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, 2002
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 Which Registered:
Preferred Shares, without par value* New York Stock Exchange**
American Depositary Shares (as evidenced by New York Stock Exchange
American Depositary Receipts), each
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, 2002 was:
63,470,811,399 Common Shares, no par value per share
49,715,328,034 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|
Please send copies of notices and communications from the Securities
and Exchange Commission to:
Andrew B. Janszky, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Table of Contents
Page
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.........................25
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................38
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................45
ITEM 8 FINANCIAL INFORMATION................................................48
ITEM 9 THE OFFER AND LISTING................................................52
ITEM 10 ADDITIONAL INFORMATION...............................................55
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........70
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...............76
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................76
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS..................................................76
ITEM 15 CONTROLS AND PROCEDURES..............................................76
ITEM 16 [Reserved]...........................................................76
PART III
ITEM 17 FINANCIAL STATEMENTS.................................................76
ITEM 18 FINANCIAL STATEMENTS.................................................76
ITEM 19 EXHIBITS.............................................................77
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 13, 2003, the commercial market rate for purchasing U.S.
dollars was R$2.8570 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, 2002 and 2001 and for each of the three years in the period
ended December 31, 2002 appear elsewhere in this annual report, together with
the report of PricewaterhouseCoopers Auditores Independentes, Sao Paulo, Brazil,
independent accountants. The selected financial information at December 31,
2000, 1999 and 1998 and for each of the two years ended December 31, 1999 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,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------
(millions of U.S. dollars, except share, per share
and per ADS amounts)
Statement of operations data
Net sales revenue.......................... $ 3,257.6 $ 3,515.4 $ 4,190.0 $ 3,205.4 $ 3,819.0
Cost of sales.............................. (2,345.2) (2,506.8) (3,015.7) (2,321.5) (2,742.6)
--------- ---------- ---------- ----------- ---------
Gross profit............................... 912.4 1,008.6 1,174.3 883.9 1,076.4
Selling, general and administrative (660.4) (743.7) (892.5) (643.8) (808.8)
expenses...................................
Depreciation and amortization.............. (107.8) (146.2) (135.4) (87.3) (101.0)
--------- ---------- --------- ---------- ---------
Operating income........................... 144.2 118.7 146.4 152.8 166.6
Financial income........................... 158.3 142.3 188.3 154.7 169.8
Financial expense.......................... (222.9) (161.7) (172.5) (374.6) (181.2)
Other non-operating income (expense)....... 1.5 0.7 4.0 (0.7) 2.7
--------- ---------- --------- ---------- ---------
Income (loss) before taxes................. 81.1 100.0 166.2 (67.8) 157.9
Income tax (expense) benefit:
Current.................................... (11.8) (16.5) (9.2) (7.5) (16.3)
Deferred................................... (8.8) 17.2 3.2 25.7 0.8
--------- ---------- --------- ---------- ---------
Net income (loss).......................... $ 60.5 $ 100.7 $ 160.2 $ (49.6) $ 142.4
========= ========== ========= ========== =========
Basic earnings (loss) per 1,000 shares (1). 0.53 0.91 1.59 (0.60) 1.82
Diluted earnings (loss) per 1,000 shares... 0.47 0.81 1.39 (0.60) 1.81
Earnings (loss) per ADS.................... 0.53 0.91 1.59 (0.60) 1.82
Dividends declared and interest on equity
per 1,000 shares (2)................. 0.19 - 1.07 0.11 0.41
Weighted average number of shares
outstanding (in thousands)........... 113,131,702 110,052,747 100,954,456 82,761,711 78,116,125
Balance sheet data
Cash and cash equivalents.................. $ 315.7 $ 451.7 $ 456.2 $ 704.6 $ 306.3
Property and equipment, net................ 1,062.7 1,342.0 1,435.4 1,128.9 1,173.2
Total assets............................... 2,527.7 3,056.4 3,305.7 2,840.3 2,461.7
Short-term debt (including current portion
of long-term debt)................... 462.6 555.8 519.2 524.5 337.7
Long-term debt............................. 385.8 381.6 425.9 397.1 609.1
Shareholders' equity....................... 932.6 1,396.7 1,404.7 1,220.1 780.6
Capital stock............................. $ 1,498.2 $ 1,288.6 $ 1,180.8 $ 901.1 $ 404.2
Number of shares outstanding (in thousands):
Preferred shares....................... 49,715,328 49,590,328 44,513,279 34,402,519 28,049,753
Common shares.......................... 63,470,811 63,470,811 62,858,755 62,858,755 50,066,372
Other financial information
EBITDA (3):
Operating income....................... $ 144.2 $ 118.7 $ 146.4 $ 152.8 $ 166.6
Add: depreciation and amortization.... 107.8 146.2 135.4 87.3 101.0
--------- ---------- ---------- ---------- ----------
EBITDA.................................... 252.0 264.9 281.8 240.1 267.6
========== ========== ========== ========== ==========
Net cash provided by (used in):
Operating activities....................... 166.4 119.2 122.1 175.7 323.6
Investing activities....................... (348.2) (274.6) (717.1) (464.7) (761.2)
Financing activities....................... 181.7 113.8 293.3 628.9 363.6
Capital expenditures....................... 348.4 275.2 720.5 464.7 762.6
-----------------------------
(1) Both preferred and common shares effectively participate equally in
earnings. 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$0.55 in 2001, R$1.93 in
2000, R$0.19 in 1999 and R$0.58 in 1998. A dividend of R$0.53 per 1,000
shares was approved and declared at the general shareholders' meeting on
April 30, 2003.
(3) EBITDA means operating income plus depreciation and amortization included
in our U.S. GAAP statement of operations. EBITDA is not a U.S. GAAP
measurement, does not represent cash flow for the periods presented and
should not be considered as an alternative to net income, as an indicator
of our operating performance or as an alternative to cash flows as a source
of liquidity. Our definition of EBITDA may not be comparable with EBITDA as
defined by other companies. Although EBITDA, as defined above, does not
provide a measure of operating cash flows, based on our experience in the
retail food industry, we present EBITDA because our management uses it to
measure our operating performance and because we believe it is frequently
used by securities analysts, investors and other interested parties in the
evaluation of companies in our industry.
4
At and for the Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ---------- ----------- ----------- ---------
Operating Data
Employees at end of period (1)...................... 57,898 52,060 50,106 39,642 31,343
Total square meters of selling area at end of period 979,723 866,280 815,291 663,237 470,591
Number of stores at end of period:
Pao de Acucar.................................... 188 176 186 146 149
Barateiro (2).................................... 148 150 111 83 29
Extra............................................ 60 55 53 46 30
Extra Eletro..................................... 54 62 66 74 76
Se and CompreBem (7)............................. 50 -- -- -- --
Total number of stores at end of period.......... 500 443 416 349 284
Net sales revenues per employee (6)(8)(9):
Pao de Acucar.................................... $ 67,262 $ 63,149 $ 61,536 $ 64,773 $ 56,679
Barateiro (2).................................... 66,345 43,045 66,811 60,020 21,758
Extra............................................ 82,829 75,246 75,147 74,086 91,301
Extra Eletro..................................... 100,434 122,796 99,834 72,192 76,241
Se and CompreBem (7)............................. 20,325 -- -- -- --
Superbox (3)..................................... -- -- -- -- 64,298
Total net sales revenues per employee............ $ 68,619 $ 65,970 $ 70,048 $ 68,625 $ 62,565
Net sales revenues by store format (4)(6):
Pao de Acucar.................................... $ 977 $ 906 $ 828 $ 701 $ 595
Barateiro (2).................................... 530 376 353 231 82
Extra............................................ 1,527 1,344 1,262 934 602
Extra Eletro..................................... 115 162 155 121 131
Se and CompreBem (7)............................. 109 -- -- -- --
Superbox (3)..................................... -- -- -- -- 93
-------- ------- -------- -------- --------
Total net sales.................................. $ 3,258 $ 2,788 $ 2,598 $ 1,987 $ 1,503
Average monthly net sales revenue per
square meter (5)(6)(8):
Pao de Acucar.................................... $ 372.7 $ 340.9 $ 330.1 $ 342.2 $ 308.7
Barateiro (2).................................... 258.5 181.0 243.7 237.3 197.3
Extra............................................ 294.0 272.4 284.2 301.3 334.1
Extra Eletro..................................... 246.5 328.6 313.7 259.0 296.2
Se and CompreBem (7)............................. 184.2 -- -- -- --
Superbox (3)..................................... -- -- -- -- 289.7
CBD average monthly net sales revenue per
square meter..................................... $ 282.8 $ 274.3 $ 292.2 $ 301.5 $ 282.4
Average ticket amount (6)(8):
Pao de Acucar.................................... $ 6.5 $ 6.0 $ 5.8 $ 5.8 $ 5.8
Barateiro (2).................................... 4.8 4.1 4.1 4.2 4.2
Extra............................................ 12.8 12.3 12.6 12.3 14.2
Extra Eletro..................................... 94.2 101.2 86.3 75.7 79.1
Se and CompreBem (7)............................. 4.6 -- -- -- --
Superbox (3)..................................... -- -- -- -- 13.9
CBD average ticket amount........................ $ 8.0 $ 7.9 $ 7.8 $ 7.8 $ 8.7
Average number of tickets per month:
Pao de Acucar.................................... 12,590,382 12,646,836 11,999,308 10,131,503 8,623,038
Barateiro (2).................................... 9,206,964 7,600,350 7,178,567 4,547,207 3,216,331
Extra............................................ 9,911,953 9,106,790 8,359,188 6,320,427 3,525,012
Extra Eletro..................................... 101,326 133,445 148,940 133,391 137,876
Se and CompreBem (7)............................. 3,941,203 -- -- -- --
Superbox (3)..................................... -- -- -- -- 559,780
CBD average number of tickets per month.......... 33,781,227 29,487,421 27,686,003 21,132,528 16,062,037
----------------------
(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) We acquired the Barateiro supermarket chain in May 1998, which became our
Barateiro division.
