferred Share Capital
Under the Brazilian corporate law, each shareholder has a general
preemptive right to subscribe for shares in any capital increase, in proportion
to its shareholding, except in the event of the grant and exercise of any option
to acquire shares of our capital stock under our stock option program. A
shareholder has a general preemptive right to subscribe for debentures
convertible into shares of our company. A minimum period of 30 days following
the publication of notice of the capital increase is allowed for the exercise of
the right, and the right is negotiable. However, our board of directors is
authorized to eliminate preemptive rights with respect to the issuance of new
preferred shares up to the limit of the authorized share capital, provided that
the distribution of such shares is effected (i) through a stock exchange or in a
public offering or (ii) through an exchange of shares in a public offering, the
purpose of which is to acquire control of another company. In this case, we may
entitle shareholders with a priority right to subscribe shares during a term we
determine.
In the event of a capital increase, which would maintain or increase
the proportion of capital represented by preferred shares, holders of ADSs,
except as described above, would have preemptive rights to subscribe only to
newly issued preferred shares. In the event of a capital increase which would
reduce the proportion of capital represented by preferred shares, holders of
ADSs, except as described above, would have preemptive rights to
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subscribe for preferred shares, in proportion to their shareholdings and for
common shares only to the extent necessary to prevent dilution of their interest
in us. For risks associated with preemptive rights, see "Item 3D - Key
Information - Risk Factors."
Withdrawal Rights
Neither the common shares nor the preferred shares are redeemable. A
dissenting or abstaining shareholder under Brazilian law may seek withdrawal
following a decision made at a shareholders' meeting by shareholders
representing at least 50% of the voting shares (i) to create preferred shares or
to disproportionately increase an existing class of preferred shares relative to
the other classes of shares, unless such action is provided for or authorized by
the by-laws, (ii) to modify a preference, privilege or condition of redemption
or amortization conferred on one or more classes of preferred shares, or to
create a new class with greater privileges than the existing classes of
preferred shares, (iii) to reduce the mandatory distribution of dividends, (iv)
to change our corporate purposes, (v) to transfer all of the shares to another
company in order to make us a wholly owned subsidiary of such company or vice
versa (incorporacao de acoes), (vi) to acquire another company, the price of
which exceeds certain limits set forth in the Brazilian corporate law, (vii) to
merge into another company, including if we are merged into one of our
controlling companies, or are consolidated with another company, (viii) to
participate in a group of companies as defined under the Brazilian corporate law
and subject to the conditions set forth therein, (ix) to approve a spin-off of
our company if it entails a change in the corporate purpose, a reduction in
mandatory dividends or the participation in a centralized group of companies, or
(x) in the event that the entity resulting from (a) an "incorporacao de acoes"
as described above, (b) a spin-off, (c) a merger or (d) a consolidation of a
Brazilian publicly listed company fails to become a Brazilian publicly listed
company within 120 days of the general shareholders' meeting in which such
decision was taken. The actions resulting from items (i) through (v) and items
(vii) through (x) give the dissenting shareholder the right to withdraw. The
right to withdraw lapses 30 days after publication of the minutes of the
relevant shareholders' meeting unless, in items (i) and (ii) above, the
resolution is subject to confirmation by the preferred shareholders (which must
be made at a special meeting to be held within one year), in which case the
30-day term is counted from the date the minutes of the special meeting are
published. In any event, we are entitled to reconsider any action giving rise to
withdrawal rights within ten days following the expiration of the 30-day term
mentioned above if the withdrawal of shares of dissenting shareholders would
jeopardize our financial stability.
In addition, the rights of withdrawal in items (vii) and (viii) above
may not be exercised by holders of shares if such shares have (a) liquidity,
when such shares are part of the Bovespa Index, or part of any other stock
exchange index in Brazil or in the world, as defined by the CVM, and (b)
dispersion, when the controlling shareholder or other companies under the same
control has less than 50% of the shares or class of shares.
Our preferred shares may be withdrawn at their book value, determined
on the basis of the last balance sheet approved by the shareholders. If the
shareholders' meeting giving rise to withdrawal rights occurs more than sixty
days after the date of the last approved balance sheet, a shareholder may demand
that its shares be valued on the basis of a new balance sheet that is of a date
within sixty days of such shareholders' meeting.
Form and Transfer of Shares
Our preferred shares are in book-entry form, and the transfer of such
shares is made by the registrar in our books, by debiting the share account of
the transferor and crediting the share account of the transferee. We maintain
book-entry form services with Banco Itau S.A., or the registrar, which performs
all the services of safekeeping and transfer of our shares and related services.
Transfer of shares by a foreign investor is made in the same way and is
requested by the investor's local agent on the investor's behalf. If the
original investment is registered with the Central Bank pursuant to Resolution
2,689, the foreign investor should also seek an amendment, if necessary, through
its local agent, of the relevant registration with the Central Bank to reflect
the new ownership.
The Sao Paulo Stock Exchange operates a central clearing system. A
holder of our shares may choose, at its discretion, to participate in this
system, and all shares elected to be put into the system will be deposited in
custody with the stock exchange (through a Brazilian institution that is duly
authorized to operate by the Central Bank and maintains a clearing account with
the stock exchange). The fact that these shares are subject to custody with the
stock exchange will be reflected in our registry of shareholders. Each
participating shareholder will, in
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turn, be registered in our register of beneficial shareholders maintained by the
stock exchange and will be treated in the same way as registered shareholders.
Other Changes Implemented Under the Brazilian Corporate Law
Besides the changes already described in this annual report, Law No.
10,303, which amended the Brazilian corporate law and current regulations,
provides for the following changes:
o upon a sale of control, the acquiror is required to launch a
tender offer to purchase all minority voting shares at a price
equal to at least 80% of the control price;
o if provided for in the by-laws, disputes among our shareholders
will be subject to arbitration. Our by-laws currently do not
provide for arbitration;
o upon the occurrence of a tender offer aiming at delisting our
company or through which our controlling shareholders acquire
more than one-third of the float shares on September 4, 2000,
the purchase price shall be equal to the fair value of the
shares considering the total number of outstanding shares;
o minority shareholders that hold either (i) preferred shares
representing at least 10% of our total share capital, or (ii)
common shares representing at least 15% of our voting capital,
have the right to appoint one member and an alternate to our
board of directors. If no common or preferred shareholder
meets the thresholds described above, shareholders holding
preferred shares or common shares representing at least 10% of
our total share capital are entitled to combine their holdings
to appoint one member and an alternate to our board of
directors. Until 2005, a director appointed by the preferred
shareholders as a group, or collectively with the common
shareholders, is to be chosen from a list of three names drawn
up by the controlling shareholder;
o members of our board of directors elected by the non-controlling
shareholders will have the right to veto the choice of the
independent auditor of the controlling shareholder;
o our controlling shareholders, the shareholders that elect members
to our board of directors and to the board of auditors, the
members of our board of directors and board of auditors and our
executive officers will be required to disclose any purchase or
sale of our shares to the CVM and to the Sao Paulo Stock Exchange;
and
o the chairman of any shareholders' or board of directors' meeting
shall disregard any vote that is rendered against provisions of
any shareholders' agreement if that shareholders' agreement has
been duly filed with us.
We have amended our by-laws to meet certain mandatory provisions of the
Brazilian corporate law.
10C. Material Contracts
Other than the shareholders' agreement between our controlling
shareholders and the Casino Group and between us and Sendas described under
"Item 7A - Major Shareholders and Related Party Transactions - Major
Shareholders - Shareholders' Agreement," we have not entered into any material
contracts outside the normal course of our business.
10D. Exchange Controls
The ownership of preferred or common shares by individuals or legal
entities domiciled outside Brazil is subject to restrictions established in the
Brazilian Constitution.
The right to convert dividend payments and proceeds from the sale of
common shares or preferred shares into foreign currency and to remit those
amounts outside Brazil is subject to exchange control restrictions and
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foreign investment legislation which generally requires, among other things,
obtaining an electronic registration before the Central Bank.
Resolution No. 1,927 of the CMN, which is the restated and amended
Annex V to Resolution No. 1,289 of the CMN, or the Annex V Regulations, provides
for the issuance of depositary receipts in foreign markets in respect of shares
of Brazilian issuers. We filed an application to have the ADSs approved under
the Annex V Regulations by the Central Bank and the CVM, and we received final
approval before the offering of the preferred shares underlying the ADSs in May
1997.
An electronic registration, which replaced the amended certificate of
registration, was issued in the name of the depositary with respect to the ADSs
and is maintained by the custodian on behalf of the depositary.
This electronic registration was carried on through the Sistema do
Banco Central-SISBACEN, a database of information provided by financial
institutions to the Central Bank. Pursuant to the electronic registration, the
custodian is able to convert dividends and other distributions with respect to
the preferred shares represented by the ADSs into foreign currency and remit the
proceeds outside Brazil. In the event that a holder of ADSs exchanges those ADSs
for preferred shares, that holder will be entitled to continue to rely on the
depositary's electronic registration for only five business days after that
exchange, following which that holder must seek to obtain its own electronic
registration. Thereafter, unless the preferred shares are held pursuant to
Resolution No. 2,689 of January 26, 2000, or Resolution 2,689, of CMN, the
national monetary council, by a duly registered investor or, if not a registered
investor under Resolution 2,689, a holder of preferred shares who applies for
and obtains a new electronic registration, that holder may not be able to obtain
and remit abroad U.S. dollars or other foreign currencies upon the disposition
of the preferred shares, or distributions with respect thereto, and generally
will be subject to less favorable tax treatment when it obtains its own
electronic registration. In addition, if the foreign investor resides in a tax
haven jurisdiction, the investor will be also subject to less favorable tax
treatment. See "Item 10E - Taxation - Brazilian Tax Considerations."
Under Resolution 2,689, foreign investors may invest in almost all
financial assets and engage in almost all transactions available in the
Brazilian financial and capital markets, provided that the requirements
described below are fulfilled. In accordance with Resolution 2,689, the
definition of foreign investor includes individuals, legal entities, mutual
funds and other collective investment entities domiciled or headquartered
abroad.
Pursuant to Resolution 2,689, foreign investors must fulfill the
following requirements before engaging in financial transactions:
o appoint at least one representative in Brazil with powers to
perform actions relating to the foreign investment,
o complete the appropriate foreign investor registration form,
o register as a foreign investor with the CVM, the Brazilian
securities commission, and
o register the foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
the CVM. In addition, securities trading is restricted to transactions carried
out in the stock exchanges or organized over-the-counter markets licensed by the
CVM.
Investors under Resolution 2,689 who are not resident in a tax haven
jurisdiction (i.e., a country that does not impose income tax or where the
maximum income tax rate is lower than 20%) are entitled to favorable tax
treatment. See "Item l0E - Taxation - Brazilian Tax Considerations."
10E. Taxation
This summary contains a description of the principal Brazilian and U.S.
federal income tax consequences of the purchase, ownership and disposition of
preferred shares or ADSs, but it does not purport to be a
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comprehensive description of all the tax considerations that may be relevant to
these matters based upon the particular circumstances of a holder. In
particular, this summary deals only with holders that will hold preferred shares
or ADSs as capital assets, and does not address the tax treatment of holders
that may be subject to special tax rules, including, but not limited to, banks,
insurance companies, dealers in securities, persons that will hold, for tax
purposes, preferred shares or ADSs as a position in a "straddle" or "conversion
transaction," U.S. persons that have a "functional currency" other than the U.S.
dollar and persons that own or are treated as owning 10% or more of our voting
shares. Investors in and holders of preferred shares or ADSs should consult
their own tax advisers as to the tax consequences to them of the purchase,
ownership and disposition of preferred shares or ADSs, including, in particular,
the effect of any state, local or other national tax laws.
This summary is based upon tax laws of Brazil and the United States in
effect as of the date hereof, which laws are subject to change (possibly with
retroactive effect) and differing interpretations. This summary is also based
upon the representations of the depositary and on the assumption that each
obligation in the Amended and Restated Deposit Agreement, dated as of May 28,
1997, among us, the depositary and the Owners from time to time of American
Depositary Receipts, and any related documents, will be performed in accordance
with its terms.
Although there is presently no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how such a treaty would affect
a U.S. holder of preferred shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian
taxation, or by a holder of preferred shares with an investment in preferred
shares registered with the Central Bank as a U.S. dollar investment (in each
case, a "non-Brazilian holder"). It is based on Brazilian law as currently in
effect, and, therefore, any change in such law may change the consequences
described below. Each non-Brazilian holder should consult his or her own tax
adviser concerning the Brazilian tax consequences of an investment in preferred
shares or ADSs.
A holder of ADSs may withdraw them in exchange for preferred shares in
Brazil. The investment may be registered under Resolution 2,689, of January 26,
2000, of the National Monetary Council.
Pursuant to Resolution 2,689, a foreign investor must: (1) appoint at
least one representative in Brazil with powers to perform actions relating to
the foreign investment, (2) complete the appropriate foreign investor
registration form, (3) register as a foreign investor with the CVM, and (4)
register the foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
the CVM. In addition, securities trading is restricted to transactions carried
out in the stock exchanges or organized over-the-counter markets licensed by the
CVM.
Registered Capital
The amount of an investment in preferred shares held by a non-Brazilian
holder who qualifies under Resolution 2,689 and obtains registration with the
CVM, or by the depositary representing such holder, is eligible for registration
with the Central Bank; such registration (the amount so registered is referred
to as "Registered Capital") allows the remittance outside Brazil of foreign
currency, converted at the commercial market rate, acquired with the proceeds of
distributions on, and amounts realized with respect to dispositions of, such
preferred shares. The Registered Capital for each preferred share purchased in
the form of an ADS, or purchased in Brazil after the date hereof, and deposited
with the depositary will be equal to its purchase price (in U.S. dollars). The
Registered Capital for a preferred share that is withdrawn upon surrender of an
ADS will be the U.S. dollar equivalent of (i) the average price of a preferred
share on the Brazilian stock exchange on which the greatest number of such
shares was sold on the day of withdrawal, or (ii) if no preferred shares were
sold on that day, the average price on the Brazilian stock exchange on which the
greatest number of preferred shares were sold in the fifteen trading sessions
immediately preceding such withdrawal. The U.S. dollar value of the preferred
shares is
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determined on the basis of the average commercial market rates quoted by the
Central Bank on such date (or, if the average price of preferred shares is
determined under clause (ii) of the preceding sentence, the average of such
quoted rates on the same fifteen dates used to determine the average price of
the preferred shares).
A non-Brazilian holder of preferred shares may experience delays in
effecting such registration which may delay remittances abroad. Such a delay may
adversely affect the amount, in U.S. dollars, received by the non-Brazilian
holder.
Taxation of Dividends
As a result of the tax legislation adopted on December 26, 1995,
dividends based on profits generated after January 1, 1996, including dividends
paid in kind, payable by us in respect of preferred shares, are exempt from
withholding income tax. Stock dividends with respect to profits generated before
January 1, 1996 are not subject to Brazilian tax, provided that the stock is not
redeemed by us or sold in Brazil within five years after distribution of such
stock dividends. Dividends relating to profits generated prior to January 1,
1996 may be subject to Brazilian withholding income tax at varying rates,
depending on the year the profits were generated.
Taxation of Gains
Gains realized outside Brazil by a non-Brazilian holder on the
disposition of ADSs to another non-Brazilian holder may be subject to Brazilian
tax. According to Law No. 10,833 of December 2003, the disposition of assets
located in Brazil by a non-Brazilian holder, whether to other non-Brazilian
holder or Brazilian holders, may become subject to taxation in Brazil. Although
we believe that the ADSs do not fall within the definition of assets located in
Brazil for the purposes of this rule, considering the general and unclear scope
of it and the lack of judicial court ruling in respect thereto, we are unable to
predict whether such understanding will ultimately prevail in the courts of
Brazil.
The withdrawal of ADSs in exchange for preferred shares is not subject
to Brazilian income tax. The deposit of preferred shares in exchange for ADSs
may be subject to Brazilian capital gain tax at the rate of 15% or 25%, in case
the holder is located in a "tax haven" (as described below), if the amount
previously registered with the Central Bank as a foreign investment in the
preferred shares is lower than (1) the average price per preferred share on a
Brazilian stock exchange on which the greatest number of such shares were sold
on the day of deposit, or (2) if no preferred shares were sold on that day, the
average price on the Brazilian stock exchange on which the greatest number of
preferred shares were sold in the fifteen trading sessions immediately preceding
such deposit. In this case, the difference between the amount previously
registered and the average price of the preferred shares, calculated as above,
shall be considered a capital gain. Upon receipt of the underlying preferred
shares, the non-Brazilian holder registered under Resolution 2,689 will be
entitled to register the U.S. dollar value of such shares with the Central Bank
as described above in "- Registered Capital." However, if this non-Brazilian
holder does not register under Resolution 2,689, it will be subject to the less
favorable tax treatment described below.
Non-Brazilian holders are generally subject to income tax imposed at a
rate of 15% or 25%, in case the holder is located in a "tax haven" (as described
below) on gains realized on sales or exchanges of preferred shares that occur,
off of Brazilian stock, future and commodities exchanges. In the case of gains
obtained on Brazilian stock, future and commodities exchanges, the general
applicable rate is 20%, except as described below. Non-Brazilian holders are
subject to income tax currently at a rate of 20% on gains realized on sales in
Brazil of preferred shares that occur on the Brazilian stock exchanges unless
such a sale is made by a non-Brazilian holder who is not resident in a "tax
haven" (as described below) and: (1) such sale is made within five business days
of the withdrawal of such preferred shares in exchange for ADSs and the proceeds
thereof are remitted abroad within such five-day period, or (2) such sale is
made under Resolution 2,689 by registered non-Brazilian holders who obtain
registration with the CVM. In the two latter cases, the gains realized are
exempt from income tax. Such "gain realized" arising from transactions on the
Brazilian stock exchanges is the difference between the amount in Brazilian
currency realized on the sale or exchange and the acquisition cost, measured in
Brazilian currency, without any correction for inflation, of the shares sold.