(3) We discontinued the Superbox format in September 1998. The majority of the
Superbox stores were converted into other store formats.
(4) In millions of U.S. dollars.
(5) 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.
(6) The financial information for December 31, 2001, 2000, 1999 and 1998 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
52.3% in 2002, 18.7% in 2001, 9.3% in 2000, 48.0% in 1999 and 8.3% in 1998.
For more information on foreign currency effects on our financial results,
see "Item 5 - Operating and Financial Review and Prospects."
(7) We intend to convert these stores into one of our formats during the next
two years.
(8) In U.S. dollars.
(9) 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. 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, 2002, the real depreciated
by 192.3% against the U.S. dollar, and as of December 31, 2002, the commercial
market rate for purchasing U.S. dollars was R$3.5333 to US$1.00. In the first
three months of 2003, the real appreciated by 5.1% to R$3.3531 to US$1.00 at
March 31, 2003, and as of June 13, 2003, the commercial market rate for
purchasing U.S. dollars was R$2.8570 to US$1.00, an appreciation of 14.8% since
March 31, 2003. 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
---- --- ---- ----------- --------
1998.......................................... 1.1164 1.2087 1.1605 1.2087
1999.......................................... 1.2078 2.1647 1.8133 1.7890
2000.......................................... 1.7234 1.9847 1.8278 1.9554
2001.......................................... 1.9357 2.8007 2.3519 2.3204
2002.......................................... 2.2709 3.9552 2.9309 3.5333
------------------
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 2002.............................. 3.4278 3.7980
January 2003............................... 3.2758 3.6623
February 2003.............................. 3.4832 3.6580
March 2003................................. 3.3531 3.5637
April 2003................................. 2.8898 3.3359
May 2003................................... 2.8653 3.0277
------------------
Source: Central Bank
6
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 CBD
A decrease in credit sales may adversely affect our results.
Credit sales are an important component of our results. In 2002, 14.4%
of our net sales revenue was accounted for by sales on credit. In the past, the
Brazilian government has implemented measures to restrain domestic demand,
imposing credit restrictions on banks, credit card companies and retailers and
raising interest rates. Our results could be adversely affected if credit
purchases become less attractive or if government policies curtail the extension
of consumer credit. See "Item 4B - Information on the Company - Business
Overview - Credit Sales" for a discussion of our credit policy.
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.
7
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 and its effects on consumer spending,
o interest rate hikes,
o liquidity of domestic capital and lending markets,
o changes in tax laws,
o currency fluctuations,
o exchange controls and restrictions on remittances abroad, which
were briefly imposed in 1989 and early 1990, 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, known as Lula. In the period leading up to,
and subsequent to, his election there was substantial uncertainty relating to
the policies that the new government would pursue, including the potential
implementation of macroeconomic policies that differed significantly from those
of the prior administration. This uncertainty resulted in a loss of confidence
in the Brazilian capital markets, including the steady devaluation of the real
against the U.S. dollar in that period. Although the new government has not
departed in any material way from previous policy, it is premature to evaluate
the way in which investors and the capital markets will react, whether these
policies will continue and whether they will be effective. Any substantial
negative reaction to the policies of the Brazilian government 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. According to
the IPCA, the Brazilian government's official consumer price index, the
inflation rate was 12.5% in 2002, 7.7% in 2001 and 6.0% in 2000. 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
8
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 9.3% in 2000 and 18.7% in
2001. During 2002, the real continued to undergo significant devaluation due in
part to the political uncertainty with the elections and the global economic
slowdown. In 2002, the depreciation of the real relative to the U.S. dollar
totaled 52.3%. In the first three months of 2003, the real appreciated against
the U.S. dollar by 5.1%.
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.
Developments in other emerging market countries may adversely affect
the Brazilian economy and, therefore, the market price of the preferred
shares and the ADSs.
Economic and market conditions in other emerging market countries,
especially those in Latin America, influence the market for securities issued by
Brazilian companies and investors' perception of economic conditions in Brazil.
Although economic conditions are different in each country, the reaction of
investors to developments in one country may cause the capital markets in other
countries to fluctuate. Developments or conditions in other emerging market
countries have at times significantly affected the availability of credit in the
Brazilian economy and resulted in considerable outflows of funds and declines in
the amount of foreign currency invested in Brazil.
For example, after prolonged periods of recession, followed by
political instability, Argentina in 2001 announced it would not service its
public debt. In order to address the worsening economic and social crisis, the
Argentine government abandoned its decade-old fixed dollar-peso exchange rate,
allowing the currency to float to market levels. In 2002, the Argentine peso
experienced a 237.3% devaluation against the U.S. dollar. The situation in
Argentina has negatively affected investors' perceptions towards Brazilian
securities.
The recent political crisis in Venezuela may also influence investors'
perception of risk in Brazil. Although market concerns that similar crises would
ensue in Brazil have not become a reality, the volatility in market prices for
Brazilian securities increased in 2001 and 2002. If market conditions in
Argentina or Venezuela continue to deteriorate, they 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. Accordingly, adverse developments in
Argentina, Venezuela or in other emerging market countries could lead to a
reduction in the demand for, and market price of, the preferred shares and the
ADSs.
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 US$21.6 billion in 2002 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 and received 12.5 million warrants exercisable for our common
shares representing an additional 15.8% of our common stock. The Casino Group
may exercise these warrants by 2004, resulting in a further capital investment
of US$565.7 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 1998 through 2002 we invested approximately US$265.9 million in
technology, or about 10.3% 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
website, amelia.com.br. In 2001, we discontinued on-line shopping through one
centralized website and resumed
10
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 1998, we have acquired a total of 284 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 1998, we have also opened 59 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 108.2% since 1998 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 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.
4B. Business Overview
The Brazilian Retail Food Sector
The Brazilian retail food sector represented approximately 6.1% of
Brazil's GDP in 2002. According to ABRAS (Brazil's supermarket association), the
food retail sector in Brazil had gross revenues of R$79.8 billion (equivalent at
the December 31, 2002 exchange rate to US$22.6 billion) in 2002, a 10.1%
increase over 2001. 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 38.8% of the
retail food sector in 2002, up from 33.0% in 1998. 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 14.6% of the
gross sales of the entire retail food sector in 2002, giving effect to the
acquisitions we made in 2002.
Foreign ownership in the Brazilian food retail sector began with
Carrefour, a leading French retail chain, which opened its first hypermarket 28
years ago. In recent years, international chains such as Wal-Mart, Royal
11
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 2002, foreign retailers in Brazil accounted for an estimated
24.1% 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 175 million at the end of 2002, making Brazil the fifth most
populous country in the world, and the population is currently growing at a rate
of 1.3% per year. As approximately 83% 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 10.4 million, and Rio de Janeiro, with a population
of approximately 5.9 million, are the two largest cities in Brazil. Sao Paulo
State has a total population in excess of 37 million, representing approximately
21.1% 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.
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 $16,981
B Between R$24,000 and R$60,000 Between $6,793 and $16,981
C Between R$9,600 and R$24,000 Between $2,717 and $6,793
D Below R$9,600 Below $2,717
Class A households account for only 5% of the urban population, and
class B households account for 19% of the urban population. Classes C and D
collectively represent 76% 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 2002, we had a market share of 14.6% in the Brazilian
food retailing business according to ABRAS, with annualized gross
12
sales of R$11.7 billion (equivalent at the December 31, 2002 exchange rate to
US$3.3 billion), giving effect to the acquisitions we made in 2002. As of
December 31, 2002, we operated 500 stores throughout Brazil, of which 446 were
retail food stores. Of our retail food stores, 330 are located in Sao Paulo
State, representing 64.0% of our net sales revenue from our retail food stores
in 2002. 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 (188
supermarkets), Barateiro (148 supermarkets), Extra (60 hypermarkets) and Extra
Eletro (54 home appliance stores). In 2002, we acquired the Se Supermercados
chain of supermarkets. Of the 60 Se stores we acquired, 17 were converted into
one of our various store formats and four others were closed. In 2002, we also
reacquired 12 CompreBem stores from our franchisee, and closed one of them
afterwards. We intend to convert the remaining 39 Se stores and 11 CompreBem
stores into one of our formats during the next two years.
The following table sets forth the number of our stores by region, as
of December 31, 2002:
South and Southeast
Rest of (excluding States of
Greater 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...... 64 59 11 12 30 12
Extra.............. 29 9 8 4 5 5
Barateiro.......... 104 26 18 - - -
Extra Eletro (3)... 43 11 - - - -
Se and
CompreBem (4)...... 27 12 - - 11 -
------------ --------------- --------------- ----------------------- ----------- --------------
Total.............. 267 117 37 16 46 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.
(4) We intend to convert these stores into one of our formats during the next
two years.
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, 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
has this format variety in scale. We believe that the ability to have different
focuses is the key to customer satisfaction and loyalty. In addition, our
ability to reach different segments of population reflects our strong knowledge
of the Brazilian market. This approach also permits us to meet diverse customer
needs without confusing consumers as to the marketing or price focus of each
format. We acquired Barateiro in 1998 and, capitalizing on the chain's already
strong name with Brazil's lower income classes, we kept its banner and continued
its cost-oriented focus. This, in turn, allowed us to use the Pao de Acucar
stores more specifically for the higher income classes and to move stores from
one banner to the other to better suit their target markets. 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.
13
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. We
opened our distribution center in Recife in the second half of 2002. 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 77% of our inventory in 2002 came directly
from a distribution center instead of a supplier, a substantial increase from
48% in 1998. 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 platform linking us with all of
our suppliers, and our computer automated ordering system, which automatically
replenishes our inventory based on consumers' shopping habits.
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, better
operating margins and more favorable payment terms. It allows us to spread
significant marketing costs such as 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 have attractive returns on
major investments, such as in technology. Our size and financial ability,
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 investing in sophisticated management information systems.
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.
High level of customer service
We offer a broad selection of quality products in a pleasant shopping
environment that emphasizes customer service. We focus on quality in all our
retail food store formats, and we adjust the level of service in our stores
according to store format and customer preference. We train our employees to
offer a high level of customer service which differentiates us from our
competitors. Customer service is most emphasized in our Pao de Acucar stores.
For our Pao de Acucar, 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. 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. We initiated a pilot project to operate drugstores inside the
stores, and plan to offer additional services such as insurance products. 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.
Our Strategy
Our strategy is to increase profitability and sales while continuing to
focus and build upon our investments after 1994 in logistics and technology, in
our broadened customer base and in our strengthened capital structure, all of
which have enabled us to achieve our position as the largest food retailer in
Brazil. In order to achieve our strategy, we intend to continue to expand our
selling space through store openings and acquisitions, further improve
efficiencies, improve our margins, and offer new products to increase revenues
and customer traffic without increasing our fixed costs.
14
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 2003, we plan to open
approximately 19 stores, including five Pao de Acucar stores, ten Barateiro
stores and four Extra stores. 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 economies of scale. We carefully evaluate
potential store sites based on market research, the ability of the relevant
geographic market to support a new supermarket 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 data
covering population and 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. 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 seek to further 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. This automation
has resulted in significant efficiencies, such as the reduction since 1998 of
approximately five man hours per month per store in our supermarket divisions
and of approximately 25 man hours per month per store in our hypermarket
division. We intend to improve operating efficiencies in the remaining stages of
the supply chain, particularly product outflow, by increasing the volume of
merchandise going through our distribution centers. In 2002, approximately 77%
of our inventory came directly from one of our distribution centers instead of a
supplier. 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. We have already reduced
our stock-out levels to approximately 5%, down from roughly 20% in 1998.
Similarly, shrinkage levels were reduced to 1.3% in 2002, 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. For example, we relaunched our
Barateiro format in 2001 in order to achieve a greater balance among leading
brands, private label products and lower-priced brands as market reaction
indicated that Barateiro's original strategy to offer primarily generic brands
and private label products was not gaining acceptance. 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.
Offer new products to increase revenues and customer traffic without
increasing fixed costs
We are exploring 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. For example, we have ATMs in these areas, which is a service
representing an additional convenience to our customers
15
at no additional cost to us. In addition, we have recently added commercial
outlets inside some of our Extra hypermarkets which offer laundry services, we
have also added gasoline stations conveniently located in the parking lots of
these stores, and have also added drugstores inside the sales area. In some
cases, we rent the space for these activities to third parties. We believe these
additional features at our stores increase revenues and customer traffic without
increasing fixed costs, and we intend to expand these services.
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, 2002:
Store Number Total Selling Average Selling Total Number Percentage of
Area (in square Area Per Store of Our Net Sales
Format of Stores meters) (in square meters) Employees (1) Revenues
------ --------- ------- -------------- ------------- -----------
Pao de Acucar......... Supermarkets 188 239,762 1,275 14,820 30.0%
Barateiro............. Supermarkets 148 177,540 1,200 7,960 16.3
Extra................. Hypermarkets 60 456,569 7,609 19,023 46.9
Extra Eletro.......... Home appliance
stores 54 36,709 680 760 3.5
Se and CompreBem...... Supermarkets 50 69,143 1,383 5,060 3.3
Head office & --
distribution
center.............. -- -- -- -- 10,275 --
--------- ------- -------------- ------------- -----------
Total: 500 979,723 1,959 57,898 100.0%
----------------
(1) Full-time equivalent number of employees calculated by dividing total
number of hours worked by all employees in the month of December 2002 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 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 6.2 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 which consists
of approximately 120 items.
We had 188 Pao de Acucar stores at December 31, 2002. The Pao de Acucar
stores range in size from 331 to 4,730 square meters and averaged 1,275 square
meters of selling space at December 31, 2002. The sale of food products
represented 94% and non-food products represented 6% of this division's net
sales revenue in 2002. 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
16
end of 2002, more than 2 million families had registered for this card, which
allowed us to identify approximately 54% 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 23 Pao de Acucar stores in 2002 and 95 in the 1998 to 2002 period. The
Pao de Acucar division has also further strengthened its presence in the state
of Sao Paulo (greater metropolitan, interior and coastal regions), and the
cities of Curitiba, Fortaleza, Rio de Janeiro, Brasilia and Recife. As part of
our expansion strategy, we plan to open five Pao de Acucar stores in 2003.
Barateiro Division
We acquired the Barateiro chain of supermarkets in 1998. The Barateiro
name is a strong brand among middle and low income consumer segments so we
decided to use it for supermarkets serving those segments. The Barateiro format
further serves to strengthen and expand our presence in the Brazilian market.
The Barateiro supermarkets offer large volumes of basic products and a variety
of brands at low prices. 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 76% of all urban households.
Accordingly, Barateiro stores are located in lower-income neighborhoods compared
to Pao de Acucar stores. Generally, 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 4.5 employees per 100 square meters of store space.
We had 148 stores under the Barateiro banner at December 31, 2002.
Barateiro's stores range in size from 289 to 5,092 square meters and averaged
1,200 square meters of selling space at December 31, 2002. In 2002, non-food
items accounted for approximately 4% and food items accounted for approximately
96% of net sales revenue of the Barateiro division.
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 Barateiro card, which is currently used by more than 380,000
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 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. 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 model 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 intend to open 10 Barateiro stores in 2003 and intend to expand our
presence in the states of Sao Paulo and Rio de Janeiro.
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 7,609 square meters at December 31, 2002. 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, 2002, we had
60
17
Extra stores. The sale of food products represented 68% and non-food products
represented 32% of the Extra division's net sales revenue in 2002.
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 commercial outlets inside the Extra
hypermarkets, which offer laundry, photo development, dining and banking
services for the convenience of the customer. In addition to ATM facilities, our
Extra stores also offer various insurance products, the most popular of which is
the extended warranty policy, which can be purchased in connection with
appliance sales. We intend to add additional gasoline stations located in the
parking lots of Extra stores and offer other non-retail services to customers.
We also offer customers the brand's own preferred shopper/fidelity
card, the Extra card. The Extra card is currently used by approximately 860,000
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. In 2001, we launched
the extra.com.br website for on-line sales of the Extra division. 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.
We have sought to strengthen the Extra division's presence recently
through organic growth in selected areas in Brazil. In 2002, we opened three
stores in the greater Sao Paulo metropolitan area, one in Brasilia and one in
state of Goias. Our Extra store in Goias extended Extra's presence into another
Brazilian state. We intend to open four additional stores in strategic locations
in 2003 as part of our strategy to expand this division.
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 680 square meters at December 31, 2002. Customers
place orders in the stores, and products are shipped from a central warehouse.
At December 31, 2002 we had 54 Extra Eletro stores, all of which are in the
state of Sao Paulo. Approximately 74% of the net sales of Extra Eletro stores in
2002 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.
Capital Expansion and Investment Plan
As part of our capital expansion and investment plan, we have invested
approximately US$2.6 billion in our operations since 1998. Our investments have
included:
Acquisitions of supermarket and hypermarket chains - Since 1998, we
have acquired 284 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
18
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$635.0 million on acquisitions since 1998.
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
---- --------------- ------ -----------------------
1998 Barateiro (32 stores), 89 Sao Paulo: 86
Millo's (3 stores), SAB (3 Brasilia: 3
stores), G Aronson (13
stores) and Peralta (38
stores)
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)
2001 ABC Supermercados 26 Rio de Janeiro: 26
2002 Se Supermercados (60) and 72 Sao Paulo: 60
CompreBem (12) Pernambuco: 12
------------------
Total 284
================
----------------------
(1) 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, 2002.
Opening of new stores - As part of our expansion strategy, we have
opened 59 new stores since 1998, including 16 Pao de Acucar stores, 17 Barateiro
stores, 20 Extra stores and six Extra Eletro stores. The total cost of these new
stores was US$700.0 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. Our
entry into Goiania in the state of Goias is a recent example of this expansion
pattern. We also tend to enter new regional markets with the construction of a
hypermarket.
Renovation of existing stores - We have remodeled 282 stores since
1998, including 95 Pao de Acucar stores, 143 Barateiro stores, 17 Extra stores
and 27 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$565.2 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
19
centers, suppliers and corporate headquarters. We implemented a computer
automated ordering system, which automatically replenishes our inventory based
on consumers' shopping habits. In addition, in 2001, we finished implementing
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$265.9
million on information technology since 1998.
Expansion of distribution facilities - Since 1998, we have opened
distribution centers in the cities of Sao Paulo, Brasilia, Fortaleza, Rio de
Janeiro and Recife which have increased our storage area by approximately 79,000
square meters. 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$140.6 million on our distribution
facilities since 1998.