The "gain realized" as a result of a transaction that occurs other than on a
Brazilian stock exchange will be the positive difference between the amount
realized on the sale or exchange and the acquisition cost of the preferred
shares, both such values to be taken into account in reais; there are grounds,
however, to hold that the "gain realized" should be calculated based on the
foreign currency amount registered with the Central Bank, such foreign currency
amount to be translated into Brazilian currency at the commercial market rate.
There is no assurance that the current preferential treatment for holders of
ADSs and non-Brazilian holders of
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preferred shares under Resolution 2,689 will continue in the future or that it
will not be changed in the future. Reductions in the rate of tax provided for by
Brazil's tax treaties do not apply to the tax on gains realized on sales or
exchange of preferred shares.
Any exercise of preemptive rights relating to the preferred shares will
not be subject to Brazilian taxation. Any gain on the sale or assignment of
preemptive rights relating to the preferred shares by a holder of preferred
shares or by the depositary on behalf of holders of the ADSs, will be subject to
Brazilian taxation at the same rate applicable to the sale or disposition of
preferred shares.
Interest Attributed to Shareholders' Equity
Distribution of an interest on equity charge attributed to
shareholders' equity in respect of the preferred or common shares as an
alternative form of payment to shareholders who are either Brazilian residents
or non-Brazilian residents, including holders of ADSs, is subject to Brazilian
withholding income tax at the rate of 15% or 25%, in case the holder is located
in a "tax haven" (as described below). Such payments, subject to certain
limitations, are deductible for Brazilian income tax purposes and, as from 1997,
deductible in determining social contribution on net income (the latter is not
applicable to us) by us as long as the payment of a distribution of interest is
credited to the shareholder's account and approved at our general meeting of
shareholders. To the extent that such payment is accounted for as part of the
mandatory dividend, under current Brazilian law, we are obliged to distribute to
shareholders an additional amount sufficient to ensure that the net amount
received by the shareholders, after payment by us of applicable Brazilian
withholding taxes in respect of the distribution of interest on net worth, is at
least equal to the mandatory dividend. To the extent we distribute interest on
capital, which distribution is not accounted for as part of the mandatory
dividend, we are not obliged to pay such an additional amount on behalf of the
shareholders. The distribution of interest attributed to shareholders' equity is
proposed by our board of directors and subject to subsequent declaration by the
shareholders at the general meeting.
Beneficiaries Resident or Domiciled in Tax Havens or Low Tax
Jurisdiction
Law 9779/99, in effect as of January 1, 1999, states that, with the
exception of certain prescribed circumstances, income derived from operations by
a beneficiary resident or domiciled in a country considered as a "tax haven" is
subject to income tax withholding at a rate of 25%. "Tax havens" are considered
to be places which do not impose any income tax or which impose such tax at a
maximum rate of less than 20% and those where the internal legislation imposes
restrictions to disclosure the shareholding composition or the ownership of the
investment. Accordingly, if the distribution of interest attributed to
shareholders' equity is made to a beneficiary resident or domiciled in a "tax
haven," the income tax rate applicable will be 25% instead of 15%. Capital gains
related to transactions not conducted in the Brazilian stock exchange (for
"gains realized") are not subject to this 25% tax. The 25% rate is not
applicable for capital gains obtained in transactions conducted in the Brazilian
stock exchange, which remains subject to income tax at the rate of 20%.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable
to the ownership, transfer or disposition of preferred shares or ADSs by a
non-Brazilian holder, except for gift and inheritance taxes, which are levied by
some states of Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil within such states to individuals
or entities resident or domiciled within such states in Brazil. There are no
Brazilian stamp, issue, registration or similar taxes or duties payable by
holders of preferred shares or ADSs.
Tax on Bank Account Transactions (CPMF)
As a general rule, CPMF is imposed on debits to bank accounts.
Therefore, transactions by the depositary or by holders of preferred shares
which involve the transfer of Brazilian currency through Brazilian financial
institutions shall be subject to a financial transactions tax, the CPMF tax. The
CPMF tax is a temporary contribution on financial transactions, at a current
rate of 0.38%, despite the fact that, for some cases, transactions involving
foreign investors may be exempt from CPMF. The responsibility for the collection
of the CPMF tax is borne by the financial institution that carries out the
relevant financial transaction.
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Taxation of Foreign Exchange Transactions (IOF/Cambio)
Pursuant to Decree 4,494/2000, IOF/Cambio may be imposed on the
conversion of Brazilian currency into foreign currency (e.g., for purposes of
paying dividends and interest) and on the conversion of foreign currency into
Brazilian currency. Except under specific circumstances, the rate of IOF tax on
such conversions is currently 0%, but the Minister of Finance has the legal
power to increase at any time the rate to a maximum of 25%, but only in relation
to future transactions.
Tax on Bonds and Securities Transactions (IOF/Titulos)
Law 8,894/1994 created the Tax on Bonds and Securities Transactions,
the IOF/Titulos, which may be imposed on any transactions involving bonds and
securities, including those carried out on Brazilian futures and commodities
stock exchanges. As a general rule, the rate of this tax is currently zero,
although the executive branch may increase such rate up to 1.5% per day, but
only with respect to future transactions.
U.S. Federal Income Tax Considerations
The following discussion summarizes the principal U.S. federal income
tax consequences of the purchase, ownership and disposition of preferred shares
or ADSs by a U.S. holder (as defined below) holding such preferred shares or
ADSs as capital assets. This summary is based upon the Internal Revenue Code of
1986, as amended, Treasury regulations, administrative pronouncements of the
Internal Revenue Service and judicial decisions, all as in effect on the date
hereof, and all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This summary does not describe any
implications under state, local or non-U.S. tax law, or any aspect of U.S.
federal tax law other than income taxation.
As used below, a "U.S. holder" is a beneficial owner of preferred
shares or ADSs that is, for U.S. federal income tax purposes:
(i) a citizen or resident alien individual of the United States;
(ii) a corporation or partnership created or organized in or under
the laws of the United States or any state thereof (including
the District of Columbia);
(iii) an estate the income of which is subject to U.S. federal
income tax regardless of its source; or
(iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust or (B) the
trust has a valid election in effect under applicable Treasury
regulations to be treated as a United States person.
If a partnership or other entity taxable as a partnership holds
preferred shares or ADSs, the tax treatment of a partner will generally depend
on the status of the partner and the activities of the partnership. Partners of
partnerships holding preferred shares or ADSs should consult their tax advisors.
In general, for U.S. federal income tax purposes, holders of American
Depositary Receipts evidencing ADSs will be treated as the beneficial owners of
the preferred shares represented by those ADSs.
Taxation of Distributions
In general, distributions with respect to the preferred shares or the
ADSs (which likely would include distributions of interest on equity charges
attributed to shareholders' equity, as described above under "- Brazilian Tax
Considerations - Interest Attributed to Shareholders' Equity") will, to the
extent made from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles, constitute dividends for U.S. federal
income tax purposes. If a distribution exceeds the amount of our current and
accumulated earnings and profits, it will be treated as a non-taxable return of
capital to the extent of the U.S. holder's tax basis in the preferred shares or
ADSs, and thereafter as capital gain. As used below, the term "dividend" means a
distribution that constitutes a dividend for U.S. federal income tax purposes.
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The gross amount of any dividends (including amounts withheld in
respect of Brazilian taxes) paid with respect to the preferred shares or ADSs
generally will be subject to U.S. federal income taxation as ordinary income and
will not be eligible for the dividends received deduction allowed to
corporations. Dividends paid in Brazilian currency will be included in the gross
income of a U.S. holder in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date the dividends are received by the U.S.
holder, or in the case of dividends received in respect of ADSs, on the date the
dividends are received by the depositary, whether or not converted into U.S.
dollars. A U.S. holder will have a tax basis in any distributed Brazilian
currency equal to the amount included in gross income, and any gain or loss
recognized upon a subsequent disposition of such Brazilian currency generally
will be foreign currency gain or loss that is treated as ordinary income or
loss. If dividends paid in Brazilian currency are converted into U.S. dollars on
the day they are received by the U.S. holder or the depositary, as the case may
be, U.S. holders generally should not be required to recognize foreign currency
gain or loss in respect of the dividend income. U.S. holders should consult
their own tax advisors regarding the treatment of any foreign currency gain or
loss if any Brazilian currency received by the U.S. holder or the depositary is
not converted into U.S. dollars on the date of receipt.
Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to the ADSs will be subject to taxation at a maximum rate of
15% if the dividends represent "qualified dividend income." Dividends paid on
the ADSs will be treated as qualified dividend income if (i) the ADSs are
readily tradable on an established securities market in the United States and
(ii) we were not in the year prior to the year in which the dividend was paid,
and are not in the year in which the dividend is paid, a passive foreign
investment company ("PFIC"), foreign personal holding company ("FPHC") or
foreign investment company ("FIC"). The ADSs are listed on the New York Stock
Exchange, and may qualify as readily tradable on an established securities
market in the United States so long as they are so listed. However, no
assurances can be given that the ADSs will be or remain readily tradable. Based
on our audited financial statements as well as relevant market and shareholder
data, we believe that we were not treated as a PFIC, FPHC or FIC for United
States federal income tax purposes with respect to our 2003 taxable year. In
addition, based on the our audited financial statements and current expectations
regarding the value and nature of its assets, the sources and nature of its
income, and relevant market and shareholder data, we do not anticipate becoming
a PFIC, FPHC or FIC for its 2004 taxable year. Because these determinations are
based on the nature of our income and assets from time to time, and involve the
application of complex tax rules, no assurances can be provided that we will not
be considered a PFIC, FPHC, or FIC for the current, or any past or future tax
year.
Based on existing guidance, it is not entirely clear whether dividends
received with respect to the preferred shares will be treated as qualified
dividends, because the preferred shares are not themselves listed on a United
States exchange. In addition, the United States Treasury Department has
announced its intention to promulgate rules pursuant to which holders of ADSs or
preferred stock and intermediaries though whom such securities are held will be
permitted to rely on certifications from issuers to establish that dividends are
treated as qualified dividends. Because such procedures have not yet been
issued, we are not certain that we will be able to comply with them. U.S.
Holders of ADSs and preferred shares should consult their own tax advisors
regarding the availability of the reduced dividend tax rate in the light of
their own particular circumstances.
Dividends paid by us generally will constitute passive (or possibly,
financial services) income from non-U.S. sources for U.S. foreign tax credit
purposes. Subject to generally applicable limitations under U.S. federal income
tax law, Brazilian withholding tax imposed on such dividends, if any, will be
treated as a foreign income tax eligible for credit against a U.S. holder's U.S.
federal income tax liability (or at a U.S. holder's election, all foreign income
taxes paid may instead be deducted in computing such holder's taxable income).
In general, special rules will apply to the calculation of foreign tax credits
in respect of dividend income that is subject to preferential rates of U.S.
federal income tax pursuant to recently enacted legislation. U.S. holders should
be aware that the U.S. Internal Revenue Service ("IRS") has expressed concern
that parties to whom ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. holders of ADSs.
Accordingly, the discussion above regarding the creditability of Brazilian
withholding tax on dividends could be affected by future actions that may be
taken by the IRS.
Taxation of Capital Gains
Deposits and withdrawals of preferred shares by holders in exchange for
ADSs will not result in the realization of gain or loss for U.S. federal income
tax purposes.
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In general, gain or loss, if any, realized by a U.S. holder upon a sale
or other taxable disposition of preferred shares or ADSs will be subject to U.S.
federal income taxation as capital gain or loss in an amount equal to the
difference between the amount realized on the sale or other taxable disposition
and such holder's adjusted tax basis in the preferred shares or ADSs. Such
capital gain or loss will be long-term capital gain or loss if at the time of
sale or other taxable disposition the preferred shares or ADSs have been held
for more than one year. Under current U.S. federal income tax law, net long-term
capital gain of certain U.S. holders (including individuals) are eligible for
taxation at preferential rates. The deductibility of capital losses is subject
to certain limitations. Gain, if any, realized by a U.S. holder on the sale or
other disposition of preferred shares or ADSs generally will be treated as U.S.
source income for U.S. foreign tax credit purposes. Consequently, if a Brazilian
withholding tax is imposed on the sale or disposition of preferred shares, a
U.S. holder that does not receive sufficient foreign source income from other
sources may not be able to derive effective U.S. foreign tax credit benefits in
respect of such Brazilian withholding tax. U.S. holders should consult their own
tax advisors regarding the application of the foreign tax credit rules to their
investment in, and disposition of, preferred shares or ADSs.
Passive Foreign Investment Company Rules
Based upon our current and projected income, assets and activities, we
do not expect the preferred shares or ADSs to be considered shares of a PFIC for
our current fiscal year or for future fiscal years. However, because the
determination of whether the preferred shares or ADSs constitute shares of a
PFIC will be based upon the composition of our income and assets, and entities
in which we hold at least a 25% interest, from time to time, and because there
are uncertainties in the application of the relevant rules, there can be no
assurance that the preferred shares or ADSs will not be considered shares of a
PFIC for any fiscal year. If the preferred shares or ADSs were shares of a PFIC
for any fiscal year, U.S. holders (including certain indirect U.S. holders) may
be subject to adverse tax consequences, including the possible imposition of an
interest charge on gains or "excess distributions" allocable to prior years in
the U.S. holder's holding period during which we were determined to be a PFIC.
U.S. holders should consult their own tax advisors.
U.S. Backup Withholding and Information Reporting
A U.S. holder of preferred shares or ADSs may, under certain
circumstances, be subject to "backup withholding" with respect to certain
payments to such U.S. holder, such as dividends paid by our company or the
proceeds of a sale of preferred shares or ADSs, unless such holder (i) is a
corporation or comes within certain other exempt categories, and demonstrates
this fact when so required, or (ii) provides a correct taxpayer identification
number, certifies that it is not subject to backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax. Any amount withheld under these rules will
be creditable against a U.S. holder's U.S. federal income tax liability,
provided the requisite information is timely furnished to the IRS.
10F. Dividends and Paying Agents
Not applicable.
10G. Statement by Experts
Not applicable.
10H. Documents on Display
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended, pursuant to which we file reports and other
information with the Commission. Reports and other information filed by us with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. You may obtain copies of this material by mail
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may also inspect these reports
and other information at the offices of the New York Stock Exchange, 11 Wall
Street, New York, New York 10005, on which our ADSs are listed.
73
We also file financial statements and other periodic reports with the
CVM.
Copies of our annual reports on Form 20-F and documents referred to in
this annual report and our by-laws will be available for inspection upon request
at our headquarters at: Avenida Brigadeiro Luiz Antonio, no. 3,142, CEP
01402-901, Sao Paulo, SP, Brazil.
10I. Subsidiary Information
Not required.
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risks from changes in foreign currency and
interest rates. Market risk is the potential loss arising from adverse changes
in market rates, such as foreign currency exchange rates and interest rates. See
notes 2(s) and 16 to our financial statements for additional information
regarding derivative financial instruments and our foreign exchange and interest
rate risk management.
We use derivative financial instruments for purposes other than trading
and do so to manage and reduce our exposures to market risk resulting from
fluctuations in interest rates and foreign currency exchange rates. These
instruments do not qualify for deferral, hedge, accrual or settlement accounting
and are marked-to-market value, with the resulting gains and losses reflected in
the statement of operations within "financial income" and "financial expense,"
respectively.
Since late 1999, we have adopted a treasury policy designed to manage
financial market risk, principally by swapping a substantial part of our U.S.
dollar-denominated liabilities to obligations denominated in reais. We engage in
cross-currency interest rate swaps under which we enter into an agreement
typically with the same counter-party which provides the original U.S.
dollar-denominated financing. A separate financial instrument is signed at the
time the loan agreement is consummated, under which we effectively are then
liable for amounts in reais and interest at a percentage of an interbank
(Certificado de Deposito Interbancario - CDI) variable interest rate. Amounts
are normally consummated with the same financial institutions and for the same
maturity periods. See "Item 5B - Operating and Financial Review and Prospects -
Liquidity and Capital Resources."
We use derivative financial instruments, usually cross-currency
interest rate swaps, to mitigate risk caused by fluctuating currency and
interest rates. We enter into cross-currency interest rate swaps to protect
foreign currency exposure. Decisions regarding swap contracts are made on a
case-by-case basis, taking into consideration the amount and duration of the
exposure, market volatility, and economic trends. We use the fair-value method
of accounting, recording realized and unrealized gains and losses on these
contracts which are included within "financial income" and "financial expense,"
respectively.
We do not hold or issue financial instruments for trading purposes.
We use interest rate swap agreements to manage interest costs and risks
associated with changing rates. The differential to be paid or received is
accrued as interest rates change and is recognized in interest expense over the
life of the agreements.
We have a policy of entering into contracts only with parties that have
high credit ratings. The counter-parties to these contracts are major financial
institutions, and we do not have significant exposure to any single
counter-party. We do not anticipate a credit loss from counter-party
non-performance.
In order to minimize credit risk from our investments, we have adopted
policies restricting cash and/or investments that may be allocated among
financial institutions, which take into consideration monetary limits and
financial institution credit ratings.
74
Interest Rate Risk
We are exposed to interest rate volatility with regard to our cash and
cash equivalents, fixed and floating rate debt. For cash and cash equivalents,
we generally will swap the fixed interest rate for a floating rate, the CDI
rate. The interest rate in our cash and cash equivalents denominated in reais is
based on the CDI rate, the benchmark interest rate set by the interbank market
on a daily basis.
We are exposed to interest rate volatility with regard to future
issuances of fixed rate debt, foreign currency fluctuations and existing
issuances of fixed rate debt, foreign currency fluctuations and existing
issuances of variable rate debt. We manage our debt portfolio in response to
changes in interest rates and foreign currency rates by periodically retiring,
redeeming and repurchasing debt, and using derivative financial instruments. We
primarily use working capital debt to meet our financing requirements,
originally denominated in U.S. dollars and swapped to obligations in reais
accruing interest based on the CDI.