The following table provides a summary description of our principal
capital expenditures disbursed for the last three years:
Year Ended December 31,
-------------------------------------------------------------------------
2002 2001 2000
------------------------ ----------------------------- ----------------
(millions of U.S. dollars)
Acquisition of retail chains........ $94.3 $40.4 $133.5
Opening of new stores............... 131.4 25.2 224.6
Purchases of real estate............ 15.8 50.2 66.8
Renovations......................... 73.2 71.1 163.4
Information technology.............. 29.8 49.4 86.1
Distribution centers................ 3.9 38.9 46.1
-------- -------- --------
Total ....................... $348.4 $275.2 $720.5
======== ======== ========
As the leader in the market, we will invest R$540 million in new
projects (equivalent at the December 31, 2002 exchange rate to US$152.8
million), which includes R$240 million (equivalent at the December 31, 2002
exchange rate to US$67.9 million) for the opening of new stores, R$200 million
(equivalent at the December 31, 2002 exchange rate to US$56.6 million) for store
remodelings, R$70 million (equivalent at the December 31, 2002 exchange rate to
US$19.8 million) for technology and R$30 million (equivalent at the December 31,
2002 exchange rate to US$8.5 million) for other investments.
Supply and Distribution
Supply. We have centralized purchasing for our Pao de Acucar,
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 106,000 products from approximately 6,000
suppliers. In 2002, no single supplier accounted for more than 6% of total goods
purchased. Our 10 largest suppliers in 2002 collectively accounted for less than
25% 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 10 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 reduces the need
of in-store stockroom space, and limits non-productive store inventories.
Although approximately 77% of our inventory was delivered to the store from one
of our distribution centers instead of a supplier, we seek to increase this
percentage to 80% in 2003. For comparison purposes, only 10% of the distribution
structure of the Se Supermercados chain of supermarkets, which we acquired in
June 2002, was centralized. 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.
We have arrangements with 60 companies to outsource delivery of our products.
These companies collectively operate approximately 800 vehicles, which transport
our merchandise.
20
In 2002, we invested in the distribution of perishable food products.
We equipped our distribution centers in Brasilia and Recife and our fruit and
vegetables distribution center in Sao Paulo with refrigeration chambers to
guarantee the higher quality of those products. In addition, we implemented a
process of sprinkling water on some perishable products in Brasilia and Sao
Paulo, which further ensures the freshness of fruits and vegetables. At the end
of the year, we opened a distribution center exclusively for flowers in the
interior of Sao Paulo State.
We intend to continue focusing on our cross-docking capability, which
refers to the process of simultaneous delivery by suppliers to one of our
distribution centers, arrangement of the merchandise according to the store
orders and subsequent delivery of those goods to the stores. Cross-docking is
used in particular for products that require fast turnover, such as fruits and
vegetables. We intend to substantially increase our cross-docking capability, as
this should result in working capital savings and lower inventory levels. In
addition, we seek to obtain further efficiency gains in our supply chain. For
example, we intend to continue improving our fleet tracking and management
process in order to improve efficiency and security. Although a part of our
fleet is already tracked via satellite, particularly the part that delivers more
expensive products such as home appliances, we intend to expand tracking
capability.
New Corporate Management Structure
In late 2002, our shareholders approved a reorganization of our
corporate management structure at a general shareholders' meeting, pursuant to
which the role of our two principal management bodies, the executive officers
and the board of directors, was reorganized and redefined. Effective in March
2003, the reorganization was designed to increase efficiency in the corporate
governance structure, to increase the role of control and planning in the daily
management of each governing body, to develop a more active board of directors
and to create more autonomy for each of the governing bodies. Simultaneously,
three new committees were created to support the management bodies, which
included: the executive committee, the financial committee and the development
and marketing committee.
Under the revised model, the executive officers will collectively
oversee the daily management of our company, while the board of directors has
the broader role of directing the overall corporate governance of our company.
The three new committees function as an interface between the two principal
governing bodies. For more information, see "Item 6 - Directors, Senior
Management and Employees."
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 2001 and 2002,
we spent approximately US$79.8 million and US$74.2 million, respectively, on
advertising (approximately 2.2% of total net sales revenues in each year).
We spent 15.9% in 2001 and 26.8% in 2002 of our total marketing
expenditures on radio, newspaper and magazine advertising. In addition,
television accounted for 14.9% of advertising expenses in 2001 and 14.1% in
2002. We spent 69.2% in 2001 and 59.1% in 2002 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 Barateiro 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 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.
21
Credit Sales
In 2002, 46.3% 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 2001, 46.4% 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
31.9% of our net sales revenue in 2002. In 2001, sales through credits card
accounted for 29.1% 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 2002 averaged 10 months, with fixed interest
payments averaging approximately 5.5% per month throughout 2002. 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
2002, installment sales accounted for 44.2% of the net sales revenue of Extra
Eletro stores, 3.2% of the Extra division's net sales revenues and 3.1% 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 300,000 customers use the programs on at
least a monthly basis. Sales to customers using post-dated checks accounted for
4.8% of our net sales revenue in 2002 (6.2% in 2001).
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 6.5% of our net
sales revenue in 2002. 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$49.4
million in technology in 2001 and US$29.8 million in 2002. We have budgeted
approximately R$70.0 million (equivalent at the December 31, 2002 exchange rate
to US$19.8 million) for 2003 in order to continue our investment in our
management information systems.
In 2001, pd@net was implemented, and it was consolidated as an
important tool to enhance our relationship with suppliers in 2002. The use of
this Internet process results in reduced costs, since it allows for better
management of the supply, distribution and inventory chains. In addition, since
September 2001, we have coordinated, together with other international
retailers, the establishment of the Worldwide Retail Exchange (WWRE) in Latin
America. We were the first Brazilian retailer to use the WWRE. WWRE, which was
founded in March 2000 by retailers all over the world, is the largest
Internet-based business-to-business exchange in the retail e-marketplace.
22
We also joined the Executive Committee of the Global Commerce
Initiative, an international independent entity whose goal is to establish
business and technology standards to improve the management of the supply chain
and the worldwide relationship between the retail and manufacturing industries.
Among the various technological innovations introduced, the emphasis is on
multifunction kiosks, that provide, in addition to the price of the product,
additional information about products, clients, images and videos of our
products; wireless appliances at the checkout counters that allow checkout
counter clerks to better serve clients; bioptical scanners that make faster
readings; the Compra Facil (Easy Purchase) feature, whereby an employee scans
the value of the customer's purchases while on the checkout line, reducing the
time wasted on the lines; and self checkout, whereby the consumers execute all
checkout operations themselves.
Competition
The Brazilian food retailing business is highly competitive and has
experienced consolidation in recent years. In 2002, the five largest food
retailers in Brazil accounted for 38.8% of the organized sector sales, which
consist of sales by companies enrolled in ABRAS, Brazil's supermarket
association. In 2002, we accounted for 14.6% 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 2002, 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, 2002
operated 270 retail stores principally in the southeast and south of Brazil. At
December 31, 2002, Carrefour accounted for 12.6% of the organized sector's sales
according to data from ABRAS. Wal-Mart, which as of December 31, 2002 operated
22 stores in Brazil, is also a competitor in the hypermarket format with a 2.1%
market share.
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 Casas Sendas,
which as of December 31, 2002 operated a total of 84 supermarkets, most of which
are located in the city of Rio de Janeiro.
The Barateiro division also faces different competitors depending on
the particular regional market. In the state of Sao Paulo, Barateiro faces
strong competition from a number of smaller regional chains. The main competitor
of Barateiro in the state of Rio de Janeiro is Champion. Barateiro also faces
competition from Casas Sendas in the city of Rio de Janeiro, Brazil's second
largest consumer market.
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
160 retail stores at December 31, 2002. Bompreco, owned by Royal Ahold, is our
main retail food competitor in the Northeast region of Brazil. Bompreco operated
119 retail stores at December 31, 2002.
23
According to ABRAS, the market share held by Royal Ahold, Sonae and
Casas Sendas was 4.2%, 4.2% and 3.2%, respectively, of all food sales in the
Brazilian retail sector at December 31, 2002.
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,
Barateiro, Extra and Extra Eletro banners.
4D. Property, Plant and Equipment
We own 88 stores, seven warehouses and a part of our headquarters. The
remaining 412 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 18 leases expiring in 2003 and 57 expiring in 2004. Based
on our prior experience and Brazilian law and
24
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,
2002, 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, 2002:
Owned Leased Total
----- ------ -----
Area Area Area
(in square (in square (in square
Number meters) Number meters) Number meters)
------ ------- ------ ------- ------ -------
Pao de Acucar........ 29 45,211 159 194,551 188 239,762
Extra................ 28 250,777 32 205,792 60 456,569
Extra Eletro......... 3 3,624 51 33,085 54 36,709
Barateiro............ 8 8,748 140 168,792 148 177,540
Se and Comprebem..... 20 28,667 30 40,476 50 69,143
Warehouses........... 7 273,830 3 42,170 10 316,000
Headquarters......... -- 28,591 -- 13,043 -- 41,634
As of December 31, 2002, we owned 13 lots of property representing in
the aggregate approximately 857,668 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, 2002 and 2001 and for the three years in
the period ended December 31, 2002 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.
25
Goodwill, Intangible Assets and Amortization
We have made acquisitions that included a significant amount of
goodwill and other intangible assets. As a result of certain acquisitions, we
recorded goodwill and tradenames in the amount of US$29.1 million in 2001 and
US$31.4 million in 2002. The balance of these assets at December 31, 2002 was
US$203.8 million. See notes 1 and 9 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.
Our goodwill was grouped into reporting units and tested for impairment
in 2002, 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, 2002.
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 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 established, because the future offset is contingent and the
recovery was not considered to be more likely than not. Any reversal of
valuation allowance recognized for the deferred tax asset at the acquisition
date will be 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
26
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 48.0%
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.