75
The table below provides information about our significant interest
rate-sensitive instruments. For variable interest rate debt, the rate presented
is the weighted average rate calculated as of December 31, 2003. See notes 2(d),
12, 13 and 16 to our financial statements.
As of December 31, 2003
--------------------------------------------------------- -
Expected Maturity Date
-----------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
---- ---- ---- ---- ---- -----------
(millions of U.S. dollars)
Assets:
Cash and banks in reais..................................... $50.0 - - - - -
Cash equivalents denominated in reais....................... 289.9 - - - - -
----- ----- ----- ----- ----- -----
Total cash and cash equivalents...................... 339.9 - - - - -
===== ===== ===== ===== ===== =====
Liabilities:
Short-term debt:
Denominated in U.S. dollars............................... 4.6 - - - - -
Floating rate, denominated in U.S. dollars(1) ............ 52.4 - - - - -
Floating rate, denominated in reais....................... 131.2 - - - - -
Floating rate, denominated in reais....................... 48.7 - - - - -
Unrealized losses on cross-currency interest rate swaps(2) 5.6 - - - - -
----- ----- ----- ----- ----- -----
Total short-term debt................................ 242.5 - - - - -
===== ===== ===== ===== ===== =====
Long-term debt:
Floating rate, denominated in foreign currency............ 4.8 6.5 6.6 4.4 2.1 2.1
Floating rate, denominated in U.S. dollars(1)............. 64.8 79.1 4.4 - - -
Floating rate, denominated in reais....................... 86.0 11.1 - - - -
Floating rate, denominated in reais....................... 58.9 54.1 28.6 15.0 7.5 6.7
Floating rate, denominated in reais....................... 145.5 - - - - -
Unrealized losses on cross-currency interest rate swaps(2) 10.9 1.8 - - - -
Total long-term debt................................. 370.9 152.6 39.6 19.4 9.6 8.8
===== ===== ===== ===== ===== =====
Capital lease obligations:
Fixed rate, denominated in U.S. dollars................... 8.0 3.8 0.7 - - -
Floating rate, denominated in reais....................... 1.3 1.4 0.7 - - -
Total capital lease obligations...................... 9.3 5.2 1.4 - - -
As of December 31, 2003
------------------------------
Average
Interest Rate
Total Fair Value (Annual Charges)
-------- ---------- --------------
Assets:
Cash and banks in reais..................................... $50.0 $50.0
Cash equivalents denominated in reais....................... 289.9 289.9 100.5% of CDI
----- -----
Total cash and cash equivalents...................... 339.9 339.9
Liabilities:
Short-term debt:
Denominated in U.S. dollars............................... 4.6 4.6 0%
Floating rate, denominated in U.S. dollars(1) ............ 52.4 54.0 8.8%
Floating rate, denominated in reais....................... 131.2 131.3 102.5% of CDI
Floating rate, denominated in reais....................... 48.7 48.9 TR plus 15.4%
Unrealized losses on cross-currency interest rate swaps(2) 5.6 5.6
----- -----
Total short-term debt................................ 242.5 244.4
===== =====
Long-term debt:
Floating rate, denominated in foreign currency............ 26.5 26.3 3.7% over basket of
foreign currencies (3)
Floating rate, denominated in U.S. dollars(1)............. 148.3 157.4 10.5%
Floating rate, denominated in reais....................... 97.1 96.9 102.4% of CDI
Floating rate, denominated in reais....................... 170.8 169.4 3.5% over TJLP
Floating rate, denominated in reais....................... 145.5 145.3 1.45% over CDI
Unrealized losses on cross-currency interest rate swaps(2) 12.7 12.7
----- ------
Total long-term debt................................. 600.9 608.0
===== ======
Capital lease obligations:
Fixed rate, denominated in U.S. dollars................... 12.5 13.3 9.8%
Floating rate, denominated in reais....................... 3.4 3.4 100.1% of CDI
---- -----
Total capital lease obligations...................... 15.9 16.7
==== =====
(1) We entered into cross-currency interest rate swaps in the same amount to
exchange the U.S. dollars exposure for CDI.
(2) Fair value liabilities on cross-currency interest rate swap contracts.
(3) Based on a basket of foreign currencies to reflect BNDES's funding
portfolio.
76
The annual TJLP, which is modified quarterly was as follows:
2003 2002 2001
---- ---- ----
First quarter................... 11.00% 10.00% 9.25%
Second quarter.................. 12.00 9.50 9.25
Third quarter................... 12.00 10.00 9.50
Fourth quarter.................. 11.00 10.00 10.00
The TJLP was 10.00% and 9.75% in the first and second quarters of 2004,
repectively.
Annualized Rate
-----------------------------------------------------
As of December 31
-------------------------------------
Three months ended
March 31, 2004 2003 2002 2001
------------------ ------ ----- -----
IGP-M (1)......... 2.7% 8.7% 25.3% 10.4%
CDI (2)........... 16.0% 16.3% 24.8% 19.0%
TR................ 0.4% 4.6% 2.8% 2.3%
(1) Indice Geral de Precos -- Mercado (general price index) compiled by the
Fundacao Getulio Vargas.
(2) Certificado de Deposito Interbancario (interbank variable interest rate),
annualized rate at the end of each period.
We have not experienced, and we do not expect to experience, difficulty
obtaining financing or refinancing existing debt. As of December 31, 2003, we
had no committed line of credit agreements, other than the BNDES contracts. See
"Item 5B - Operating and Financial Review and Prospects - Liquidity and Capital
Resources" for a discussion of these agreements.
Foreign Exchange Risk
We are exposed to fluctuations in foreign currency cash flows related
to certain short-term and long-term debt payments. Primary exposure is to the
U.S. dollar. Additionally, certain lines of credit agreements entered into with
BNDES are subject to indexation based on a basket of foreign currencies to
reflect BNDES's funding portfolio.
Since January 1, 1999 and through December 31, 2003, the U.S. dollar
appreciated by 139.0% against the real, and as of December 31, 2003, the
commercial market rate for purchasing U.S. dollars was R$2.8892 to US$1.00. In
the first three months of 2004, the real depreciated by 0.7% against the U.S.
dollar, and as of March 31, 2004, the commercial market rate for purchasing U.S.
dollars was R$2.9086 to US$1.00.
Our foreign currency exposure gives rise to market risks associated
with exchange rate movements against the U.S. dollar. Foreign
currency-denominated liabilities at December 31, 2003 included debt denominated
mainly in U.S. dollars. Our net foreign currency exposure (U.S.
dollar-denominated debt less our cross-currency interest rate swaps in our U.S.
dollar-denominated debt) was US$10.6 million at December 31, 2003 compared to
US$13.7 million at December 31, 2002. Our net foreign currency exposure is
represented by the debt due to import financing and capital lease agreements.
Our cross-currency interest rate swaps partially protect our exposure arising
from our U.S. dollar-denominated debt.
The table below provides information on our debt outstanding as of
December 31, 2003. The amounts have been translated into U.S. dollars based on
the exchange rate prevailing on December 31, 2003 determined by the Brazilian
Central Bank (R$2.8892 to US$1.00).
77
As of December 31, 2003
----------------------------------------------------------------------------------------------
Expected Maturity Date
----------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
------- ------ ------ ------- ------- -------- ------ -----------
(millions of U.S. dollars)
Short-term debt:
U.S. dollars................... $ 4.6 - - - - - $ 4.6 $ 4.6
U.S. dollars (1)............. 52.4 - - - - - 52.4 54.0
Reais.......................... 185.5 - - - - - 185.5 185.8
----- ------ ----- ----- ----- ----- ----- -------
Total short-term debt.... 242.5 - - - - - 242.5 244.4
===== ====== ===== ===== ===== ===== ===== =======
Long-term debt:
Foreign currencies (2)......... 4.8 6.5 6.6 4.4 2.1 2.1 26.5 26.3
U.S. dollars (1).............. 64.8 79.1 4.4 - - - 148.3 157.4
Reais......................... 301.3 67.0 28.6 15.0 7.5 6.7 426.1 424.3
----- ----- ---- ---- --- --- ----- -----
Total long-term debt..... 370.9 152.6 39.6 19.4 9.6 8.8 600.9 608.0
===== ===== ==== ==== === === ===== =====
Capital lease obligations:
U.S. dollars.................. 8.0 3.8 0.7 - - - 12.5 13.3
Reais......................... 1.3 1.4 0.7 3.4 3.4
--- --- --- ---- ----
Total capital lease
obligations................ 9.3 5.2 1.4 15.9 16.7
--- --- --- ---- ----
____________________
(1) Originally U.S. dollar-denominated and swapped to CDI.
(2) Based on a basket of foreign currencies to reflect BNDES's funding
portfolio.
Our utilization of derivative financial instruments is substantially
limited to the use of cross-currency interest rate swap contracts to mitigate
foreign currency risks. Foreign currency swap contracts allow us to swap fixed
rate U.S. dollar-denominated short-term and long-term debt for Brazilian
real-denominated floating rate debt, based on the CDI rate variation. See notes
12, 13 and 16 to the financial statements. As of December 31, 2003, the U.S.
dollar-denominated short-term and long-term debt balance of US$433.5 million
(2002 - US$538.5 million) includes US$428.9 million (2002 - US$533.6 million),
which were covered by floating rate swaps in Brazilian reais, based on the CDI
rate, including US$228.3 million (2002 - US$414.9 million) which has been
treated on a combined basis pursuant to EITF No. 02-02 as if these loans had
been originally denominated in reais and accrued CDI. In addition, the swap
agreements do not provide for collateral.
78
The table below provides information about our cross-currency interest
rate swaps:
As of December 31, 2003
------------------------------------------------------------------------------------------------
Expected Maturity Date
--------------------------------------------------------------
Fair Value
of Assets
2004 2005 2006 2007 2008 Thereafter Total (Liabilities)
---- ---- ---- ---- ---- -------- ------ ---------------
(millions of U.S. dollars)
Cross-currency and interest
rate swap contracts notional amount:
Current assets:
TR to CDI............... $48.7 - - - - - $48.7 $0.2
Other assets:
U.S. dollar to reais.... 7.5 9.1 7.4 4.9 2.4 2.3 33.6 2.4
Short-term debt:
U.S. dollars to reais.. 57.1 2.3 0.5 - - - 59.9 (5.6)
Long-term debt:
U.S. dollars to reais.. 64.8 79.1 4.4 - - - 148.3 (12.7)
As of December 31, 2003
-------------------------------------
Average Paying Average
Rate in Reais Receiving Rate
------------- -------------------
Cross-currency and interest
rate swap contracts notional amount:
Current assets:
TR to CDI............... 95.0% of CDI TR plus 15.4%
Other assets:
U.S. dollar to reais.... 95.8% of CDI U.S. dollar
Short-term debt:
U.S. dollars to reais.. 96.1% of CDI 7.7% over U.S. dollar
Long-term debt:
U.S. dollars to reais.. 99.8% of CDI 10.5% over U.S. dollar
79
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
No matters to report.
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Brazilian corporate law No. 10,303 of December 10, 2001 amended the
provisions of the Brazilian corporate law relating to the rights of preferred
shareholders. In order to comply with such modifications, on the extraordinary
general shareholders' meeting held on February 28, 2003, an amendment to our
bylaws was approved granting the preferred shareholders the right to receive
dividends 10% higher that the dividends paid to common shareholders.
ITEM 15 CONTROLS AND PROCEDURES
Our Chief Executive Officer, or CEO, and our Acting Chief Financial
Officer, or Acting CFO, are responsible for establishing and maintaining our
disclosure controls and procedures. These controls and procedures were designed
to ensure that information relating to us required to be disclosed in the
reports that we file under the Securities Exchange Act of 1934, as amended, is
recorded, processed summarized and reported within the time periods specified in
the rules and forms of the SEC. We evaluated these disclosures controls and
procedures under the supervision of our CEO and Acting CFO as of December
31,2003. Based on this evaluation, our CEO and Acting CFO concluded that our
disclosure controls and procedures are effective in timely alerting them to
information required to be included in our periodic reports to the SEC.
As of today, there has been no change in our internal control over
financial reporting during the year ended December 31, 2003 that has materially
affected or is reasonably likely to materially affect our internal control over
financial reporting.
ITEM 16 [Reserved]
16A. Audit Committee Financial Expert
As of yet, we have not appointed an "audit committee financial expert",
as defined by the SEC. As disclosed in item 16D below, we are in the process of
implementing a fully independent audit committee as a best corporate governance
practice, and presently, our current audit committee does not follow the
independence requirements of such rule as we are still exempt from the
independence requirements until July 2005 according to Exchange Act Rule 10A-3
(a)(5)(A).
16B. Code of Ethics
We implemented in 2000 our Code of Ethics regulating the ethical
relationship of our professionals with us and our customers, suppliers,
competitors and the public at large. Pursuant to our Code of Ethics:
o our employees are not allowed to accept any kind of personal
benefit from suppliers, and any supplier that feels
discriminated against any of our employees may contact
directly the ombudsman to take the necessary measures;
o our employees are not allowed to carry out parallel
activities, except if different from our business and
previously authorized by our management;
80
o all professional contact with any media publication must be
authorized by us in advance;
o any decision on hiring new professionals at management level
who have relatives in competitor companies must be taken after
authorization by our Executive Committee; and
o employees who do not comply with the rules of our Code of
Ethics, as well as other employees who deliberately fail to
notify violations or omit relevant information in connection
with such violations, are subject to disciplinary actions.
In addition, we later amended our Code of Ethics in order to comply
with the requirements of the Sarbanes-Oxley Act and New York Stock Exchange
rules. These rules intend to regulate the conduct of our managers in connection
with the registration and control of financial and accounting information and
their access to privileged and non-public information and data, and establish
that:
o our managers are not allowed to perform any activities which
may affect their ability to decide or to act in the Company's
interests or which may result in professional advantages due
to the use of information or work-related situation deemed to
be a business opportunity or prospect identified by our
Company;
o our managers must be aware of and comply with the laws and
regulations applicable to their position within our Company,
as well as promote the compliance of our Company with the laws
and regulations applicable to its business;
o every document and confidential information to which the
managers have access must be exclusively used in our Company's
business and commercial activities;
o our managers are responsible for the security and accuracy of
the information contained in the records and documents that
support our business, being also responsible for the autonomy
of our independent auditors in dealing with information and
data of our Company;
o any inappropriate conduct or undue access to privileged
information, as well as any violation to the rules and
principles provided for in out Code of Ethics, must be
promptly informed to our Ethical Committee, which may impose
to our managers sanctions, including warnings, suspensions and
the filings of civil and criminal liabilities, after the
approval by our Board of Executive Officers; and
o our managers must motivate their collaborators and promote
their knowledge of, and compliance with, the Code of Ethics.
A copy of our code of ethics is filed as an exhibit to this annual
report. A copy of this document is also available on our website
(www.cbdri.com.br).
16C. Principal Accountant Fees and Services
PricewaterhouseCoopers Auditores Independentes, acted as our
independent auditor for the fiscal years ended December 31, 2003 and 2002. The
chart below sets forth the total amount billed to us by PricewaterhouseCoopers
Auditores Independentes for services performed in the years 2003 and 2002, and
breaks down these amounts by category of service:
2003 2002
---- ----
(millions of U.S. dollars) (1)
Audit Fees...................... $ 1.3 $ 1.2
Audit-Related Fees.............. 1.2 0.7
Tax Fees........................ 0.1 0.1
81
All Other Fees.................. - -
Total........................... $ 2.6 $ 2.0
____________________
(1) Fees including out-of-pocket expenses, translated to U.S. dollars
at December 31, 2003 exchange rate.
Audit Fees
Audit fees are fees billed for the audit of our annual financial
statements and for the reviews of our quarterly financial statements in
connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees in 2003 and 2002 were comprised of assurance and
related services that are related to the performance of the audit or review of
the financial statements, including due diligence related to mergers and
acquisitions, audit in connection with acquisitions, internal control reviews,
attest services that are not required by statute or regulation, and
consultations concerning financial accounting and reporting standards.
Tax Fees
Tax fees in 2003 and 2002 were related to services for tax compliance,
tax planning and tax advice.
Pre-Approval Policies and Procedures
The audit committee approves all audit, audit-related, tax and other
services provided by PricewaterhouseCoopers Auditores Independentes. Any
services provided by PricewaterhouseCoopers Auditores Independentes that are not
specifically included within the scope of the audit must be pre-approved by the
audit committee prior to any engagement. The audit committee is permitted to
approve certain fees for audit-related services, tax services and other services
pursuant to a de minimis exception before the completion of the engagement. In
2003, none of the fees paid to PricewaterhouseCoopers Auditores Independentes
were approved pursuant to the de minimis exception.
16D. Exemptions from the Listing Standards for Audit Committees
On June 13, 2000, our board of directors approved the creation of an
audit committee (comite de supervisao), whose responsibilities are consistent
with the U.S. Blue Ribbon Committee and the rules and regulations of the New
York Stock Exchange. The primary responsibility of the audit committee, which is
independent of our management (except for Mr. Augusto Marques da Cruz Filho who
is our chief executive officer) and of our independent auditors, is to review
our financial statements and report on them to our shareholders. Although we are
in the process of implementing a fully independent audit committee, presently
our current audit committee (comite de supervisao) does not follow the
independence requirements of such rule as we are still exempt from the
independence requirements until July 2005 according to Exchange Act Rule 10A-3
(a)(5)(A).
16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not required for the year ended December 31, 2003.
PART III
ITEM 17 FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
82
ITEM 18 FINANCIAL STATEMENTS
The following financial statements, together with the Report of
Independent Auditors thereon, are filed as part of this annual report:
Index to consolidated financial statements.....................F-1
Report of Independent Auditors.................................F-2
Consolidated Balance Sheets at December 31, 2003 and 2002......F-3
Consolidated Statements of Operations for the years ended December
31, 2003, F-6 2002 and 2001....................................F-6
Consolidated Statements of Cash Flows for the years ended December
31, 2003, F-8 2002 and 2001....................................F-8
Statements of Changes in Shareholders' Equity for the years ended
December 31, F-10 2003, 2002 and 2001.........................F-10
Notes to Consolidated Financial Statements....................F-14
ITEM 19 EXHIBITS
Exhibit Number Description
-------------- -----------
1.1 Unofficial English translation of our Estatuto Social (by-laws),
as amended.***
2.(a) Form of Amended Deposit Agreement, among us, The Bank of New
York, as depositary, and each Owner and Beneficial Owner from
time to time of ADRs issued thereunder, including the form of
American Depositary Receipt.*
4.(b)(1) Shareholders' Agreement dated August 9, 1999, among Pao de
Acucar S.A. Industria e Comercio-PAIC, Peninsula Participacoes
S.A., Abilio dos Santos Diniz, Geant International B.V., Nova
Peninsula S.A.
and Casino Guichard Perrachon.**
4(b)(2) Shareholders' Agreement dated January 29, 2004, among us, Sendas
S.A., Se Supermercados Ltda., Novasoc Comercial Ltda., Sendas
Distribuidora S.A., Athur Antonio Sendas, Sendas Empreendimentos
e Participacoes Ltda., Pao de Acucar S.A. Industria e Comercio,
Peninsula Participacoes Ltda., Nova Peninsula Participacoes S.A.
and Abilio dos Santos Diniz ***
6.1 See notes 2(r) and 15(g) to our financial statements for
information explaining how earnings per share information was
calculated.
8.1 List of Subsidiaries. See note 2(c) to our financial statements
for information regarding our subsidiaries.
11.1 Unofficial English translation of our Code of Ethics and
Annex***
12.1 Section 906 Certification of the Chief Executive Officer***
12.2 Section 906 Certification of the Chief Financial Officer***
13.1 Section 302 Certification of the Chief Executive Officer***
13.2 Section 302 Certification of the Chief Financial Officer***
______________
* Incorporated herein by reference to our registration statement on Form
F-1 (No. 333-6860).
83
** Incorporated herein by reference to our registration statement on Form
20-F filed on May 10, 2002.
*** Filed herewith.
84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.................................F-2
Consolidated Balance Sheets at December 31, 2003 and 2002......F-3
Consolidated Statements of Operations for the years ended December
31, 2003, F-6 2002 and 2001....................................F-6
Consolidated Statements of Cash Flows for the years ended December
31, 2003, F-8 2002 and 2001....................................F-8
Statements of Changes in Shareholders' Equity for the years ended
December 31, F-10 2003, 2002 and
2001..........................................................F-10
Notes to Consolidated Financial Statements.....................F-14
F-1
Report of Independent Auditors
To the Board of Directors and Shareholders
Companhia Brasileira de Distribuicao
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Companhia Brasileira de Distribuicao and its subsidiaries at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. As discussed in Note 1(b) to
the consolidated financial statements, the Company adopted FASB Statement No.
142, "Goodwill and Other Intangible Assets", at January 1, 2002 and for
acquisitions after June 30, 2001.
PricewaterhouseCoopers Sao Paulo, Brazil
Auditores Independentes February 9, 2004
F-2
Companhia Brasileira de Distribuicao
Consolidated Balance Sheets
Expressed in thousands of U.S. dollars, except number of shares
--------------------------------------------------------------------------------
December 31
----------------------------------
2003 2002
Assets ------------ -------------
Current assets
Cash and cash equivalents 339,856 315,712
Restricted cash and marketable
securities 28,680
Unrealized gains from cross-currency
interest rate swaps 242 13,587
Accounts receivable, net 364,745 307,897
Inventories 326,607 277,586
Recoverable taxes 138,146 98,461
Prepaid expenses 7,115 4,674
Deferred income tax 11,769 5,290
Advances to suppliers and employees 14,939 3,496
Other 75,407 40,981
------------ ------------
Total current assets 1,307,506 1,067,684
------------ ------------
Property and equipment, net 1,383,987 1,062,707
------------ ------------
Other assets
Unrealized gains from cross-currency
interest rate swaps 2,401 2,455
Customer credit financing 5,480 5,431
Other receivables 91,325 67,796
Restricted deposits for legal proceedings 52,237 33,739
Goodwill and other acquired intangible
assets, net 226,206 203,768
Deferred income tax, net 100,327 81,840
Related parties 108 73
Other 1,613 2,218
------------ ------------
479,697 397,320
------------ ------------
Total assets 3,171,190 2,527,711
============ ============
F-3
Companhia Brasileira de Distribuicao
Consolidated Balance Sheet
Expressed in thousands of U.S. dollars, except number of shares (continued)
--------------------------------------------------------------------------------
December 31
----------------------------------
2003 2002
Liabilities and shareholders' equity ------------ -------------
Current liabilities
Short-term debt 242,459 228,560
Current portion of long-term debt 370,864 232,309
Capital lease obligations 9,338 9,178
Accounts payable 411,954 398,952
Payroll and related charges 38,833 27,745
Deferred income tax 1,577
Taxes, other than on income 14,975 9,439
Tax on income 3,568
Related parties 295 444
Other 18,887 16,747
------------ -------------
Total current liabilities 1,112,750 923,374
------------ -------------
Long-term liabilities
Long-term debt 230,022 385,069
Capital lease obligations 6,547 9,189
Mandatorily redeemable equity
interest in securitization fund 144,569
Deferred income tax 1,873
Taxes, other than on income 37,364 3,494
Accrued liability for legal proceedings 397,462 269,717
Other 2,715 4,312
------------ -------------
Total long-term liabilities 820,552 671,781
------------ -------------
Total liabilities 1,933,302 1,595,155
------------ -------------
Commitments and contingencies (Note 17)
F-4
Companhia Brasileira de Distribuicao
Consolidated Balance Sheet
Expressed in thousands of U.S. dollars, except number of shares (continued)
--------------------------------------------------------------------------------
December 31
-----------------------------------
2003 2002
-------------- --------------
Shareholders' equity
Preferred shares - no par value,
49,971,428,034 shares
issued and outstanding
and 69,712,996,269 shares
authorized at December 31, 2003
(49,715,328,034 shares
issued and outstanding
and 69,712,996,269 shares
authorized at December 31, 2002) 1,186,985 1,014,640
Common shares - no par value,
63,470,811,399 shares
issued and outstanding
and 80,287,003,731 shares
authorized at December 31, 2003 and 2002 483,588 483,588
Additional paid-in capital 114,902 204,719
Deferred compensation (1,395) (1,504)
Appropriated retained earnings 33,374 25,485
Unappropriated retained earnings 323,317 318,337
Accumulated other comprehensive income
Cumulative translation adjustment (902,883) (1,112,709)
-------------- ------------------
Total shareholders' equity 1,237,888 932,556
-------------- ------------------
Total liabilities and shareholders' equity 3,171,190 2,527,711
============== ==================
The accompanying notes are an integral part of these financial statements.
F-5
Companhia Brasileira de Distribuicao
Consolidated Statements of Operations
Expressed in thousands of U.S. dollars, except per-share amounts
--------------------------------------------------------------------------------
Year ended December 31
---------------------------------------------
2003 2002 2001
-------------- ------------ ------------
Gross sales 4,183,377 3,843,686 4,153,389
Sales and value-added tax (648,782) (586,120) (638,001)
-------------- ------------ ------------
Net sales revenue 3,534,595 3,257,566 3,515,388
Cost of sales (2,538,150) (2,345,245) (2,506,791)
-------------- ------------ ------------
Gross profit 996,445 912,321 1,008,597
Selling, general and
administrative expenses (695,321) (660,395) (743,706)
Depreciation and amortization (115,478) (107,828) (146,248)
Other operating income, net 2,486 1,567 728
-------------- ------------ ------------
Operating income 188,132 145,665 119,371
Non-operating income (expenses)
Financial income 179,267 158,300 142,339
Financial expenses (221,480) (222,869) (161,722)
-------------- ------------ ------------
Income before income taxes 145,919 81,096 99,988
-------------- ------------ ------------
Income tax benefit (expense)
Current (7,937) (11,824) (16,471)
Deferred (25,073) (8,795) 17,154
-------------- ------------ ------------
(33,010) (20,619) 683
-------------- ------------ ------------
Net income 112,909 60,477 100,671
============== ============ ============
Net income applicable to each
class of shares
Preferred 52,263 26,528 42,902
Common 60,646 33,949 57,769
-------------- ------------ ------------
Net income 112,909 60,477 100,671
============== ============ ============
F-6
Companhia Brasileira de Distribuicao
Consolidated Statements of Operations
Expressed in thousands of U.S. dollars,
except per-share amounts (continued)
--------------------------------------------------------------------------------
Year ended December 31
--------------------------------------------
2003 2002 2001
------------ --------------- ---------------
Weighted-average number
of shares outstanding
(thousands)
Basic
Preferred 49,725,151 49,596,794 46,912,582
Common 63,470,811 63,470,811 63,168,975
Diluted
Preferred 49,988,708 50,115,825 47,859,191
Common 63,470,811 63,470,811 63,168,975
Basic earnings per thousand
shares
Preferred - U.S.$ 1.05 0.53 0.91
Common - U.S.$ 0.96 0.53 0.91
Diluted earnings per thousand
shares
Preferred - U.S.$ 1.05 0.53 0.91
Common - U.S.$ 0.95 0.53 0.91
The accompanying notes are an integral part of these financial statements.
F-7
Companhia Brasileira de Distribuicao
Consolidated Statements of Cash Flows
Expressed in thousands of U.S. dollars
--------------------------------------------------------------------------------
Year ended December 31
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net income 112,909 60,477 100,671
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation 110,085 104,109 118,216
Amortization of goodwill and tradename 5,393 3,719 28,032
Loss (gain) on sale of property and
equipment (1,309) 234 (60)
Unrealized losses (gains) from
cross-currency interest rate swaps 14,709 (19,230)
Stock based compensation 1,250 912 1,853
Deferred income tax (benefit) expense 25,073 8,795 (17,154)
Unrealized foreign exchange (gain) loss (26,537) 11,865 4,307
Decrease (increase) in assets
Accounts receivable 3,199 (33,257) (50,706)
Inventories 12,077 (52,916) 72,242
Recoverable taxes (16,645) (79,957) (10,870)
Advances to suppliers and employees (10,009) (3,716) 2,270
Other (31,724) (37,272) 11
Increase (decrease) in liabilities
Accounts payable (71,273) 103,589 (138,257)
Payroll and related charges 4,593 (4,566) 724
Taxes payable 37,623 (308) (8,795)
Accrued liability for legal
proceedings, net of restricted deposits 44,164 90,270 42,144
Accrued interest 20,306 22,413 (20,214)
Other (2,270) (8,635) (5,192)
----------- ----------- ----------
Net cash provided by operating activities 231,614 166,526 119,222
----------- ----------- ----------
Cash flows from investing activities
Property and equipment (184,778) (254,078) (234,748)
Purchase of subsidiaries,
less cash acquired (449) (94,274) (40,414)
Proceeds from sale of property
and equipment 6,090 149 592
Proceeds from sale of intangible
assets 97
Other (28,572)
----------- ----------- ----------
Net cash used in investing activities (207,612) (348,203) (274,570)
----------- ----------- -----------
F-8
Companhia Brasileira de Distribuicao
Consolidated Statements of Cash Flows
Expressed in thousands of U.S. dollars (continued)
--------------------------------------------------------------------------------
Year ended December 31
-----------------------------------------
2003 2002 2001
----------- --------- -----------
Cash flows from financing activities
Loans with original maturities
of less than 90 days, net (2,122) (8,873) (53,575)
Short-term debt
Issuances 206,458 362,756 442,165
Repayments (242,511) (483,608) (331,107)
Long-term debt
Issuances 114,559 392,412 223,938
Repayments (258,844) (60,591) (112,676)
Dividends paid (20,569) (21,232)
Interest attributed to equity paid (59,114)
Proceeds from stock options exercised 1,916 714 4,126
Proceeds from subscription of
mandatorily redeemable equity
interest in securitization fund 139,787
--------- ---------- -----------
Net cash provided by (used in)
financing activities (61,326) 181,578 113,757
--------- ---------- -----------
Effect of exchange rate changes on cash 61,468 (135,874) 37,084
--------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents 24,144 (135,973) (4,507)
Cash and cash equivalents, beginning of
year 315,712 451,685 456,192
--------- ---------- -----------
Cash and cash equivalents, end of year 339,856 315,712 451,685
========= ========== ===========
Cash paid during the year for
Interest (net of amount capitalized) 148,994 122,272 102,636
Income taxes 3,323
Non-cash transactions (Note 19)
The accompanying notes are an integral part of these financial statements.
F-9
Companhia Brasileira de Distribuicao
Statements of Changes in Shareholders' Equity
Expressed in thousands of U.S. dollars, except per-share amounts
--------------------------------------------------------------------------------
Year ended December 31
----------------------------------
2003 2002 2001
--------- ---------- ----------
Share capital
Preferred shares
At beginning of year 1,014,640 804,992 718,928
Capitalization of retained earnings 79,471 208,934
Capital increase with share warrants
forfeited 90,958
Capital issued for interest attributed
to equity (2001 - 310,993,184 shares) 8,505
Stock options exercised (2003 - 256,100,000
shares; 2002 - 125,000,000 shares;
2001 - 591,385,000 shares) 1,916 714 4,126
Debenture conversion (2001 - 4,174,671,130
shares) 73,433
---------- ---------- ---------
At end of year 1,186,985 1,014,640 804,992
========== ========== =========
Common shares
At beginning of year 483,588 483,588 461,829
Capital issued for interest attributed
to equity (2001 - 612,056,784 shares) 21,759
---------- ---------- ---------
At end of year 483,588 483,588 483,588
========== ========== =========
Additional paid-in capital
Share warrants
At beginning of year 181,915 181,915 181,915
Share warrants forfeited
Preferred shares warrants
(2,064 warrants) (24)
Common shares warrants
(6,285,876 warrants) (90,934)
---------- ---------- ---------
At end of year 90,957 181,915 181,915
---------- --------- ---------
F-10
Companhia Brasileira de Distribuicao
Statements of Changes in Shareholders' Equity
Expressed in thousands of U.S. dollars,
except per-share amounts (continued)
--------------------------------------------------------------------------------
Year ended December 31
-------------------------------------
2003 2002 2001
--------- ----------- ----------
Other
At beginning of year 22,804 21,752 24,389
Stock issuance costs, net of taxes (3,055)
Stock options granted 1,141 1,052 418
--------- ----------- ----------
At end of year 23,945 22,804 21,752
--------- ----------- ----------
Total at end of year 114,902 204,719 203,667
========= =========== ==========
Deferred compensation
At beginning of year (1,504) (1,364) (2,799)
Stock options granted (1,141) (1,052) (418)
Amortization of deferred compensation 1,250 912 1,853
--------- ----------- ----------
At end of year (1,395) (1,504) (1,364)
========= =========== ==========
F-11
Companhia Brasileira de Distribuicao
Statements of Changes in Shareholders' Equity
Expressed in thousands of U.S. dollars,
except per-share amounts (continued)
-------------------------------------------------------------------
Year ended December 31
-----------------------------
2003 2002 2001
-------- -------- --------
Appropriated retained earnings
Statutory reserve
At beginning of year 21,560 27,548 26,279
Transfer (to)
from unappropriated retained
earnings 8,710 (5,988) 1,269
-------- -------- --------
At end of year 30,270 21,560 27,548
-------- -------- --------
Tax incentive reserve
At beginning of year 1,746 2,071
Capital increase (1,710)
Transfer to unappropriated
retained earnings (36) (325)
-------- -------- --------
At end of year 1,746
-------- -------- --------
Unrealized income reserve
At beginning of year 3,925 8,087 12,102
Transfer to unappropriated
retained earnings (821) (4,162) (4,015)
-------- -------- --------
At end of year 3,104 3,925 8,087
-------- -------- --------
Total at end of year 33,374 25,485 37,381
======== ======== ========
F-12
Companhia Brasileira de Distribuicao
Statements of Changes in Shareholders' Equity
Expressed in thousands of U.S. dollars, except per-share amounts (continued)
------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
Unappropriated retained earnings
At beginning of year 318,337 476,130 372,388
Net income for year 112,909 60,477 100,671
Capital increase (79,471) (207,224)
Dividends declared, per thousand shares
(2003 - U.S.$ 0.18; 2002 - U.S.$ 0.19) (20,569) (21,232)
Transfers (to) from appropriated retained earnings
and additional paid-in-capital (7,889) 10,186 3,071
------------------ ------------------ ------------------
At end of year 323,317 318,337 476,130
================== ================== ==================
Cumulative translation adjustment
At beginning of year (1,112,709) (607,743) (392,362)
Net translation gain (loss) 209,826 (504,966) (215,381)
------------------ ------------------ ------------------
At end of year (902,883) (1,112,709) (607,743)
================== ================== ==================
Total shareholders' equity 1,237,888 932,556 1,396,651
================== ================== ==================
Comprehensive income (loss)
Net income 112,909 60,477 100,671
Net translation gain (loss) 209,826 (504,966) (215,381)
------------------ ------------------ ------------------
Comprehensive income (loss) 322,735 (444,489) (114,710)
================== ================== ==================
The accompanying notes are an integral part of these financial statements.
F-13
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
1 The Company
(a) Operations
Companhia Brasileira de Distribuicao is a corporation organized under
the laws of the Federative Republic of Brazil, the shares of which are
traded on the New York, Luxembourg and Sao Paulo stock exchanges.
The principal business of Companhia Brasileira de Distribuicao and its
subsidiaries (collectively referred to as the "Company") comprises the
retailing of food, general merchandise, electronic goods, home
appliances and other products from its supermarkets, hypermarkets, and
home appliance stores. The Company's stores operate in Brazil primarily
under the tradenames Pao de Acucar, Extra, Barateiro, CompreBem and
Extra-Eletro.