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, 2003 2002 2001 2000 1999 1998
-------------- ---- ---- ---- ---- ----
Inflation - IGP-M (1)........................... 6.3% 25.3% 10.4% 9.9% 20.1% 1.8%
Inflation - IPCA (2)........................... 5.1% 12.5% 7.7% 6.0% 8.9% 1.7%
Nominal devaluation (appreciation) of the real
against the U.S. dollar..................... (5.1%) 52.3% 18.7% 9.3% 48.0% 8.3%
------------------
(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.
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.
27
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 losses were US$24.5 million in 2002,
US$8.0 million in 2001 and US$2.5 million in 2000. The devaluation of the
real was 52.3% in 2002, 18.7% in 2001 and 9.3% in 2000.
o Any 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 2002, we recorded a US$505.0 million charge
directly to shareholders' equity and a US$215.4 million charge in 2001,
without affecting net income, to reflect the lower dollar value of our net
assets over the year as the real devalued by 52.3% in 2002 and by 18.7% in
2001.
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.
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
28
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 16 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. The tax contingencies relate primarily to value-added sales taxes,
taxes on revenue, social security contributions, income tax and tax on bank
account transactions. We have identified probable losses in the amount of
US$269.7 million at December 31, 2002 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 materially 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 8A -
Financial Information - Consolidated Financial Statements and Other Financial
Information - Legal Proceedings."
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
high as the average sales revenues in the other months. Similarly, we generally
realize a significant increase in liabilities to suppliers during this period.
2001 Business and Economic Environment
We implemented several operational measures in 2001 designed to
increase operating efficiency, which had an impact on our 2001 financial
results. In 2001, we transferred our category management activities to each of
29
our different store formats from our commercial area. As a result, the
commercial area focuses exclusively on negotiating with our suppliers. We expect
this change will result in greater bargaining power with suppliers and decreased
cost of sales, extended payment terms with suppliers and improved inventory
levels. For more information, see "Item 4A - Information on the Company -
History and Development of the Company."
Sales of the Barateiro division did not meet our target sales as our
efforts beginning in 2000 to operate this chain as a hard discount retailer had
not gained market acceptance. In response, we relaunched the Barateiro format in
October 2001 by offering a new product assortment, new store layouts, and new
non-retail services, such as home delivery and the payment of utility bills at
Barateiro cash registers. We also created the brand's own preferred
shopper/fidelity card, the Clube Barateiro card, which offers credit to
customers and fosters customer loyalty. We incurred some costs in 2001 in
connection with the relaunching of the division. Barateiro sales began to
improve in response to the relaunching beginning in November 2001. As a result,
the improvement in our Barateiro sales will not be fully reflected in our
financial results presented in this annual report, but we expect it will be
reflected in subsequent periods. See "Item 4B - Information on the Company -
Business Overview - Operations - Barateiro Division" for more information about
the relaunching of this division.
In 2001, we also faced several negative economic factors, which
adversely affected our sales of consumer electronics and chilled foods in
particular. In April 2001, Brazil faced an unexpected shortage of energy, which
continued during the second half of 2001, as a result of increased demand due to
economic growth and a failure to keep up with this demand, as well as inadequate
expansion of generation and unfavorable hydrological conditions. As a result,
the Brazilian government implemented measures for electricity rationing that had
an adverse effect on economic growth in virtually all segments of Brazilian
industry and society, including the Brazilian retail business. The energy crisis
adversely affected the sales of our Extra and Extra Eletro stores in particular.
Extra Eletro sells exclusively household appliances and consumer electronic
products, and a significant part of Extra's sales volume consists of these types
of products.
In addition, the uncertainty regarding the economic and market
conditions in Argentina in 2001 and its possible effect on the Brazilian economy
adversely affected consumer confidence. The terrorist attacks on September 11,
2001 and the uncertainty following this event further eroded consumer
confidence, resulting in reduced discretionary spending by consumers. All of
these economic factors are reflected in our results of operations for 2001.
2002 Business and Economic Environment
In 2002, several negative economic factors adversely affected consumer
confidence levels in Brazil and, consequently, adversely affected our sales of
consumer electronics and household appliances in particular. Prior to and
subsequent to the presidential elections in November 2002, there was substantial
uncertainty relating to Brazil's own political and economic future. Other
negative economic factors in 2002 included the continued economic and political
uncertainties in Argentina, the political uncertainties in Venezuela and the
global economic slowdown. This economic instability, in turn, resulted in a
substantial devaluation of the real, interest rate hikes and an increased
inflation rate. As a result, these factors adversely affected the sales of our
Extra and Extra Eletro stores.
Of all our store formats, our Barateiro division experienced the
largest percentage increase in terms of net sales. The Barateiro division
experienced a 40.9% increase (in constant dollars) in net sales in 2002 largely
as a result of the positive response by consumers to the relaunching of this
format in October 2001.
In June 2002, we acquired the Se Supermercardos 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. The
inclusion of Se's results is reflected in our results of operations as of July
1, 2002. We intend to convert these stores into one of our store formats during
the next two years.
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, 2000, 2001 and 2002.
From December 31, 2000 to December 31, 2001, the real devalued by 18.7% and from
December 31, 2001 to December 31, 2002, the real devalued further against the
U.S. dollar by 52.3%. 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.
30
dollar. As a result, a comparison of the 2001 U.S. dollar results against 2000
U.S. dollar results and 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, 2000 financial information in
the "constant dollars" column has been translated at the average exchange rates
used to translate the December 31, 2001 financial information and 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. Because these two "constant dollar" columns have been
prepared at different exchange rates, the columns are not comparable to each
other.
Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000
---------- ------------------------------------ ---------------------------------
Constant Dollars Constant Dollars
2002 Average 2001 Average
Actual Exchange Rate Actual Exchange Rate Actual
---------- -------------------- --------------- --------------------- -----------
(millions of U.S. dollars, except percentage amounts)
Net sales revenue by
store format:
Pao de Acucar........... $976.8 30.0% $905.9 32.5% $1,142.2 32.5% 1,044.4 31.9% $1,335.7 31.9%
Extra.................. 1,526.7 46.9 1,344.0 48.2 1,694.5 48.2 1,591.8 48.6 2,035.8 48.6
Extra Eletro........... 114.6 3.5 162.2 5.8 204.5 5.8 194.5 5.9 248.8 5.9
Barateiro.............. 529.9 16.3 376.1 13.5 474.2 13.5 445.5 13.6 569.7 13.6
Se and CompreBem....... 109.6 3.3 - - - - - - - -
------ ------ -------- ------ --------- ------ -------- ------ ---------- -------
Total net sales revenue $3,257.6 100.0% $2,788.2 100.0% $3,515.4 100.0% $3,276.2 100.0% $4,190.0 100.0%
======== ====== ======== ====== ========= ====== ======== ====== ========== =======
Results of Operations for 2002, 2001 and 2000
The following table summarizes our historical results of operations for
the years ended December 31, 2000, 2001 and 2002. 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, 2000 financial information in the "constant dollars" column has
been translated at the average exchange rates used to translate the December 31,
2001 financial information and 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. Because these two
"constant dollar" columns have been prepared at different exchange rates, the
columns are not comparable to each other.
31
Year Ended December 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------
Constant Dollars Constant Dollars
2002 Average 2001 Average
Actual Exchange Rate Actual Exchange Rate Actual
------------------ ------------------- ----------------- ----------------- ------------------
(millions of U.S. dollars, except percentage amounts)
Net sales revenue........... $3,257.6 100.0% $2,788.2 100.0% $3,515.4 100.0% $3,276.2 100.0% $4,190.0 100.0%
Cost of sales............... (2,345.2) (72.0) (1,988.2) (71.3) (2,506.8) (71.3) (2,358.0) (72.0) (3,015.7) (72.0)
---------- ------- --------- -------- -------- ------- -------- ------- --------- ------
Gross profit................ 912.4 28.0 800.0 28.7 1,008.6 28.7 918.2 28.0 1,174.3 28.0
Selling, general and
administrative expenses... (660.4) (20.3) (589.9) (21.2) (743.7) (21.2) (697.8) (21.3) (892.5) (21.3)
Depreciation and
amortization.............. (107.8) (3.3) (116.0) (4.2) (146.2) (4.2) (105.9) (3.2) (135.4) (3.2)
---------- ------- --------- -------- -------- ------- -------- ------- --------- ------
Operating income............ 144.2 4.4 94.1 3.3 118.7 3.3 114.5 3.5 146.4 3.5
Financial income............ 158.3 4.9 112.9 4.0 142.3 4.0 147.2 4.5 188.3 4.5
Financial expense........... (222.9) (6.8) (128.2) (4.6) (161.7) (4.6) (134.9) (4.0) (172.5) (4.0)
Other non-operating
income (expenses)......... 1.5 -- 0.6 0.1 0.7 0.1 3.1 0.1 4.0 0.1
---------- ------- --------- -------- -------- ------- -------- ------- --------- -------
Income before
income taxes.............. 81.1 2.6 79.4 2.8 100.0 2.8 130.0 4.0 166.2 4.0
Income tax (expense)
benefit:
Current................. (11.8) (0.4) (13.1) (0.5) (16.5) (0.5) (7.2) (0.2) (9.2) (0.2)
Deferred................ (8.8) (0.3) 13.6 0.6 17.2 0.6 2.5 0.1 3.2 0.1
---------- ------- --------- -------- -------- ------- -------- ------- --------- -------
Net income.................. $60.5 1.9% $79.9 2.9% $100.7 2.9% $125.3 3.8% $160.2 3.8%
========== ======= ========= ======== ======== ======= ======== ======= ========= =======
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.
The 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
32
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 53.2% to US$144.2
million in 2002 from US$94.1 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.