(b) Business combinations
On June 30, 2002, the Company acquired Se Supermercados Ltda.("Se") and
Companhia Pernambucana de Alimentacao ("CIPAL").
The acquisitions were recorded using the purchase method of accounting.
The purchase price has been allocated to assets acquired and liabilities
assumed based on the estimated fair market values at the date of
acquisition. Amounts allocated to goodwill related to these acquisitions
have not been amortized. Amortization of goodwill ceased on January 1,
2002 upon adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", including
acquisitions after June 30, 2001.
F-14
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
--------------------------------------------------------------------------------
The combined fair value of the assets acquired and liabilities assumed of Se,
the total purchase consideration and allocated and unallocated goodwill are
summarized below:
2002
----------------
Current assets 32,679
Property and equipment, net 89,733
Other assets 926
Deferred tax assets, net 59,167
Current liabilities (53,050)
Long-term liabilities (24,264)
----------------
Net assets (liabilities) at fair value 105,191
Less: Purchase consideration 135,841
----------------
Goodwill on acquisition of Se 30,650
Goodwill from other acquisitions 720
----------------
Total goodwill arising from acquisitions in 2002 31,370
================
Selected pro forma unaudited combined financial data of the Company prepared as
though the acquisitions of the more significant companies acquired had occurred
on January 1, 2001, are presented below:
Year ended December 31
-------------------------------
2002 2001
---------- ------------------
Net sales revenue 3,388,939 4,033,334
Net income 4,136 51,566
Basic pro forma earnings per thousand
preferred and common shares - U.S.$ 0.04 0.47
Diluted pro forma earnings per thousand
preferred and common shares - U.S.$ 0.04 0.46
========== ==================
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisitions been consummated on January 1, 2001.
F-15
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
2 Summary of Significant Accounting Policies
(a) Basis of presentation
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America, which differ in certain respects from the accounting principles
applied by the Company in its statutory financial statements prepared in
accordance with accounting practices adopted in Brazil ("Brazilian
GAAP").
Shareholders' equity and results of operations included in these
financial statements differ from those included in the statutory
accounting records as a result of differences between the rate of
devaluation of the Brazilian real (R$ or reais) against the United
States dollar and the indexes mandated for indexation of statutory
financial statements in Brazil through 1995 and adjustments made to
reflect the requirements of accounting principles generally accepted in
the United States of America.
Certain amounts in the comparative financial statements for the year
ended December 31, 2002 and the notes thereto have been reclassified to
be consistent with the current year presentation.
(b) Translation of financial statements
The Company transacts the majority of its business in Brazilian reais
and has selected the United States dollar as its reporting currency. The
U.S. dollar amounts for all periods presented have been remeasured
(translated) from reais amounts in accordance with the criteria set
forth in U.S. accounting standards (SFAS No. 52 "Foreign Currency
Translation"). As the Brazilian economy ceased to be highly-inflationary
as from 1998, the Company adopted the Brazilian real as the functional
currency, and applied the following translation method:
. Assets and liabilities are translated from the functional currency to
the reporting currency using the official exchange rates reported by
the Brazilian Central Bank at the balance sheet date (R$ 2.8892 and R$
3.5333 to U.S.$ 1.00 at December 31, 2003 and 2002, respectively);
. Revenue, expenses, gains and losses, and cash flows, including
exchange gains and losses on foreign currency assets and liabilities,
are translated from the functional currency to the reporting currency
using the monthly weighted-average exchange rates for the period;
. Capital transactions, warrants, dividends and interest attributed to
equity distributions are recorded at historical exchange rates;
F-16
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
. Translation gains and losses are recorded in the cumulative
translation adjustment account in shareholders' equity; and
. Foreign exchange transaction gains or losses resulting from foreign
currency denominated assets and liabilities are reflected directly in
results of operations.
(c) Consolidation
The consolidated financial statements include the financial statements
of Companhia Brasileira de Distribuicao and its subsidiaries. Although
the Company's interest in Novasoc Comercial Ltda. ("Novasoc") is
represented by 10% of Novasoc's quotas, Novasoc is included in the
consolidated financial statements as the Company has effective control
and a 99.98% beneficial interest. The other quotaholders have no
effective veto or other participating or protective rights. Under the
bylaws of Novasoc, the appropriation of its net income need not be
proportional to the quotaholding in the company. At the quotaholders'
meeting on December 29, 2000 it was agreed that the Company would
participate retrospectively from inception and prospectively in 99.98%
of Novasoc's results.
With the exception of CBD Technology Inc., a minor U.S. non-operating
subsidiary incorporated under the laws of Delaware, all subsidiaries
were incorporated under the laws of Brazil. All significant intercompany
balances and transactions are eliminated.
Pao de Acucar Fundo de Investimentos em Direitos Creditorios ("PAFIDC")
is a special purpose entity which is treated as a variable interest
entity under FASB Interpretation No. ("FIN") 46R, "Consolidation of
Variable Interest Entities, (revised December 2003)" and has been
consolidated in the financial statements as at and for the year ended
December 31, 2003.
(d) Cash and cash equivalents
Cash and cash equivalents are carried at cost plus accrued interest.
Cash equivalents consist principally of time deposits and certificates
of deposit in Brazilian currency having a ready market and an original
maturity of 90 days or less. Cash and cash equivalents and marketable
securities held by the PAFIDC are classified as Restricted cash and
marketable securities.
(e) Accounts receivable
Accounts receivable are stated at estimated realizable values. An
allowance for doubtful accounts is provided in an amount considered by
management to be sufficient to meet probable future losses related to
uncollectible accounts.
F-17
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
The Company's post-dated check credit sales program accrues interest and
permits customers to settle credit sales in up to two monthly
installments. Customer credit financing is generally for a term of up to
24 months. Financial income is earned with respect to such interest and
taken to income over the period of the loan. Third party service
providers carry credit card and purchase voucher credit risk.
(f) Inventories
Inventories are composed of goods held for sale in the stores and in the
distribution centers. Inventories are carried at the lower of cost or
market. The cost of inventories purchased directly by the stores is
based on the last purchase price, which approximates the First In, First
Out (FIFO) method. The cost of inventories purchased by the distribution
centers is the average cost, including warehousing and handling costs.
(g) Securitization of receivables
PAFIDC was incorporated in September 2003 and received from the Company
certain accounts receivable under a securitization program. The Company
retained an interest in the form of subordinated quotas and services the
receivables (Note 6). For purposes of U.S. GAAP, the transfer of the
receivables to PAFIDC was not considered as a sale, nor did PAFIDC meet
the pre-requisites of a qualifying special purpose entity ("QSPE"), as
defined by SFAS No. 140 "Accounting for Transfer and Servicing of
Financial Assets and Extinguishment of Liabilities - a replacement of
FASB Statement 125". Because the subordinated quotas have a
disproportional percentage of the expected losses, PAFIDC was considered
a variable interest entity under FIN 46R (Note 2(v)) and was fully
consolidated in the financial statements. The senior quotas held by a
third party are presented in the consolidated balance sheet as
Mandatorily redeemable equity interest in securitization fund, as
required by SFAS No. 150 "Accounting For Certain Financial Instruments
with Characteristics of Both Liabilities and Equity".
(h) Property and equipment
Property and equipment are recorded at cost. Expenditures for repairs
and maintenance that do not significantly extend the useful lives of the
related asset are charged to expense as incurred. Expenditures that
significantly extend the useful lives of existing facilities and
equipment are capitalized. Interest incurred during the construction
period of property and equipment is capitalized. Interest on
construction-period borrowings denominated in foreign currencies is
capitalized using contractual interest rates, exclusive of foreign
exchange gains or losses. Depreciation, which includes depreciation of
property held under capital leases, is computed based upon the estimated
useful lives of the respective assets using the straight-line method.
Leasehold improvements are depreciated over the shorter of the estimated
useful life of the assets or the lease terms.
F-18
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Depreciation is computed over the useful lives of the assets as follows:
Years
------------------
Buildings 30
Refurbishments and improvements 5-20
Equipment and software 3-10
Equipment under capital lease (*) 3
Fixtures and installations 5-10
Vehicles 5
Other 5-10
(*) Primarily electronic point-of-sale equipment, hardware and software.
The Company has adopted the guidance of American Institute of Certified
Public Accountants Executive Committee Statement of Position ("SOP") No.
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", for the costs related to its software and
website development. The SOP requires certain costs incurred in
connection with developing or obtaining internal-use software to be
capitalized and other costs to be expensed. Costs incurred in the
development of core software for the Company's websites and
infrastructure are capitalized in accordance with SOP No. 98-1. Costs
incurred in the development of website content and maintenance costs are
expensed as incurred. Costs include direct labor and related overhead
for software developed and amounts paid to third party consultants to
develop the websites. All costs which are classified as research and
development are expensed as incurred. Capitalized amounts are stated at
cost and are being amortized on a straight-line basis over the estimated
useful lives which vary between 3 to 5 years. The Company capitalized
U.S.$ 1,038 of software and website development costs in the year ended
December 31, 2001. No costs were capitalized in the years ended December
31, 2002 and December 31, 2003.
(i) Intangible assets related to businesses acquired
SFAS No. 141, "Business Combinations", requires that the purchase method
of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria that must be met in order
for intangible assets acquired in a purchase method business combination
to be recognized and reported apart from goodwill. Intangible assets
related to businesses acquired principally represent goodwill and
tradenames. Acquisitions from third parties have been accounted for
under the purchase method of accounting. Accordingly, the purchase
price, including the direct costs of acquisition, is allocated to assets
acquired and liabilities assumed based upon the estimated fair values at
the date of acquisition. Results of operations are included as from the
acquisition date.
F-19
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
SFAS No. 142, "Goodwill and Other Intangible Assets", prohibits
amortization of goodwill and identifiable indefinite-lived intangible
assets as from January 1, 2002 but instead requires these assets to be
tested for impairment at least annually. SFAS No. 142 requires that
intangible assets with finite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". In connection with
the adoption of SFAS No. 142, the Company performed a transitional
goodwill impairment test as required and determined that no goodwill
impairment existed at January 1, 2002. The Company also reviewed the
lives of its intangible assets in 2003 and as a result has determined
that none of its intangible assets, other than goodwill, have indefinite
lives. As discussed in Note 10, management reduced the expected useful
lives of a certain tradename following a strategy review in 2002.
Goodwill and other intangible assets are stated at cost and through
December 31, 2001 were being amortized on a straight-line basis over the
estimated future periods to be benefited, between 5 and 20 years.
Effective January 1, 2002, only the other intangible assets are being
amortized.
(j) Recoverability of long-lived assets
Management reviews long-lived assets, primarily buildings and equipment
to be held and used in the businesses, and tradenames from businesses
acquired, for the purpose of determining and measuring impairment on a
recurring basis or when events or changes in circumstances indicate that
the carrying value of an asset or group of assets may not be
recoverable, measured on the basis of an undiscounted cash flow model.
Assets are grouped and evaluated for possible impairment at a store and
distribution facility level. As from January 1, 2002 impairment is
assessed in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", to identify circumstances that might
require assessment of the recoverability of long-lived assets and to
measure any potential impairment charge.
No impairment losses have been recorded for any of the periods
presented. Write-down of the carrying value of assets or groups of
assets will be made if and when appropriate.
(k) Compensated absences
The liability for future compensation for employee vacations is fully
accrued as earned.
F-20
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(l) Interest attributed to equity
Brazilian corporations are permitted to attribute tax-deductible
interest expense on shareholders' equity in the form of a dividend, up
to certain limits. The distribution is treated as declared once the
credit is made available to the shareholders (and the withholding tax
becomes payable) or when formally approved by the shareholders. For
financial reporting purposes, the notional interest attributed to equity
is recorded as a deduction from unappropriated retained earnings. The
Company is required to withhold income tax (15%) on these amounts.
(m) Share warrants
The proceeds from share warrant issuance are recorded as additional
paid-in capital when proceeds from the share warrant issue are received.
When share warrants are exercised or forfeited, the amount originally
recorded as additional paid-in capital is transferred to share capital
(Note 15(c)).
(n) Revenues and expenses
Sales are recognized as customers receive the goods. Financial income
arising from credit sales is accrued over the credit term. Expenses and
costs are recognized on the accrual basis. Volume bonuses and discounts
received from suppliers in the form of product are recorded as zero-cost
additions to inventories and the benefit recognized as the product is
sold. Discounts and bonuses in cash are recorded to income ("Cost of
sales") when the conditions are fulfilled. Cost of sales includes
warehousing and handling costs.
(o) Advertising costs
Advertising costs are expensed as incurred. Selling, general and
administrative expenses for the years ended December 31, 2003, 2002 and
2001 include U.S.$ 65,772, U.S.$ 74,230 and U.S.$ 79,780, respectively,
for advertising expenses. No advertising-related assets are deferred at
the balance sheet dates.
(p) Income taxes
Income taxes in Brazil generally comprise Federal income tax and social
contribution, a Federal tax based on income, as recorded in the
Company's statutory accounting records (Note 3(a)).
F-21
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
For the purposes of these financial statements, the Company has applied
SFAS No. 109, "Accounting for Income Taxes", for all periods presented.
The effect of adjustments made to reflect the requirements of accounting
principles generally accepted in the United States of America, as well
as differences between the tax basis of non-monetary assets as stated in
the statutory accounting records, prepared in accordance with the
Brazilian tax law, and the amounts included in these financial
statements, have been recognized as temporary differences for the
purpose of recording deferred income taxes. Valuation allowances are
established against tax assets, when necessary, based on management's
expectation as to whether realization is more likely than not.
(q) Stock-based compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation using the intrinsic value method
described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. The
plans are accounted for as variable plans as the indexed exercise price
of the options is adjusted by dividends declared from the grant date
through to the exercise date. Under variable plan accounting, periodic
changes in the differences between the market price of the Company's
stock and the exercise prices of the outstanding options are recognized
as compensation expense, charged ratably over a period of the expected
average terms of four years from grant-date, the period over which the
employee services are rendered.
(r) Earnings per share
Pursuant to SFAS No. 128, "Earnings per Share", the Company has
presented its earnings per share for each class of share (Note 15(g)).
Earnings per share are disclosed in amounts per thousand shares, as a
lot of one thousand shares is the minimum number of the Company's shares
that can be traded.
Beginning in 2003, preferred shares are entitled to a dividend 10%
greater than that distributed to the common shares. As such earnings may
be capitalized or otherwise appropriated; there can be no assurance that
preferred shareholders will receive the 10% premium referred to above,
unless earnings are fully distributed, and, accordingly, earnings per
share have been calculated using the "two class" method. The "two class"
method is an earnings allocation formula that determines earnings per
share for preferred and common share according to the dividends declared
and participation rights in undistributed earnings. The Company computes
earnings per share by dividing the net income pertaining to each class
of share by the weighted-average number of the respective class of
shares outstanding during the period.
F-22
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
From 1997 to 2000, the Company issued debentures convertible into
preferred shares (Note 13(ii)). For convertible securities, diluted
earnings per share should be calculated using the "if-converted" method,
i.e., as if the debentures had been converted to shares at the beginning
of the period. As the effects of applying the "if-converted" method are
antidilutive, considering the interest expense (net of tax and
nondiscretionary adjustments) which would be avoided if converted,
diluted earnings per share are not affected by the convertible
securities.
The Company has issued employee stock options (Note 15(d)), the dilutive
effects of which are reflected in diluted earnings per share by
application of the "treasury stock" method. Under the treasury stock
method, earnings per share are calculated as if options were exercised
at the beginning of the period, or at time of issuance, if later, and as
if the funds received were used to purchase the Company's own stock.
When the stock options' exercise price was greater than the average
market price of the preferred shares, diluted earnings per share are not
affected by the stock options. During 1999, the Company issued share
warrants giving the holder the right to subscribe capital from August
31, 2001 over a period of two to three years. As the effects of applying
the treasury stock method are antidilutive, diluted earnings per share
are not affected by the share warrants.
(s) Derivative financial instruments
The Company uses derivative financial instruments for purposes other
than trading and does so to manage and reduce its exposures to market
risk resulting from fluctuations in interest rates and foreign currency
exchange rates. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivative instruments and for hedging activities and requires an entity
to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value.
The Company has entered into cross-currency interest rate swaps to
minimize its exposure to certain foreign currency fluctuations and fixed
interest rates (Note 16). These instruments do not qualify for deferral,
hedge, accrual or settlement accounting and are marked to market, with
the resulting gains and losses reflected in the statement of operations
within "Financial income" and "Financial expense". The Company has a
policy of only entering into contracts with parties that have credit
ratings. The counterparties to these contracts are major financial
institutions and the Company does not have significant exposure to any
single counterparty.
F-23
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(t) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Estimates are used for, but not limited to: accounting for
allowance for doubtful accounts, depreciation and amortization, asset
impairments, depreciable lives of assets, useful lives of intangible
assets, fair values of financial instruments, tax valuation allowances
and contingencies.
(u) Industry segment
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". The Company operates principally in
the retail trade; the Company's other activities are not significant.
(v) Recently issued accounting pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FIN 46R - "Consolidation of Variable Interest Entities, (revised
December 2003)". The primary objectives of FIN 46R are to provide
guidance on the identification of entities for which control is achieved
through means other than through voting rights (variable interest
entities or VIEs) and how to determine when and which business
enterprise should consolidate the VIE (the primary beneficiary). This
new model for consolidation applies to an entity in which either (1) the
equity investors (if any) do not have a controlling financial interest
or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46R requires that both the
primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures regarding the
nature, purpose, size and activities of the VIE and the enterprise's
maximum exposure to loss as a result of its involvement with the VIE.
The implementation date of FIN 46R is the first period ending after
December 15, 2003 for Special Purpose Entities (SPEs) and as from
January 1, 2004 for previously existing variable interest entities which
are not SPEs. FIN 46R may be applied prospectively with a cumulative
adjustment as of the date on which it is first applied or by restating
previously issued financing statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated. The adoption of FIN 46R resulted in the consolidation of
PAFIDC (Note 2(g)) at December 31, 2003. The Company is evaluating if it
has any continuing transactions or agreements which existed before
January 31, 2003 which may be required to be consolidated as from 2004.
F-24
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
In May 2003, the FASB issued SFAS No. 150 - "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and
Equity", which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The FASB decided to make this statement effective
shortly after issuance for contracts entered into or modified after it
is issued and for existing contracts at the beginning of the first
interim period beginning after June 15, 2003. The Company has applied
SFAS 150 in relation to the classification in the consolidated balance
sheet of the Mandatorily redeemable equity interest in securitization
fund (Note 6).
3 Income Taxes
(a) Tax rates
Income taxes in Brazil generally include Federal income tax and social
contribution. The composite tax rate is 34%, comprised of income tax
(25%) and social contribution tax (9%). However, the Company, but not
its subsidiaries, obtained an injunction seeking protection from
non-payment of the existing social contribution tax (Note 17(a)(v)).
Accordingly, no social contribution tax has been provided by the Company
for the periods presented.
(b) Analysis of tax balances
The major components of the deferred tax accounts in the balance sheet
are as follows:
December 31
-----------------------------
2003 2002
--------- -----------
Current deferred income tax asset
Net operating loss carryforwards 11,395
Allowance for doubtful accounts 374 2,234
Other 3,056
--------- -----------
11,769 5,290
--------- -----------
Non-current net deferred income tax asset
Net operating loss carryforwards 63,103 52,994
Temporary differences
Goodwill on acquisitions 19,982 25,233
Provisions 8,218 13,401
Interest capitalization 1,119 1,046
F-25
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
December 31
-----------------------------
2003 2002
--------- -----------
Other 7,905 12,059
Valuation allowance (22,893)
--------- -----------
100,327 81,840
--------- -----------
Total deferred income tax asset 112,096 87,130
========= ===========
Current deferred income tax liability
Fair value of swap contracts (1,577)
Long-term deferred income tax liability
Fair value of swap contracts (1,873)
--------- -----------
Total deferred income tax liability (3,450)
========= ===========
Total deferred income tax, net 108,646 87,130
========= ===========
(c) Net operating loss carryforwards
Net deferred income tax assets include net operating losses, primarily
losses from the ABC and Se acquisitions, which have no expiration dates,
but may offset only up to 30% of annual taxable income.
2003 2002
--------- -----------
At beginning of year 52,994 39,667
Current net operating losses, net (*) 9,683 32,296
Translation gains (losses) 11,821 (18,969)
---------- -----------
At end of year 74,498 52,994
========== ===========
Current deferred income tax asset 11,395
Non-current net deferred income tax asset 63,103 52,994
========== ===========
(*) Including pre-acquisition losses (before valuation allowances) of
subsidiaries acquired in 2002 (U.S.$ 43,587) which were considered
in the determination of goodwill.
F-26
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(d) Valuation allowances
The valuation allowance related primarily to income tax and social
contribution losses available for offset and against certain temporary
tax differences:
2003 2002
------------ ------------
At beginning of year (22,893) (23,062)
Reversal (provision) of
valuation allowance, net (*) 26,277 (9,287)
Translation gains (losses) (3,384) 9,456
------------ ------------
At end of year (22,893)
============ ============
(*) Including valuation allowances against net operating loss
carryforwards of subsidiaries acquired in 2002 (U.S.$ 22,893) which
were no longer considered to be necessary in 2003, of which U.S.$
17,690 was released against goodwill.
(e) Income tax reconciliation
The amount reported as income tax benefit or charge for the years ended
December 31 is reconciled to the statutory rates as follows:
2003 2002 2001
-------- -------- --------
Income before income taxes 145,919 81,096 99,988
Federal income tax statutory rate 25% 25% 25%
-------- -------- --------
Tax expense at statutory rates (36,480) (20,274) (24,997)
-------- -------- --------
Adjustments to derive effective rate
Reversal of valuation allowance (i) 5,664 18,702
Nondeductible expenses (516) (725) (1,615)
Tax incentives 400 36 844
Prepayment of inflationary profit 1,508
Other permanent and tax rate differences (2,078) 344 6,241
-------- -------- --------
Tax benefit (expense) per statement
of operations (33,010) (20,619) 683
======== ======== ========
(i) 2001 - in prior periods, certain contingency provisions relating to
taxes under dispute were treated as temporary differences; however,
in view of the uncertainty as to the future deductibility of these
taxes, a valuation allowance had been recorded. In 2001, following a
clear trend of interpretations by the tax authorities, these amounts
were treated as deductible.
F-27
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
4 Financial Income and Expense
Year ended December 31
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Financial income
Interest income 134,972 114,811 77,691
Credit card and customer credit financing 34,374 32,161 48,810
Interest on post-dated check program 6,796 6,506 9,293
Other 3,125 4,822 6,545
--------------- --------------- ---------------
179,267 158,300 142,339
--------------- --------------- ---------------
Financial expense
Interest expense (257,650) (185,168) (140,099)
Foreign exchange gains (losses) 46,950 (24,464) (8,013)
Related parties - debenture interest (Note 18) (2,136) (2,180) (1,582)
Other financial charges (8,644) (11,057) (12,028)
--------------- --------------- ---------------
(221,480) (222,869) (161,722)
--------------- --------------- ---------------
Net financial expense (42,213) (64,569) (19,383)
=============== =============== ===============
5 Accounts Receivable
2003 2002
------------ ------------
Current assets
Credit card companies 262,285 182,291
Customer credit financing 68,874 73,134
Post-dated check credit sales 24,030 32,918
Unrealized interest income (8,394) (6,960)
Purchase vouchers and others 24,900 35,097
Related parties 292 244
Allowance for doubtful accounts (7,242) (8,827)
------------ ------------
364,745 307,897
============ ============
Other assets
Customer credit financing (non-current) 5,480 5,431
============ ============
F-28
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Customer credit financing accrues interest from 5.0% to 7.5% per month
(2002 - 4.0 % to 7.5%) and with payment terms of up to 24 months for
installment plans. Credit card sales relate to sales settled by
customers with third party credit cards including co-branded credit
cards and are normally receivable from the credit card companies in the
same number of installments as the customer pays the credit card
company, up to 12 months. Sales settled with post-dated checks (a common
financial instrument in Brazil) accrue interest of up to 6.9% per month
for settlement in up to 60 days.
Activity relating to the allowance and analysis of the balance was as
follows:
2003 2002
-------- --------
At beginning of year (8,827) (17,998)
Provision for doubtful accounts (18,355) (27,725)
Recoveries and provision written off 21,763 32,100
Translation gain (loss) (1,823) 4,796
--------- ---------
At end of year (7,242) (8,827)
========= =========
Customer credit financing (7,077) (8,089)
Post-dated check credit sales (165) (738)
========= =========
The policies for establishing and relieving this allowance are as
follows:
(i) customer credit financing and sales settled with post-dated checks -
based on historical loss indices over the past 12 months; the actual
loss history is applied to the current aging of delinquencies to
determine the percentage of receivables which require provision; and
(ii) credit card and purchase vouchers - an allowance for doubtful
accounts is not required as credit risks are substantially assumed
by third parties.
6 Receivables securitization fund
In October 2003, the Company subscribed U.S.$ 34,947 in subordinated
quotas of PAFIDC, a receivables securitization fund. PAFIDC has a
predetermined duration of five years renewable for one additional
five-year period, beginning in October 2003. The capital structure of
the fund is composed of 80% senior quotas held by third parties and 20%
subordinated quotas held by the Company.
F-29
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
PAFIDC is a special purpose entity that is a variable interest entity as
defined under FIN 46R and has been consolidated in the Company's
financial statements. At December 31, 2003, the retained interest of
U.S.$ 36,170 in subordinated quotas represents the maximum exposure to
loss under the securitization transactions. The net assets which have
been consolidated in the Company's financial statements as at and for
the year ended December 31, 2003 are summarized as follows:
2003
--------
Current assets
Restricted cash and marketable securities 28,680
Accounts receivable, net 155,695
Other assets 103
Current liabilities (3,739)
Long-term liabilities
Mandatorily redeemable interest in securitization fund (144,569)
--------
Net assets 36,170
========
Senior quotas are divided into two series: Series A for which the
benchmark remuneration is 103.0% of CDI (Certificado de Deposito
Interbancario), an interbank variable interest rate; and Series B for
which the benchmark remuneration is 101.0% of CDI. The quotaholders of
senior quotas series B will redeem both on June 23, 2006 and June 23,
2007, the principal amount of U.S.$ 24,816, and will redeem the
remaining balance at the end of the fund's duration. The Series A
quotaholders will redeem their quotas at the end of the fund's duration.
Upon consolidation of PAFIDC, senior quotas are recorded as Mandatorily
redeemable equity interest in securitization fund in the long-term
liabilities.
Subordinated quotas were issued in a single series, are non-transferable
and nominative. The Company will redeem the subordinated quotas only
after the redemption of senior quotas or at the end of the fund's
duration. Once the senior quotas have been remunerated, the subordinated
quotas receive the balance of the fund's net assets after absorbing any
default on the credit rights transferred to the fund and any losses
attributed to the fund. Their redemption value is subject to credit,
prepayment, and interest rate risks on the transferred financial assets.
F-30
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Between October and December 2003, the Company transferred credit rights
to PAFIDC represented by customer credit financing, post-dated check
credit sales and credit card companies receivables totaling U.S.$
440,827 in which it retained servicing responsibilities and subordinated
interests. The outstanding balance of these receivables at December 31,
2003 was U.S.$ 155,695. Servicing responsibilities which are not
remunerated include the assistance by the Company's collection
department to the fund's administrator in the collection of delinquent
credits. The holders of senior quotas have no recourse to the Company's
other assets in the event of failure by customers to pay amounts due. As
defined in the agreement between the Company and PAFIDC, the transfer of
credit rights is irrevocable, non-retroactive and the transfer is
definitive and not enforceable against the Company.
7 Inventories
2003 2002
-------- --------
Stores 233,550 178,213
Distribution centers 93,057 99,373
-------- --------
326,607 277,586
======== ========
8 Recoverable Taxes
2003 2002
-------- --------
Income tax and value-added sales taxes recoverable 134,230 93,715
Other 3,916 4,746
-------- --------
138,146 98,461
======== ========
F-31
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
9 Property and Equipment
2003 2002
---------------------------------------- ----------------------------------------
Accumulated Accumulated
Cost depreciation Net Cost depreciation Net
------------ --------------- ----------- ------------ -------------- ------------
Land 283,569 283,569 223,074 223,074
Buildings 724,705 (107,525) 617,180 511,588 (58,104) 453,484
Refurbishments and
improvements 379,608 (114,883) 264,725 317,843 (116,291) 201,552
Equipment and software 312,732 (187,476) 125,256 226,839 (121,046) 105,793
Equipment under capital lease 36,744 (25,028) 11,716 23,189 (13,150) 10,039
Fixtures and installations 193,497 (116,717) 76,780 139,043 (78,293) 60,750
Vehicles 8,391 (7,353) 1,038 7,658 (5,762) 1,896
Other 766 (679) 87 2,771 (553) 2,218
Construction in progress 3,636 3,636 3,901 3,901
------------ --------------- ----------- ------------ -------------- ------------
1,943,648 (559,661) 1,383,987 1,455,906 (393,199) 1,062,707
============ =============== =========== ============ ============== ============
Interest capitalized on construction in progress during the year ended
December 31, 2003 totaled U.S.$ 10,301 (U.S.$ 10,666 and U.S.$ 12,913,
for 2002 and 2001, respectively).
10 Goodwill and Other Acquired Intangible Assets
Goodwill and identifiable intangible assets determined on acquisition
are as follows:
2003 2002
----------------- ------------------
Goodwill 255,152 222,782
Tradenames 37,233 30,445
------------------ ------------------
292,385 253,227
Amortization (66,179) (49,459)
------------------ ------------------
226,206 203,768
================== ==================
F-32
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
In connection with the adoption of SFAS No. 142, goodwill is no longer
amortized in periods after December 31, 2001. Had goodwill not been
amortized in the year ended December 31, 2001, net income and basic and
diluted earnings per thousand shares would have been as follows:
Year Ended
December 31,
2001
----------------
Net income - as reported 100,671
Add back: Goodwill amortization 25,617
----------------
Adjusted net income 126,288
================
Earnings per thousand shares (preferred and common):
Basic - as reported 0.91
Basic - adjusted 1.15
Diluted - as reported 0.91
Diluted - adjusted 1.14
Following a strategy review in 2002, the expected useful life of certain
tradename was reduced prospectively from 19 to 8 years.
F-33
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
11 Other Receivables
In May 1999, the Company leased 25 stores from Paes Mendonca S.A., a
retail chain, through its subsidiary, Novasoc. The initial lease term
for the stores is for a five-year period renewable at the Company's
option for two additional five-year periods. At December 31, 2003, 18
stores are leased pursuant to this agreement and subsequent contract
amendments. The operating lease annual rental payments are equivalent to
U.S.$ 2,575 in 2003 (2002 - U.S.$ 2,300; 2001 - U.S.$ 2,821) including
an additional contingent rent based on 0.5% to 2.5% of store revenues.
The contingent rental element totaled U.S.$ 246, U.S.$ 355 and U.S.$ 109
in each of the periods ended December 31, 2003, 2002 and 2001,
respectively.
In 1999 Novasoc paid expenses on behalf of Paes Mendonca S.A. totaling
U.S.$ 53,166 which are contractually recoverable from Paes Mendonca S.A.
at the end of the lease term. The receivable is remunerated based on the
Indice Geral de Precos de Mercado - IGP-M (General Price Index), which
increased by 8.7% (2002 - 25.3%) in reais in 2003. The Company continues
to discharge obligations to third parties on behalf of Paes Mendonca
S.A. under the agreement. Total receivables at December 31, 2003, which
will be due at the end of the lease term, are U.S.$ 91,325 (2002 - U.S.$
67,796).
The receivables are collateralized by lease renewal rights owned by Paes
Mendonca S.A. for stores currently leased to Novasoc. The Company also
has an option to purchase the shares of Paes Mendonca S.A. if certain
trigger events occur. Paes Mendonca S.A. has a put option to require,
under certain conditions, the Company to purchase its shares. Management
does not expect to exercise its call option or expect conditions to
prevail permitting the put option to be exercised before 2014.
F-34
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
12 Short-term Debt
Annual charges (i) 2003 2002
------------------------------------- --------------- ---------------
Foreign-currency-denominated
Import financing Foreign exchange (U.S.$) 4,578 4,918
Working capital (ii) U.S. dollars + 4.1 to 14.7% swapped
to 76.0 to 104.5% of CDI 183,550 223,363
Brazilian reais
Working capital (iii) TR + 15.4% 48,699
Unrealized losses from cross-
currency interest rate swaps 5,632
Other 279
--------------- ---------------
242,459 228,560
=============== ===============
(i) Annualized benchmark rate at December 31, 2003: CDI - Certificado
de Deposito Interbancario, an interbank variable interest rate -
16.3% (2002 - 24.8%).
(ii) Substantially U.S. dollar-denominated, which was swapped into
obligations denominated in Brazilian reais. The Company utilizes
cross-currency interest rate swaps to manage its exposure on
certain loans (Note 16(b)). Pursuant to Emerging Issue Task Force
("EITF") No. 02-02, "When Separate Contracts That Meet the
Definition of Financial Instruments Should Be Combined for
Accounting Purposes", although the loan balances at December 31,
2003 of U.S.$ 131,174 (2002 - U.S.$ 194,236) were originally
denominated in U.S. dollars and accrued fixed interest rates, the
Company entered, contemporaneously with the same counter-parties,
into cross-currency interest rate swaps and has treated the
instruments on a combined basis as though the loans were
originally denominated in reais and accrued interest at floating
rates. Unrealized gains from cross-currency interest rate swaps
from the remaining balance are reported at fair value and recorded
in current assets.
(iii) The Company entered into interest rate swaps in the same amount to
exchange the TR (Taxa Referencial) for 95.0% of the CDI.
Working capital financing is obtained from local banks and is used
primarily to fund customer credit. Working capital financing is mostly
secured by promissory notes and shareholders' sureties. Collateral for
other borrowings comprises liens and mortgages on properties and
shareholders' sureties.
13 Long-term Debt
Annual charges 2003 2002
------------------------------- ----------------- -----------------
Foreign-currency-denominated
BNDES lines of credit (i) 26,487 28,232
Working capital (*) U.S. dollars + 5.0 to 18.9%
swapped to 61.9 to 104.5% of
CDI 245,361 310,249
F-35
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Annual charges 2003 2002
------------------------------- ----------------- -----------------
CDI
Brazilian reais
BNDES lines of credit (i) 141,320 120,037
Debentures (ii) 173,902 157,430
Unrealized losses from cross-
currency interest rate swaps 12,683
Other 1,133 1,430
----------------- -----------------
600,886 617,378
Current portion of long-term debt (370,864) (232,309)
----------------- -----------------
230,022 385,069
================= =================
(*) Substantially U.S. dollar-denominated which was swapped into
obligations denominated in Brazilian reais (Note 16(b)). Pursuant to
EITF No. 02-02, although the loan balances at December 31, 2003 of
U.S.$ 97,102 (2002 - U.S.$ 220,712) were originally denominated in
U.S. dollars and accrued fixed interest rates, the Company entered,
contemporaneously with the same counter-parties, into cross-currency
interest rate swaps and has treated the instruments on a combined
basis as though the loans were originally denominated in reais and
accrued interest at floating rates. Unrealized gains from
cross-currency interest rate swaps from the remaining balance, in
addition to gains from swaps on the BNDES lines of credit and
capital leases, are reported at fair value and recorded in current
or other assets, as appropriate.