Year Ended December 31, 2001 (Actual) Compared to Year Ended December 31, 2000
(Constant Dollars)
Net Sales Revenue. Net sales revenue increased by 7.3% to US$3,515.4
million in the year ended December 31, 2001 from US$3,276.2 million in the year
ended December 31, 2000. On a "same store" basis, our net sales revenue
decreased by 1.3% from 2000 to 2001.
The Pao de Acucar division's net sales revenue increased by 9.4% to
US$1,142.2 million in 2001 from US$1,044.4 million in 2000, principally as a
result of the inclusion in 2001 of a full year of sales revenue of stores
acquired during 2000, increased sales in the division's remodeled stores and
increased customer loyalty following the gradual introduction throughout Brazil
of its preferred shopper card, Pao de Acucar Mais, beginning in 2000. The weaker
Brazilian economy in 2001 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 6.5% to US$1,694.5
million in 2001 from US$1,591.8 million in 2000, principally as a result of the
opening of new stores in 2001 and the inclusion in 2001 of full year sales
revenue of stores opened in late 2000. The Extra division's performance was
adversely affected by the Brazilian energy crisis in 2001, which affected sales
of consumer electronic products in Brazil in particular. The
33
higher net sales revenue previously achieved by the Extra division in 2000
resulted primarily from the particularly strong sales of household appliances
and consumer electronic products that year.
The Barateiro division's net sales revenue increased by 6.4% to
US$474.2 million in 2001 from US$445.5 million in 2000, principally as a result
of the opening of new stores, the conversion of Pao de Acucar stores into
Barateiro stores and the inclusion in 2001 of full year sales revenue of stores
opened in late 2000. In October 2001, we relaunched the Barateiro format because
we were experiencing decreased sales in existing stores as a result of
customers' negative reaction to our operation of the Barateiro format as a hard
discount retailer. As part of the relaunching, we reevaluated the product
assortment of the Barateiro division in order to achieve a more competitive
balance among leading brands, private label products and lower-priced products.
The Eletro division's net sales revenue increased by 5.1% to US$204.5
million in 2001 from US$194.5 million in 2000. These increases were principally
due to particularly strong sales of consumer electronic products in the first
quarter of 2001 resulting from our promotional efforts and higher credit sales
resulting from increased consumer confidence at that time. In addition, our
sales in the first quarter of 2001 were converted into dollars using a more
favorable exchange rate, as the real did not devalue substantially against the
U.S. dollar until later that year. Our increase in net sales revenue was
partially offset by the weaker sales of household appliances and consumer
electronic products in Brazil beginning in the second quarter of 2001 as a
result of the energy rationing and lower consumer confidence. Although our net
sales revenue recovered partially during the fourth quarter of 2001, the
devaluation of the real throughout 2001 resulted in a proportionately smaller
sales revenue increase in U.S. dollar terms.
Gross Profit. Gross profit increased by 9.8% to US$1,008.6 million in
2001 from US$918.2 million in 2000. Gross profit as a percentage of net sales
revenue increased to 28.7% in 2001 from 28.0% in 2000 due to efficiency gains
from the restructuring of our category management operations over the year and
the reduced cost of sales resulting from our better bargaining power with
suppliers. The restructuring of our category management operations improved our
sales mix by increasing the amount of higher-margin food products and decreasing
the amount of lower-margin consumer electronic products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 6.6% to US$743.7 million in 2001 from
US$697.8 million in 2000, principally as a result of the increase in the number
of our stores. Selling, general and administrative expenses also increased due
to an increase in marketing expenses in connection with the restructuring of the
Barateiro format, the launch of the Extra card and expenses incurred in
connection with the restructuring of our category management operations and our
commercial department. As a percentage of net sales revenue, selling, general
and administrative expenses was 21.2% in 2001 and 21.3% in 2000.
Depreciation and Amortization. Depreciation and amortization increased
by 38.0% to US$146.2 million in 2001 from US$105.9 million in 2000, principally
due to the remodeling and re-equipping of some existing stores, the amortization
of goodwill resulting from acquisitions made during 2000, the opening of new
stores and our continued investment in information technology and distribution
centers.
Operating Income. Operating income increased by 3.7% to US$118.7
million in 2001 from US$114.5 million in 2000, as a result of the effects
described above.
Financial Income. Financial income decreased by 3.3% to US$142.3
million in 2001 from US$147.2 million in 2000, principally due to decreased
credit sales. The decrease in financial income also reflected, on a constant
dollar basis, the decrease in interest income from our post-dated check sales.
Financial Expenses. Financial expenses increased by 19.9% to US$161.7
million in 2001 from US$134.9 million in 2000 resulting from the losses in
cross-currency and interest rate swap contracts, foreign exchange losses and
higher interest rates. This increase took place despite the decrease in interest
expenses in connection with our import financing debt due to lower LIBOR rates
in 2001 and in connection with our related party debentures due to the
conversion of debentures into capital. See notes 11 and 12 to the financial
statements.
Income Before Taxes. Income before taxes decreased by 23.1% to US$100.0
million in 2001 from US$130.0 million in 2000 due to the effects described
above.
34
Income Tax Benefits (Expense). In 2001, we had an income tax benefit of
US$0.7 million as compared to an income tax expense of US$4.7 million for 2000.
Our effective tax rate in 2000 was reduced by the benefit from the deductibility
of interest attributed to equity paid and/or accrued within the year. Although
we recorded no such deductible expense in 2001, the income tax charge was
reduced by the deferred income tax benefit of US$17.2 million.
Net Income. Net income was US$100.7 million in 2001 against US$125.3
million in 2000 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, capital calls and issuances of
debentures. At December 31, 2002, we had US$315.7 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, Barateiro and Extra. 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.) Our post-dated check programs
provide our customers with financing for up to 60 days (with an average of 45
days). In 2002, we noted that customers tended to use principally credits 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,
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$166.4 million in 2002, US$119.2 million in 2001, and US$122.1 million in
2000. Net cash provided by financing was US$181.7 million in 2002 (after payment
of US$21.2 million of dividends), US$113.8 million in 2001 (after payment of
US$59.1 million in interest attributed to equity to shareholders), and US$293.3
million in 2000. In 2002, these cash flows were primarily used for investments
in the capital expenditures program totaling US$348.4 million (including the
payment of acquisitions of retail chains totaling US$94.3 million).
At December 31, 2002, our total outstanding debt with third parties was
US$848.4 million, consisting of:
o US$281.7 million of real-denominated loans,
o US$538.5 million of U.S. dollar-denominated debt, and
o US$28.2 million of debt linked to a basket of foreign currencies
to reflect BNDES' funding portfolio, plus an annual spread.
We assumed debt in connection with the acquisition of Se Supermercados
at June 30, 2002 in the amount of US$43.7 million. At December 31, 2002, of the
US$538.5 million of U.S. dollar-denominated debt, approximately US$533.6 million
was swapped into obligations denominated in reais, of which US$414.9 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
35
originally denominated in reais and accrued an interbank variable rate (CDI). In
addition, we have US$28.2 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 "swapping" a substantial part of our U.S.
dollar-denominated liabilities for 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
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.
Total debt at December 31, 2002 decreased by US$89.0 million from
US$937.4 million at December 31, 2001. Our most significant debt was incurred in
connection with the construction of new stores, the remodeling of existing
stores and the debt assumed relating to the acquisition of Se Supermercados. Our
debt decreased because of exchange effects, despite the issuance of debt and the
debt assumed in connection with the acquisition of Se Supermercados. Our cash
interest expense was US$122.3 million in 2002, US$102.6 million in 2001 and
US$109.1 million in 2000. The US$19.7 million increase in cash interest expense
in 2002 related directly to the increase in interest rates in 2002.
The following table summarizes significant contractual obligations and
commitments that impact our liquidity:
Payment Due by Period
---------------------
One to
Less than three Four to After five
Contractual Obligations Total one year years five years years
----------------------- ----- -------- ------ ---------- ---------
(in millions of U.S. dollars)
Long-term debt...................... $ 465.0 $ 79.1 $ 349.6 $ 36.3 $ --
Capital lease obligations........... 18.4 9.2 9.2 -- --
Operating leases.................... 263.8 52.2 83.9 61.3 66.4
----- ---- ---- ---- ----
Total contractual cash
obligations..................... $ 747.2 $ 140.5 $ 442.7 $ 97.6 $ 66.4
===== ===== ===== ==== ====
In addition, we have made provisions for total accrued liability for
legal proceedings related to some of our unpaid taxes of US$269.7 million at
December 31, 2002.
Fifteen banks provide us short-term financing; of these, five banks,
Bradesco, Citibank, Itau, Safra and BBV, individually represent greater than 10%
of the total amount of short-term debt outstanding as of December 31, 2002.
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. At December 31, 2002, 4.0% of our total indebtedness was denominated
in foreign currencies (after giving effect to the swap transactions described
above), as compared with 4.4% at the end of 2001.
Our long-term debt net of current portion aggregated US$385.8 million
and US$381.6 million at December 31, 2002 and 2001. 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 eight 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
36
the acquisition of supermarket chains. For more information regarding our lines
of credit with BNDES, see note 12(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 2002 and 2001, US$5.2 million and
US$7.3 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, 2002, the second, fourth and fifth issues were
still outstanding in part.
In 1998, we issued the second issue with two series comprising 175,000
debentures convertible into preferred shares and 25,000 non-convertible
debentures. At December 31, 2002, we had 1,850 convertible debentures and 25,000
non-convertible debentures outstanding, totaling US$0.6 million and US$4.6
million, respectively. The debentures accrue annual interest of 13.0% on the
principal, are indexed to the IGP-M, payable annually, and collateralized by
certain cash equivalents and accounts receivable.