F-36
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(i) BNDES line of credit
The line of credit agreements, denominated in reais, granted by the
Brazilian National Bank for Economic and Social Development (BNDES), are
either subject to the TJLP (Taxa de Juros a Longo Prazo) rate plus an
annual spread, or are denominated based on a basket of foreign
currencies reflecting the BNDES's funding portfolio, plus an annual
spread. Repayments are in monthly installments after expiration of a
grace period.
At December 31
Grace Number of --------------------
period in monthly Due
Contract dated Annual finance charge months installments monthly through 2003 2002
-------------------- ------------------------- ----------- ------------- ------------------- --------- ----------
October 23, 1997 TJLP + 3.5% 12 60 August 2003 5,947
Foreign currencies +
October 23, 1997 3.5% 12 60 November 2003 8,104
October 23, 1997 TJLP + 3.5% 12 60 August 2004 8,061 16,168
November 16, 1999 TJLP + 3.5% 12 60 December 2005 21,475 25,017
January 13, 2000 TJLP + 3.5% 12 72 January 2007 10,366 10,662
November 10, 2000 TJLP + 1 to 3.5% 20 60 May 2007 48,945 47,355
Foreign currencies +
November 10, 2000 3.5% 20 60 July 2007 12,133 15,057
December 14, 2000 TJLP + 2.0% 20 60 June 2007 3,010 3,006
April 16, 2001 TJLP + 3.5% 60 April 2006 4,218 4,680
Foreign currencies +
April 16, 2001 3.5% 60 April 2006 1,453 2,011
Foreign currencies +
March 12, 2002 3.5% 12 48 March 2007 998 1,192
April 25, 2002 TJLP + 3.5% 6 60 October 2007 7,354 7,202
Foreign currencies +
April 25, 2002 3.5% 6 60 October 2007 1,525 1,868
Foreign currencies +
November 11, 2003 4.1% 14 60 January 2010 10,378
November 11, 2003 TJLP + 4.1% 12 60 November 2009 34,858
November 11, 2003 TJLP + 1.0% 12 60 November 2009 3,033
--------- ----------
167,807 148,269
========= ==========
In the event the TJLP exceeds 6% per annum, the excess is added to the
principal. In 2003 and 2002, U.S.$ 5,920 and U.S.$ 5,254, respectively,
were added to the principal. The controlling shareholders provided
sureties with respect to the amount drawn down.
The Company may not offer any assets as collateral for loans to other
parties without the prior authorization of BNDES and is required to
comply with certain negative covenants measured in accordance with
Brazilian GAAP,
F-37
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
including: (i) maintenance of a capitalization ratio (shareholders'
equity/total assets) equal to or in excess of 0.40 and (ii) maintenance
of a current ratio (current assets/current liabilities) equal to or in
excess of 1.05.
F-38
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(ii) Debentures
The balance of debentures outstanding was as follows:
Outstanding Annual charges 2003 2002
------------------- ------------------ --------------- ---------------
2nd issue - 1st series IGP-M + 13% 654
2nd series IGP-M + 13% 4,578
4th issue - single series 99,908 TJLP + 3.5% 28,381 32,580
5th issue - 1st series 40,149 CDI + 1.45% 145,521 119,618
------------------- --------------- ---------------
140,057 173,902 157,430
=================== =============== ===============
Current portion 160,084 22,639
Long-term portion 13,818 134,791
=============== ===============
Activity in the debentures was as follows:
Number of
debentures Amount
------------------ ------------------
At December 31, 2001 126,758 59,095
Issuance - Fifth issue 40,149 114,797
Amortization - Second issue/First series (3,995)
Interest, net of payments 6,682
Translation gain (19,149)
------------------ ------------------
At December 31, 2002 166,907 157,430
------------------ ------------------
Amortization - Second issue (26,850) (6,423)
Amortization - Fourth issue (12,998)
Interest, net of payments 1,875
Translation loss 34,018
------------------ ------------------
At December 31, 2003 140,057 173,902
================== ==================
F-39
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
. Fourth issue - On October 17, 2000, the shareholders approved the
issue and private placement of R$ 100,000 thousand convertible
debentures due August 2005. The Company received proceeds equivalent
to U.S.$ 52,480, net of commissions of U.S.$ 477. The debentures are
indexed to the TJLP and accrue annual interest of 3.5%. The portion
of TJLP exceeding 4.5% will be capitalized and added to the nominal
value of debentures on the dates of interest payment. Beginning
September 1, 2000, at the option of the debentureholder, they may be
converted into preferred shares based on the following ratios: (i)
September 1, 2000 to August 30, 2003 - 12,821 shares per R$ 1,000
principal amount, (ii) August 31, 2003 to August 30, 2004 - 8,552
shares per R$ 1,000 principal amount and (iii) August 31, 2004 to
August 31, 2005 - 4,282 shares per R$ 1,000 principal amount, all
subject to adjustment for stock dividends, stock splits and reverse
splits. In 2001, 92 convertible debentures outstanding were
converted into 1,179,532 preferred shares.
. Fifth issue - On October 4, 2002, the shareholders approved the
issue and public placement limited to R$ 600,000 thousand of 60,000
non-convertible debentures. The Company received proceeds equivalent
to U.S.$ 112,767, net of commissions of U.S.$ 1,586, for 40,149
non-convertible debentures issued from the first series. The
debentures are indexed to the average rate of Interbank Deposits
("Depositos Interfinanceiros" - DI) and accrue annual spread of
1.45% payable each six months. The remuneration of the first series
may be renegotiated or a put exercised at October 2004. The
debentures of the first series fall due on October 1, 2007. The
Company is require to comply with certain negative covenants
measured in accordance with Brazilian GAAP: (i) Net Debt (debt less
cash and cash equivalents and accounts receivable) no higher than
the balance of shareholders' equity; (ii) maintenance of a ratio
between Net Debt and EBITDA, less than or equal to 4.
(iii) Maturities
Long-term portion of long-term debt maturities:
2003 2002
-------------- ------------------
2004 278,552
2005 157,573 70,151
2006 34,672 20,538
2007 19,429 15,828
2008 9,603
Thereafter 8,745
-------------- ------------------
230,022 385,069
=============== ==================
14 Leases
A significant portion of retail units are leased under operating lease
agreements, generally for terms from five to 25 years with varying
renewal options to extend the terms of the leases for up to 10 years
beyond the initial noncancellable term. Most of the leases include
contingent rentals based on a percentage of sales. For the year ended
December 31, 2003, the effective rate of rentals was 1.46% (2002 -
1.66%) of gross sales. Also, certain leases provide for the payment by
the lessee of certain costs (taxes, maintenance and insurance). Some
selling
F-40
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
space has been sublet to other retailers in certain of the Company's
leased facilities. Penalties are incurred on lease cancellations.
Certain store and computer equipment leases are accounted for as capital
leases, which are generally for terms of three years and allow the
Company the option to purchase such equipment at the termination of the
leases. Future minimum annual lease payments with respect to
noncancellable capital and operating leases and imputed interest on
capital leases as of December 31, 2003 are summarized below:
Capital leases Operating leases
-------------- -----------------
2004 10,554 66,529
2005 5,635 62,004
2006 1,325 55,460
2007 50,705
2008 41,456
Thereafter 84,057
-------------- -----------------
Total minimum lease payments 17,514 360,211
============== =================
Imputed interest (1,629)
--------------
Present value of minimum
capitalized lease payments 15,885
==============
Current portion 9,338
--------------
Long-term capitalized lease
obligations 6,547
==============
F-41
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Net rental expense, included in selling, general and administrative
expenses, consists of the following:
2003 2002 2001
--------- -------- ---------
Minimum rentals 62,547 60,092 68,021
Contingent rentals 10,911 13,264 11,759
Sublease rentals (12,375) (9,616) (6,651)
--------- -------- ---------
61,083 63,740 73,129
========= ======== =========
15 Shareholders' Equity
(a) Share capital
At December 31, 2003, subscribed and paid-in capital was comprised of
49,971,428 thousand (2002 - 49,715,328 thousand) preferred shares and
63,470,811 thousand (2002 - 63,470,811 thousand) common shares. The
shares have no par value. Total authorized share capital, up to which
shares may be issued without changing the Company's charter, is
150,000,000 thousand shares.
Activity in the number of shares in 2003:
Number of shares - thousand
---------------------------------------
Preferred Common
------------------ ------------------
At January 1, 2003 49,715,328 63,470,811
Subscription - stock options
(Note 15(d)) 256,100
------------------ ------------------
At December 31, 2003 49,971,428 63,470,811
================== ==================
The Annual and Extraordinary General Meetings held on April 26, 2001
approved the subscription of 612,056,784 common shares and 310,993,184
preferred shares. At the shareholders' option, part of the interest
attributed to equity, which had been recorded as an obligation at
December 31, 2000, was capitalized in the amount of U.S.$ 30,264.
F-42
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(b) Share rights
The preferred shares are non-voting and have preference with respect to
the distribution of capital in the event of liquidation. Each
shareholder has the right pursuant to the Company's charter to receive a
proportional amount, based on their respective holdings to total common
and preferred shares outstanding, of a total dividend of at least 25% of
annual net income determined on the basis of financial statements
prepared in accordance with the Brazilian GAAP, to the extent profits
are distributable, and after transfers to reserves as required by
Brazilian Corporate Law, and a proportional amount of any additional
dividends declared. Beginning in 2003, the preferred shares are entitled
to receive a dividend 10% greater than that paid to common shares.
The Company's charter provides that, to the extent funds are available,
dividends are to be paid in the following order: (i) a minimum
non-cumulative preferred dividend to the preferred shares in the amount
of R$ 0.15 per thousand preferred shares, (ii) a dividend to the common
shares in the amount of R$ 0.15 per thousand common shares up to (or if
determined by the shareholders, in excess of) the mandatory distribution
(25% of adjusted net income as determined under accounting principles
prescribed in the Brazilian Corporate Law), (iii) dividends to the
preferred shares shall be 10% higher than the dividends to common shares
up to (or, if determined by the shareholders, in excess of) the
mandatory distribution, subject, in the case of clauses (ii) and (iii),
to any determination by the Board of Directors ("Conselho de
Administracao") that such distribution would be inadvisable in view of
the Company's financial condition.
Management is required by the Brazilian Corporate Law to propose
dividends at year-end to conform with the mandatory minimum dividend
regulations, which can include the interest attributed to equity, net of
tax. At December 31, 2003, the proposed dividend of U.S.$ 18,964 (Note
15(f)) was provided as a liability in the statutory financial
statements, but will only be reflected as an obligation in these
financial statements once approved and declared by the shareholders.
F-43
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(c) Share warrants
In 1999, 4,127 preferred share warrants (the proceeds from which totaled
U.S.$ 47) and 12,571,751 common share warrants (the proceeds from which
totaled U.S.$ 181,868) were issued. Each share warrant is exercisable
for 1,000 shares. The amount paid for the warrants may not be applied
against the purchase price of the future shares to be issued. The price
to be paid for the common shares will be the greater of (i) R$ 82.13
adjusted for the higher of the general price index (IGP-M) variation or
the variation of the real to the U.S. dollar (price in U.S. dollars
equal to U.S.$ 45.00) or, (ii) the average trading price of the common
shares in the five days prior to exercise as adjusted by higher of the
average of the IGP-M variation or U.S. dollar variation. Preferred share
warrants are exercisable at R$ 65.70 adjusted by the IGP-M index.
On August 31, 2003, 6,285,876 common share warrants and 2,064 preferred
share warrants which had not been exercised were forfeited. The
remaining 6,285,875 common share warrants may be exercised through
August 31, 2004. This ratio will be adjusted proportionately in the
event of any reverse splits, splits or distribution of stock dividends.
The common share subscription warrants were acquired by the minority
shareholder, the Casino Group.
(d) Stock option plan
In 1997, the shareholders approved a compensatory stock option plan for
management and certain employees of the Company. The Company's stock
option plan (the "Plan") is designed to obtain and retain the services
of executives and certain employees. Only options covering preferred
shares are granted under the Plan.
The Plan is administered by a committee elected by the Board of
Directors. This committee periodically grants share options setting the
terms thereof and determining the employees to be included. When share
options are exercised, the Company can issue new shares or transfer
treasury shares to the new shareholder. The Plan stipulates that 50% of
the granted options will vest and can be exercised at the end of three
years and the remaining 50% will vest and can be exercised at the end of
five years. The exercise term expires three months after the vesting
dates.
F-44
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
In 1999, the Board of Directors approved a new issue of options
convertible into 3,400,000 thousand preferred shares to be granted under
the Plan. On March 31, 2000, the Company granted 305,975 thousand stock
options with an exercise price of R$ 60.00 per thousand shares
(equivalent to U.S.$ 34.34 at the grant date). On April 2, 2001, the
Company granted 361,660 thousand stock options with an exercise price of
R$ 64.00 per thousand shares (equivalent to U.S.$ 29.65 at the grant
date). On March 15, 2002, the Company granted 412,600 thousand stock
options with an exercise price of R$ 47.00 per thousand shares
(equivalent to U.S.$ 19.96 at the grant date). On May 16, 2003, the
Company granted 499,840 thousand stock options with an exercise price of
R$ 40.00 per thousand shares (equivalent to U.S.$ 13.45 at the grant
date).
Share options (thousands)
------------------------------------
2003 2002
---------------- -----------------
Options outstanding at beginning of year 1,395,960 1,362,385
Options granted
Series 6 (granted on March 15, 2002) 412,600
Series 7 (granted on May 16, 2003) 499,840
Options exercised
Series 3 - April 10, 2002 - capital increase of U.S.$ 26 (3,400)
Series 2 - December 19, 2002 - capital increase of U.S.$ 684 (120,900)
Series 3 - December 19, 2002 - capital increase of U.S.$ 4 (700)
Series 3 - December 17, 2003 - capital increase of U.S.$ 1,916 (256,100)
Options forfeited (200,360) (254,025)
---------------- -----------------
Outstanding options granted at end of year 1,439,340 1,395,960
================ =================
Share options available at end of year for future grants 2,335,999 2,635,479
================ =================
The Company has chosen to account for stock-based compensation using the
intrinsic value method described in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. The plans are accounted for as variable plans as the
indexed exercise price of the options is adjusted by dividends declared
from the grant date through to the exercise date. Under variable plan
accounting, periodic changes in the differences between the market price
of the Company's stock and the exercise prices of the outstanding
options are recognized as compensation expense, charged ratably over a
period of four years from grant-date, the period over which the employee
services are rendered.
F-45
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
U.S.$
-----------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Range of year-end exercise prices for outstanding
options at balance sheet date exchange rates
(U.S.$ per thousand shares) 13.87-32.84 10.69-24.50 5.43-27.58
Weighted average grant-date exercise price of
options (U.S.$ per thousand shares) 22.94 19.30 17.05
Weighted average grant-date quoted market price of shares
(U.S.$ per thousand shares) (based on quoted market
value at date granted) 24.61 22.02 20.82
Year-end quoted market price of shares at balance
sheet exchange rates (based on quoted market
value at the end of each year)
(U.S.$ per thousand shares) 24.37 15.42 21.33
Compensation cost recognized for the year
ended December 31 1,250 912 1,853
The following table illustrates the effect on net income and earnings
per thousand shares if the Company had applied the fair value method to
its stock-based compensation, as required under the disclosure
provisions of SFAS No. 123.
Year ended December 31
-------------------------------------------------------
2003 2002 2001
----------------- ----------------- -------------------
Net income - as reported 112,909 60,477 100,671
Add: stock-based employee compensation
included in reported net income 1,250 912 1,853
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards (3,686) (4,182) (6,388)
----------------- ----------------- ------------------
Net income - pro forma 110,473 57,207 96,136
================= ================= ==================
F-46
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Year ended December 31
------------------------------------
2003 2002 2001
----------- ------- --------
Earnings per thousand shares:
Basic - as reported
Preferred 1.05 0.53 0.91
Common 0.96 0.53 0.91
Basic - pro forma
Preferred 1.03 0.51 0.87
Common 0.93 0.51 0.87
Diluted - as reported
Preferred 1.05 0.53 0.91
Common 0.95 0.53 0.91
Diluted - pro forma
Preferred 1.03 0.50 0.87
Common 0.93 0.50 0.87
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model assuming: expected
dividend yield of 1.45% in 2003, 1.65% in 2002, 1.78% in 2001, expected
volatility of approximately 38.72% in 2003, 40.85% in 2002, 53.36% in
2001, weighted average risk-free interest rate of 12.44% in 2003, 13.43%
in 2002, 12.57% in 2001, and an expected average life of four years.
(e) Appropriated retained earnings
These reserve balances reflect the amounts in the financial statements
prepared in accordance with Brazilian GAAP, which are restricted as to
distribution. The tax incentive and statutory reserves may be
transferred to capital or used to absorb losses in the statutory
accounting records, but are not, generally, available for distribution
as cash dividends.
The statutory reserve is formed based on appropriations from retained
earnings of 5% of annual net income as stated in the Company's financial
statements prepared in accordance with Brazilian GAAP.
F-47
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
The tax incentive reserve arises from an option to apply a portion of
income tax otherwise payable for the acquisition of capital stock of
companies undertaking specified government-approved projects. The amount
so applied is credited to income tax and subsequently appropriated from
retained earnings to this reserve. No recapture provisions are required
to be satisfied unless the corresponding capital reserve presented in
the financial statements prepared in accordance with Brazilian GAAP is
used to pay dividends, at which time the income tax not previously paid
on such credits would become due, together with penalties. The Company
does not intend to pay dividends out of its capital reserves. As such
amounts are generally restricted as to distribution in the form of
dividends, an equal amount is appropriated from retained earnings.
The unrealized income reserve represents inflationary profits arising
from the system of indexation of Brazilian GAAP financial statements in
force up to December 31, 1995. The Company transfers this reserve to
unappropriated retained earnings as the underlying assets are
depreciated or disposed of, at which time it becomes available for
dividend distributions.