In 2000, we issued the fourth issue of convertible debentures due
August 2005. At December 31, 2002, we had 99,908 convertible debentures
outstanding from our fourth issue, totaling US$32.6 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 limited to R$600 million representing 60,000
non-convertible 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 Interbank Deposits (Depositos Interfinanceiros-DI) 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, 2002,
we had 40,149 non-convertible debentures outstanding from the first series of
our fifth issue, totaling US$119.6 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 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 debentures, see note 12(ii) to
our financial statements.
We continue to implement our capital expansion and investment plan and
currently intend to invest approximately R$540 million in 2003 (equivalent at
the December 31, 2002 exchange rate to US$152.8 million), which includes R$240
million (equivalent at the December 31, 2002 exchange rate to US$67.9 million)
for the opening of new stores, R$200 million (equivalent at the December 31,
2002 exchange rate to US$56.6 million) for store remodelings, R$70 million
(equivalent at the December 31, 2002 exchange rate to US$19.8 million) for
technology and R$30 million (equivalent at the December 31, 2002 exchange rate
to US$8.5 million) for other investments.
In 2002, our capital expenditures and cost of acquisitions of other
retail chains were US$348.4 million. These investment projects were financed
primarily from our operating cash flow and, to a lesser extent, by third
37
parties. Our capital expenditures were approximately US$275.2 million for 2001
and US$720.5 million for 2000. For specific use of our capital expenditures in
2002, 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 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.
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.
At December 31, 2002, our board of directors consisted of 15 members
and our board of executive officers consisted of six members. At the end of
2002, however, a reorganization of our corporate management structure took
place, pursuant to which the role of our two principal management bodies, the
board of executive officers and the board of directors, was restructured and
redefined in order to improve efficiency in the corporate governance structure
and in the control and planning of each governing body on a daily basis, to
develop a more active board of directors and to create more autonomy for each
governing body. In February 2003, our shareholders approved this 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.
In connection with this reorganization, our current 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, Mr. 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 either new members to our board of directors or renewed
the mandate of existing board members. On that same date, our directors
appointed new executive officers or renewed the mandate of existing officers. As
a result, our board of directors currently consists of 14 members and one
honorary member and our board of executive officers consists of 10 members.
Board of Directors
Our board of directors generally meets 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
38
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 14 members, consisting of four controlling
shareholders, seven 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 Honorary Chairman 1981
Abilio dos Santos Diniz Chairman 1981
Ana Maria Falleiros dos Santos Diniz D'Avila Director 2003
Joao Paulo Falleiros dos Santos Diniz Director 1999
Pedro Paulo Falleiros dos Santos Diniz Director 2003
Maria Silvia Bastos Marques Director 2003
Fernao Carlos Botelho Bracher Director 1995
Roberto Teixeira da Costa Director 1995
Mailson Ferreira da Nobrega Director 1995
Gerald Dinu Reiss Director 1995
Augusto Marques da Cruz Filho Director 1994
Christian Pierre Couvreux Director 1999
Jose Roberto Mendonca de Barros Director 1999
Luiz Carlos Bresser Goncalves Pereira Director 1999
Pierre Bruno Charles Bouchut Director 1999
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.
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. Our executive officers, elected on February 28,
2003, are currently as follows:
Name Position
---- --------
Augusto Marques da Cruz Filho President
Cesar Suaki dos Santos Supply Chain Officer
Hugo A. Jordao Bethlem Commercial Officer
Jose Roberto C. Tambasco Supermarket Division Officer
Jean Henri A. Duboc Hypermarket Division Officer
Caio Racy Mattar Investment and Construction Officer
Fernando Queiroz Tracanella Investor Relations Officer
Maria Aparecida Fonseca Human Resources Officer
---------------
As described above, Mr. Augusto Marques da Cruz Filho, the former
Administrative and Financial Vice President, assumed the Chief Executive Officer
position in March 2003. The Administrative and Financial Vice President position
was eliminated and instead divided into two newly-created positions - the
Administrative Officer (the equivalent of a Chief Financial Officer) and the
Financial and Controller Officer positions. These positions are currently
vacant. We intend to appoint an Administrative Officer and a Financial and
Controller Officer upon an
39
official appointment at a general shareholders' meeting in the future. In the
interim, Mr. Marques da Cruz Filho is our acting Chief Financial Officer.
Fiscal Committee and Audit Committee
Under the Brazilian corporate law and our by-laws, we are not required
to, and currently do not, maintain a permanent fiscal committee (conselho
fiscal). However, we are required to establish a fiscal committee 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 fiscal committee would consist of
three to five members and an equal number of alternates. The members of the
fiscal committee 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 fiscal committee are
elected, and holders of common shares would be entitled to elect the other
members (and their respective alternates).
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 as described below) and of our independent
accountants, 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. The first term of our
audit committee began with the election of Luis Carlos Bresser Goncalves
Pereira, as President, Gerald Dinu Reiss, as Vice-President, and Augusto Marques
da Cruz Filho, as member, on June 12, 2001.
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. On February 3, 1995, Manuel Carlos Teixeira de Abreu was
appointed to our consulting committee. On April 28, 1998 Jose Luiz Bulhoes
Pedreira Neto was appointed to our consulting committee and on April 30, 1999,
two members, Manuel Carlos Teixeira de Abreu and Jose Luiz Bulhoes Pedreira
Neto, were appointed to our consulting committee. On February 28, 2003, Manuel
Carlos Teixeira de Abreu, Jose Luiz Bulhoes Pedreira Neto, Candido Botelho
Bracher, Luiz Felipe Chaves D'Avila and Luiz Marcels Dias Sales were appointed
to our consulting committee. The total compensation of the members of our
consulting committee for the 2001 to 2002 term was limited to an aggregate of
R$108,000, provided that each appointed member receives R$36,000 during the
term, and for the 2003 term the total compensation of the members of our
consulting committee has been limited to an aggregate of R$300,000, provided
that each appointed member must receive R$60,000 during this term.
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 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
40
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.
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.
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.
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. 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. 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.
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
41
Corporation in Washington, D.C. Mr. Ferreira da Nobrega has a degree in
Economics from Centro de Ensino Unificado de Brasilia.
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. Augusto Marques da Cruz Filho is a member of our board of directors
and our President. 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. 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. 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 has done post-doctoral work at Yale University.
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. 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.
Mrs. Maria Silvia Bastos Marques is a member of our board of directors.
Mrs. Marques is a 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. 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. 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. Jean Henri A. Duboc is our Hypermarket Division Officer. He was a
former executive officer of TAM and chairman of Carrefour Brazil.
42
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.
Mr. Fernando Queiroz Tracanella is our Investor Relations Officer. Mr.
Tracanella has 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. 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.
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.
For the year ended December 31, 2002, the aggregate compensation paid
in cash to all of our 21 directors and executive officers as a group was
approximately US$2.1 million. Other non-cash benefits in 2002 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.
In 1997, we implemented our stock option plan. Under our stock option
plan, stock options are awarded to some directors, executive officers and
employees as well as to some managers and employees of our affiliates at the
discretion of the committee elected by our board of directors. Pursuant to the
terms of our stock option plan, the committee authorizes the issuance of options
on up to 1,659 million preferred shares. In 1999, our board of directors
approved the issuance of an additional 3.4 billion preferred shares to our stock
option plan. On March 31, 2000, we issued 305,975 stock options with an exercise
price of US$30.69 per 1,000 shares. On April 2, 2001, we issued 361,660 stock
options with an exercise price of US$29.65 per 1,000 shares. On March 15, 2002,
we issued 412,600 stock options with an exercise price of US$19.96 per 1,000
shares. See note 14(d) to the financial statements included elsewhere in this
annual report.
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.
According to our stock option plan, unless otherwise provided in the
option agreement, each beneficiary may exercise up to 50% of his options at the
end of three years after the date of signing of the option agreement. The
remaining 50% of the options may be exercised at the end of the fifth year,
subject to certain restrictions on transfer until the beneficiary's retirement.
6D. Employees
Our workforce at December 31, 2002 consisted of 57,898 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, 2002:
43
At December 31,
---------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operational...................... 47,623 42,599 43,204 34,624 27,598
Administrative................... 10,275 9,461 6,902 5,018 3,745
------ ----- ----- ----- -----
Total....................... 57,898 52,060 50,106 39,642 31,343
In 2002, we were elected one of the 10 best employers in Brazil by
Exame, the nation's leading business magazine. The survey, which asked employees
for their opinions, demonstrated their satisfaction and pride to be part of our
community and considered us an excellent place to work. The result reflects
recognition of our perseverance and investment in our employee community.
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. When share options
are exercised, we can issue new shares or transfer treasury shares to the new
shareholder. Beginning in 2000, 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 issue of
options convertible into an additional 3.4 billion preferred shares to be
granted under our stock option plan. On March 31, 2000, we issued 305,975 stock
options with an exercise price of US$30.69 per 1,000 shares. On April 2, 2001,
we issued 361,660 stock options with an exercise price of US$29.65 per 1,000
shares. On March 15, 2002, we issued 412,600 stock options with an exercise
price of US$19.96 per 1,000 shares.