(f) Unappropriated retained earnings
Brazilian law permits the payment of dividends only in reais and these
are limited to the retained earnings balances in the financial
statements prepared in accordance with the Brazilian GAAP. Distributable
retained earnings (summation of the following accounts in the statutory
financial statements: Reserva para expansao and Reserva de retencao de
lucros), net of the proposed dividend distribution of R$ 54,792 thousand
(U.S.$ 18,964 at December 31, 2003), aggregated R$ 342,698 thousand at
December 31, 2003, equivalent to U.S.$ 118,613 at the current rate of
exchange. Accordingly, the unappropriated retained earnings balance in
the U.S. GAAP balance sheet at December 31, 2003 of U.S.$ 323,317 is not
immediately available for distribution.
F-48
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(g) Earnings per share
Year ended December 31, 2003 Year ended December 31, 2002
-------------------------------------- ------------------------------------
Preferred Common Total Preferred Common Total
-------------- ------------ ----------- ------------ ------------ ----------
Basic numerator
Actual dividends declared 9,521 11,048 20,569 9,313 11,919 21,232
Basic allocated undistributed
earnings 42,742 49,598 92,340 17,215 22,030 39,245
-------------- ------------ ----------- ------------ ------------ ----------
Allocated net income available for
common and preferred shareholders 52,263 60,646 112,909 26,528 33,949 60,477
============== ============ =========== =========== ============ ===========
Basic denominator (in thousands of
shares)
Weighted-average number of
shares 49,725,151 63,470,811 113,195,962 49,596,794 63,470,811 113,067,605
============== ============ =========== =========== ============ ============
Basic earnings per thousand
shares (U.S.$) 1.05 0.96 0.53 0.53
============== =========== =========== ===========
Diluted numerator
Actual dividends declared 9,548 11,021 20,569 9,368 11,864 21,232
Diluted allocated undistributed
earnings 42,864 49,476 92,340 17,315 21,930 39,245
-------------- ----------- ----------- ------------ ----------- -------------
Allocated net income available for
common and preferred shareholders 52,412 60,497 112,909 26,683 33,794 60,477
============== =========== =========== ============ =========== =============
Diluted denominator (in thousands of
shares)
Weighted-average number of
shares 49,725,151 63,470,811 113,195,962 49,596,794 63,470,811 113,067,605
Stock options 263,557 263,557 519,031 519,031
-------------- ----------- ------------ ----------- ------------ ------------
Diluted weighted-average number of
shares 49,988,708 63,470,811 113,459,519 50,115,825 63,470,811 113,586,636
============= =========== ============ =========== ============ =============
Diluted earnings per thousand
shares (U.S.$) 1.05 0.95 0.53 0.53
============= =========== =========== ===========
F-49
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Year ended December 31, 2001
--------------------------------------------------
Preferred Common Total
--------------- ---------------- -----------------
Basic numerator
Actual dividends declared
Basic allocated undistributed earnings 42,902 57,769 100,671
-------------- ---------------- ----------------
Allocated net income available for common and
preferred shareholders 42,902 57,769 100,671
============== =============== =================
Basic denominator (in thousands of shares)
Weighted-average number of shares 46,912,582 63,168,975 110,081,557
============== =============== =================
Basic earnings per thousand shares (U.S.$) 0.91 0.91
============== ===============
Diluted numerator
Actual dividends declared
Diluted allocated undistributed earnings 43,395 57,276 100,671
-------------- ---------------- ----------------
Allocated net income available for common and
preferred shareholders 43,395 57,276 100,671
============== ================ ================
Diluted denominator (in thousands of shares)
Weighted-average number of shares 46,912,582 63,168,975 110,081,557
Stock options 946,609 946,609
-------------- ---------------- ----------------
Diluted weighted-average number of shares 47,859,191 63,168,975 111,028,166
============== =============== ================
Diluted earnings per thousand shares (U.S.$) 0.91 0.91
============== ===============
F-50
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
16 Financial Instruments and Risk Management
(a) Concentration of credit risk
The Company's sales are direct to customers. Credit risk is minimized
due to the large customer base and ongoing control procedures that
monitor the creditworthiness of customers. Advances to suppliers are
made only to select long-standing suppliers. The financial condition of
suppliers is analyzed on an ongoing basis to limit credit risk.
In order to minimize credit risk from investments, the Company adopts
policies restricting cash and/or investments that may be allocated to a
single financial institution, and which take into consideration monetary
limits and financial institution credit ratings.
(b) Foreign exchange and interest rate risk
management
All derivative financial instruments at December 31, 2003 and 2002 were
recorded on the balance sheet and include cross-currency interest rate
swaps.
The Company enters into cross-currency interest rate swaps to mitigate
foreign exchange risk on U.S. dollar denominated fixed interest debt.
The realized and unrealized gains and losses on the swap agreements used
to manage risks related to foreign currency cash flow exposures are
reported in the statement of operations and included in the amounts
reported in "Financial expense - interest expense". At December 31,
2003, the Company has cross-currency interest rate swaps outstanding of
which the fair value asset (liability) amount was U.S.$ 2,643 and U.S.$
(18,315), respectively (2002 - U.S.$ 16,042).
The cross-currency interest rate swaps also permit the Company to
exchange fixed rate interest in U.S. dollars on short-term debt (Note
12) and long-term debt (Note 13) for floating rate interest in Brazilian
reais. As of December 31, 2003, the U.S. dollar-denominated short-term
and long-term debt balances of U.S.$ 433,489 (2002 - U.S.$ 538,530),
include financings of U.S.$ 428,911 (2002 - U.S.$ 533,612) at weighted
average interest rates of 9.1% per annum (2002 - 11.8%) which were
covered by floating rate swaps, linked to a percentage of an interbank
variable interest rate (CDI), in Brazilian reais, accruing an average
weighted rate of 100.9% of CDI (2002 - 103.6% of CDI). Pursuant to EITF
No. 02-02, the amount of U.S.$ 228,276 (2002 - U.S.$ 414,948) was
treated on a combined basis as though the loans were originally
denominated in reais and linked to a percentage of CDI.
F-51
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
At December 31 the notional amounts of the cross-currency and interest
rate swaps and the fair market value amounts were as follows:
2003 2002
---------------------------------------------- ------------------------------
Notional Notional Fair market
outstanding Fair market value (*) outstanding value (*)
----------------------------- -------------
amount Asset Liability amount Asset
---------------- ------------- --------------- ---------------- -------------
Interest rate swaps 48,699 242
Cross-currency interest
rate swaps 241,765 2,401 (18,315) 156,459 16,042
------------- -------------- -------------
2,643 (18,315) 16,042
============= =============== =============
Current assets 242 13,587
Other assets 2,401 2,455
Short-term debt (5,632)
Long-term debt (12,683)
============= =============== =============
(*) Fair market value gain (loss) under outstanding cross-currency and
interest rate swaps.
The notional amounts of derivatives do not represent amounts exchanged
by the parties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged during the term of
the derivatives are calculated on the basis of the notional amounts and
the other contractual conditions of the derivatives, which relate to
interest rates and foreign currency exchange rates. Gains (losses) from
derivative activities totaled U.S.$ (64,840), U.S.$ 147,429, and U.S.$
(24,195) in the years ended December 31, 2003, 2002, and 2001,
respectively, and are included in "Financial expense - interest
expense".
(c) Fair value of financial instruments
The carrying value of the Company's financial instruments, at each
balance sheet date, approximates fair value, reflecting the short-term
maturity or frequent repricing of these instruments. In estimating the
fair value of the derivative positions, quoted market prices are used,
if available, or quotes are obtained from outside sources.
Fair value estimates are made at a specific date, based on relevant
market information about the financial instrument and based on
quotations made on similar issues. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F-52
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
17 Commitments and Contingencies
The following probable losses and unextinguished tax obligations under
dispute have been identified based on the advice of outside legal
counsel and are provided in Accrued liability for legal proceedings:
2003 2002
--------- ----------
Taxes
Taxes on revenues 262,692 151,091
Social security 94,130 66,702
Income tax 26,341 15,996
Tax on bank account transactions and other 7,628 32,347
Labor claims 6,671 3,581
--------- ----------
Total accrued liability for legal proceedings 397,462 269,717
========= ==========
(a) Taxes
The Company is party to certain lawsuits and administrative proceedings
before various courts and governmental agencies, including with respect
to certain tax liabilities arising from the ordinary course of business.
(i) Taxes on revenues
The Company considers certain taxes levied are unconstitutional;
however, as it is required by law to pay these taxes, in certain cases
amounts are deposited into court escrow accounts, although provisions
are maintained, as the obligations have not been extinguished.
Taxes on revenues include the Programa de Integracao Social ("PIS") and
the Contribuicao para Financiamento da Seguridade Social ("COFINS"). The
rate for COFINS increased from 2% to 3% in 1999 and the tax base of both
COFINS and PIS was extended in 1999 to encompass other types of income,
including financial income. The Company is challenging the increase in
contributions to the COFINS and PIS taxes, based on the Company's
understanding that the increases are unconstitutional.
F-53
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
(ii) Social security
The Company had been prosecuting a claim against the social security
authorities ("INSS"), asserting that it had overpaid certain amounts
relating to the contributions for education allowance and workers'
compensation. The Company had obtained an injunction providing
protection while the case is decided and allowing the Company to offset
the amounts against payroll taxes. The Company has recorded a provision
of U.S.$ 94,130 at December 31, 2003 (2002 - U.S.$ 66,702) which will be
maintained until a favorable ruling is obtained against which the
authorities are unable to appeal.
Due to recent judicial precedent formed in decisions which were
unfavorable for other taxpayers in similar lawsuits, the Company decided
to withdraw certain claims and legal actions, opting to join the Special
Installments Program (Parcelamento Especial - PAES), pursuant to Law
10,680/2003, and to pay social security liabilities of U.S.$ 88,801 in
installments. The payment in installments has not yet been approved.
(iii) Income tax
During 1997, the Company deducted additional depreciation expense
arising from an inflation indexation adjustment to reduce income tax
payable, although a full provision has been recorded for the benefits of
the deduction. The balance of the provision at December 31, 2003 and
2002 was U.S.$ 11,598 and U.S.$ 12,458, respectively.
The Company had been challenging a limitation on tax loss offsets
imposed by Brazilian law. Federal income tax regulations determine that
tax losses available for offsetting income are limited to 30% of annual
income before tax. The Company had challenged this limitation on the
grounds that it is unconstitutional, and had obtained a legal injunction
providing protection against possible fines. The Company has recorded a
provision of U.S.$ 13,432 at December 31, 2003 and the amount of U.S.$
9,585 is recorded as deferred taxes recoverable. The deferred tax asset
represents the net operating loss carryforwards which are available for
offset. Due to recent judicial precedent formed in decisions which were
unfavorable for other taxpayers in similar lawsuits, the Company decided
to withdraw this claim, opting to join the PAES program, and to pay the
income tax liabilities of U.S.$ 13,432 in installments. The payment in
installments has not yet been approved.
(iv) Tax on bank account transactions and other
A tax levied on bank account transactions and redemption of financial
investments (Contribuicao Provisoria sobre Movimentacao Financeira
("CPMF")), was enacted in 1999. The rate has varied between 0.20% to
0.38% for the period from June 1999 through December 2003. The Company,
based on advice of legal counsel, was prosecuting legal action against
the tax authorities claiming that this tax is unconstitutional and has
instructed its banking agents not to withhold the tax on its behalf. The
Company had obtained an injunction to avoid the withholding and payment
of the CPMF taxes.
F-54
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
Based on unfavorable decisions rendered by the court on February 19,
2003, the Company filed a request on March 13, 2003 to pay the CPMF in
installments, at December 31, 2002 the amount provided was U.S.$ 28,548.
At December 31, 2003, the amounts of U.S.$ 3,843 and U.S.$ 32,659 are
recorded as Taxes, other than on income, in current and long-term
liabilities, respectively.
(v) Other tax related matters
The Company filed an injunction seeking protection from non-payment of
the Contribuicao Social sobre o Lucro ("Social contribution") in 1990,
in which it claimed the tax was unconstitutional since the tax should
have been enacted by a complementary law to the Brazilian Constitution.
The social contribution is a Federal tax on income levied at rates of
between 8% and 12%. The Federal government filed a legal action against
a number of companies in Brazil, but the Company was not included among
the companies subject to such appeal. Based on the advice of counsel,
the Company believes that the Federal government does not have the legal
grounds to claim the Social contribution tax.
(vi) Tax audits
Direct and indirect taxes are open to audit by the tax authorities for
varying prescriptive periods which, with the exception of labor related
taxes, normally do not exceed five years.
(b) Labor claims
The Company is party to numerous lawsuits involving disputes with its
employees, primarily arising from layoffs in the ordinary course of
business. At December 31, 2003, such lawsuits collectively involve
claims equivalent to U.S.$ 39,238 (2002 - U.S.$ 27,857). At December 31,
2003 the Company has a provision of U.S.$ 6,671 (2002 - U.S.$ 3,581) for
labor related loss contingencies. At each period end, management, with
advice from external and internal counsel, evaluates these contingencies
in light of SFAS No. 5, "Accounting for Contingencies", and provides for
losses where probable and reasonably estimable.
(c) Government severance and indemnity plan
The Company maintains no private pension plans for its employees but
makes monthly contributions based on payroll to the government pension,
social security and severance indemnity plans, and such payments are
expensed as incurred. The Company is required to contribute 8.5% of each
employee's gross pay to an account maintained in the employee's name in
the Government Severance Indemnity Fund (FGTS). No other contributions
to the FGTS are required. Under Brazilian law, the Company is also
required to pay termination benefits to employees dismissed without just
cause. The amount of the benefit is calculated as 50% of the accumulated
contributions made by the Company to the FGTS during the employee's
period of service. The Company does not accrue for these termination
payments before a decision to terminate has been made, since the
benefits are neither probable nor reasonably estimable. Terminations
occur in the ordinary course of business and are not material to the
consolidated statement of financial condition, statement of operations
or liquidity. Amounts paid to former employees on dismissal totaled
U.S.$ 11,527, U.S.$ 11,293 and U.S.$ 14,467 for the years ended December
31, 2003, 2002 and 2001, respectively.
F-55
(d) Restricted escrow deposits
The Company is contesting the payment of certain taxes, contributions
and labor related obligations and has made court escrow deposits
(restricted deposits) of equivalent amounts pending final legal
decisions. Deposits that relate to taxes contested for which the Company
has received favorable rulings or for which loss is not considered
probable, in the amount of U.S.$ 3,774 and U.S.$ 2,636 at December 31,
2003 and 2002, respectively, have no offsetting provisions. The
remaining restricted deposits are related to the Accrued liability for
legal proceedings, which is sufficient to meet probable and reasonably
estimable losses from such deposits in the event of unfavorable rulings.
Although there can be no assurance that the Company will prevail in
every case, management does not believe that the ultimate disposition of
these matters will have a material effect on its financial condition or
results of operation.
(e) Profit sharing plan
The Company's charter authorizes the use of a profit sharing plan for
management and employees, which has not been formally implemented.
(f) Possible losses
The Company has other possible (unprovided) contingencies, based on the
reports of legal advisors, amounting to U.S.$ 11,075.
18 Related Party Balances and Transactions
Leases - The Company currently leases properties from certain
shareholders and their immediate families. Aggregate payments in 2003
under these operating leases were U.S.$ 4,905 (2002 - U.S.$ 4,610 and
2001 - U.S.$ 5,284).
In November 2000, the Casino Group subscribed 41,962 convertible
debentures issued by the Company. The amount of U.S.$ 11,922 is recorded
in long-term debt (2002 - U.S.$ 13,686). Interest expense related to
these debentures was U.S.$ 2,136, U.S.$ 2,180 and U.S.$ 1,582 in 2003,
2002 and 2001, respectively.
19 Major Non-cash Transactions
In 2003, the Company acquired equipment under capital lease agreements
in the amount of U.S.$ 7,752 (2002 - U.S.$ 13,075 and 2001 - U.S.$
8,275).
The capital subscription in 2001 was made through the capitalization of
U.S.$ 30,264 (U.S.$ 8,505 subscribed for preferred shares and U.S.$
21,759 for common shares) relating to part of the interest attributed to
equity which had been recorded as an obligation at December 31, 2000.
The conversions of debentures into share capital are non-cash
transactions (Note 13(ii)).
F-56
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
------------------------------------------------------------------------
20 Subsequent events
On December 3, 2003, Sendas S.A. and the Company signed a Letter of
Intent with a view to merging the operating activities of the two chains
in the State of Rio de Janeiro, as from February 2004. A new company
will be formed with equally divided voting rights.
* * *
F-57
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing this Annual Report on Form 20-F and has duly caused this Annual Report or
amendment thereto to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPANHIA BRASILEIRA DE DISTRIBUICAO
By: /s/ Augusto Marques da Cruz Filho
-----------------------------------
Name: Augusto Marques da Cruz Filho
Title: Chief Executive Officer
By: /s/ Fernando Queiroz Tracanella
-----------------------------------
Name: Fernando Queiroz Tracanella
Title: Investor Relations Officer
Dated: June 21, 2004
Exhibit Index
Exhibit Number Description
1.1 Unofficial translation of our Estatuto Social (by-laws), as amended
4.(b)(2) Shareholders' Agreement dated January 29, 2004, among us, Sendas
S.A., Se Supermercados Ltda., Novasoc Comercial Ltda., Sendas
Distribuidora S.A., Athur Antonio Sendas, Sendas Empreendimentos e
Participacoes Ltda., Pao de Acucar S.A. Industria e Comercio,
Peninsula Participacoes Ltda., Nova Peninsula Participacoes S.A. and
Abilio dos Santos Diniz
11.1 Unofficial translation of our Code of Ethics and Annex.
12.1 Section 906 Certification of Chief Executive Officer
12.2 Section 906 Certification of Chief Financial Officer
13.1 Section 302 Certification of Chief Executive Officer
13.2 Section 302 Certification of Chief Financial Officer