Share options (thousands)
---------------------------------------
2002 2001
------------------ ------------------
Granted:
Options outstanding at beginning of year 1,424,074 1,653,799
Options exercised:
Series 1 - December 7, 2001 - capital increase of US$613 (90,600)
Series 3 - December 7, 2001 - capital increase of US$3,513 (500,785)
Series 3 - April 10, 2002 - capital increase of US$26 (3,400)
Series 2 - December 19, 2002 - capital increase of US$684 (120,900)
Series 3 - December 19, 2002 - capital increase of US$4 (700)
Series 5 (issued April 2, 2001) 361,660
Series 6 (issued March 15, 2002) 412,600
------------------ ------------------
Outstanding options granted at end of year 1,711,674 1,424,074
================== ==================
Share options available at end of year for future grants 2,319,765 2,732,365
================== ==================
US$
-----------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
44
Range of year-end exercise prices for outstanding
options at balance sheet date exchange rates
(US$ per thousand shares) 10.69-24.50 5.43-27.58 6.45-30.69
Weighted average grant-date exercise price of
options (US$ per thousand shares) 17.49 17.05 14.74
Weighted average grant-date quoted market price of shares
(US$ per thousand shares) (based on quoted market value
at date granted) 21.07 20.82 18.98
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) 15.42 21.33 36.46
Compensation cost recognized for the year ended
December 31 912 1,853 2,083
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. Major Shareholders
The following table sets forth information as of December 31, 2002 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)................... 38,334,158,640 60.40% 7,332,819,981 14.75% 45,666,978,621 40.35%
Valentim dos Santos
Diniz................... 2,280,975,580 3.59 -- -- 2,280,975,580 2.02
Peninsula
Participacoes Ltda. (3) 6,458,266,960 10.17 7,746,144 0.02 6,466,013,104 5.71
Abilio Diniz............... 253,726,605 0.40 -- -- 253,726,605 0.22
Joao Paulo F. dos Santos
Diniz................... 10 -- 18,900,000 0.04 18,900,010 0.02
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 27.40 28,841,226,279 25.48
Others (4)................. 30,651,949 0.05 28,691,639,174 57.71 28,722,291,123 25.37
--------------- ------ -------------- --------- -------------- --------
Total...................... 63,470,811,399 100.00% 49,715,328,034 100.00% 113,186,139,433 100.00%
=============== ======= ============== ========= =============== =========
----------------
(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
12 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, 2001 is 150 billion shares. The balance of unissued shares
in relation to the authorized share capital relates to unissued common and
preferred shares.
45
(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 Diniz and his
children. Upon the death of Mr. Abilio 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 99% of Peninsula
Participacoes' 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.
In the two-year period ending August 31, 2003, 6,285,876 common share
warrants may be exercised, and the remaining 6,285,875 common share warrants may
be exercised between August 31, 2002 and August 31, 2004. The ratio will be
adjusted proportionately in the event of any reverse splits, splits or
distribution of stock dividends. The preferred and common subscription warrants
were acquired by the minority shareholder, the Casino Group.
Shareholder Transactions
In September 1999, the Casino Group purchased 2,500,000,000 common
shares from PAIC and was issued another 12,571,750,000 shares of common stock,
representing, in the aggregate, an ownership interest of approximately 24.0% of
total common stock.
The Casino Group also has 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 and US$45.00
per 1,000 shares. Of these 2.5 billion common shares, the Casino Group may
purchase up to 1.25 billion common shares at any time until August 31, 2003 and
up to 1.25 billion common shares at any time 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 all of the common share warrants described above and
exercises its right to purchase the additional 2.5 billion common shares, the
Casino Group may increase its ownership interest in us to approximately 39.8% 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.
In 1999, our controlling shareholders assigned the right to subscribe
the first series of third issue convertible debentures to the minority
shareholder, the Casino Group. This first series was comprised of 297,000
debentures convertible into non-voting preferred shares. We issued convertible
debentures due on September 1, 2000 and at a nominal value of R$1,000. These
debentures were fully subscribed on September 24, 1999, at which time we
received proceeds equivalent to US$154.8 million, net of accrued commissions of
US$3.4 million. On August 30, 2000, all 297,000 debentures were fully converted
by the holders into 5,999,994,000 preferred shares. 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' Agreement
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.
46
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
and corresponding alternates,
o has the right to appoint a person to serve as both 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 Mercosur (Brazil, Argentina, Uruguay and Paraguay)
and in Colombia, as long as they remain our shareholders. They also agreed not
to engage in the food 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,
47
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.
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 2002 under those leases equaled
approximately US$4.6 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 1999, our minority shareholder, the Casino Group, subscribed to
convertible debentures issued by us. In August 2000, these debentures were
converted into 5,999,994,000 preferred shares. See note 12(ii) to the financial
statements. 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$2.2 million in
2002, US$1.6 million in 2001 and US$17.8 million in 2000.
7C. Interests of Experts and Counsel
Not applicable.
ITEM 8 FINANCIAL INFORMATIO
8A. Consolidated Financial Statements and Other Financial Information
See "Item 3A - Key Information - Selected Financial Data" and "Item 19
- Exhibits."
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.
48
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 16 to the financial statements.
The following probable losses have been identified based on the advice
of outside legal counsel and have been provided as liabilities in our financial
statements:
2002 2001
----------- -----------
(millions of U.S. dollars)
Taxes:
Taxes on revenues and income...................................... $167.1 $148.4
Tax on bank account transactions and other........................ 32.3 28.3
Labor claims and social security...................................... 70.3 86.7
------------- -----------
Total accrued liabilities for legal proceedings....................... $269.7 $263.4
============= ===========
Taxes on Revenues and Income
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, 2002, we made a provision of US$151.1 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.
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
10.1% 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, 2002, we made a provision of US$12.5 million
that we believe corresponds to the difference between the 42.7% inflationary
index for January 1989 and the 10.1% inflationary index for February 1989 and
the 70.3% rate. These assessments are supported by our outside legal counsel.
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 is probable that we will not
prevail in this lawsuit, as of December 31, 2002, we made a provision of US$28.5
million that we believe corresponds to the amount of CPMF that the banks did not
withhold based on the lower court decision, and this provision is 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, which we intend to pay in 60 monthly installments.
Labor Claims and Social Security
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, 2002, these lawsuits collectively involved claims
equivalent to US$27.8 million. At December 31, 2002, we made a provision of
US$3.6 million for labor related loss contingencies, since it is probable that
we will not prevail in these lawsuits and the damages are reasonably estimable.
49
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, 2002,
we made a provision of US$66.7 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.
Other Tax-Related Matters
In June 1990, we filed an injunction seeking protection for non-payment
of the Brazilian social contribution on profits, 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. No appeal was presented by the
federal government. However, pursuant to Brazilian law, this lawsuit was
submitted to mandatory review of the Regional Federal Court, and it confirmed
the lower court's decision in February 1992. We do not pay the Brazilian social
contribution on profits based on the 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.
Dividend Policy and Dividends
General
Pursuant to the new 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 new Brazilian corporate law. Currently, the new
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 new
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 new Brazilian corporate law). In
addition to deducting amounts for the legal reserve, under the new 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 new 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 therefor. 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 new 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 fiscal committee, 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.
50
In addition, the new 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 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 new 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
therefor, 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$0.15 per 1,000 preferred shares, subject to any determination by our board of
directors that such distribution would be incompatible in view of our financial
condition. We are authorized, but not required, to distribute a greater amount
of dividends.
Pursuant to the new Brazilian corporate law, Brazilian corporations are
required to hold an annual shareholders' meeting by April 30 of each year at
which an annual dividend may be declared. Additionally, interim dividends may be
declared by the board of directors. Under the new Brazilian corporate law,
dividends generally are required to be paid to the holder of record on the date
of the annual shareholders' meeting at which the dividend was declared, within
60 days following the date the dividend was declared, unless a shareholders'
resolution sets forth another date of payment, which, in either case, must occur
prior to the end of the fiscal year in which such dividend was declared. A
shareholder has a three-year period from the dividend payment date to claim
dividends in respect of its shares, after which the Brazilian company has no
liability for such payment. Brazilian companies are not required to adjust the
amount of the dividend for inflation for the period from the date of declaration
to the payment date.
Payments of cash distributions by us on preferred shares underlying the
ADSs, if any, will be made in Brazilian currency to the custodian on behalf of
the depositary, which will then convert these proceeds into U.S. dollars and
will cause these U.S. dollars to be delivered to the depositary for distribution
to you. Dividends paid to shareholders, including holders of the ADSs, are
currently not subject to Brazilian withholding tax. See "Item 10E - Additional
Information - Taxation - Brazilian Tax Considerations."
Dividend Policy and History of Dividend Payments
The following table sets forth the distributions paid to holders of our
common shares and preferred shares since 1998:
51
Total amount in
R$ per 1,000 shares dividends and
(common and interest on equity
Period Description First payment date preferred) (in R$ millions)
---------------------- -------------------- ------------------- ---------------------- --------------------
1998.................. Dividends and June 25, 1999 0.5000 39.0
interest on equity
1999.................. Dividends June 9, 2000 0.1880 (1) 15.9
2000.................. Dividends and June 2001 1.8161 195.0
interest on equity
2001.................. Dividends June 2002 0.5375 60.8
2002.................. Dividends June 2003 (2) 0.5252 59.4
---------------
(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, 2003. 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, 2002, there were:
o an aggregate of 49,715,328,034 preferred shares issued and
outstanding and 63,470,811,399 common shares issued and
outstanding, and
52
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 36.6%
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
---------------- ------------------- --------------
1998.............................................. 30.80 9.52 26.62 8.03 692,273
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:
1st quarter.................................... 75.43 60.54 34.89 28.01 2,143,225
2nd quarter.................................... 66.49 51.51 28.85 22.35 3,029,225
3rd quarter.................................... 55.00 33.25 20.59 12.45 1,540,501
4th quarter.................................... 51.50 34.00 22.19 14.65 2,740,376
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
Share prices for the most recent six months are as follows:
December 2002..................................... 58.00 52.60 16.42 14.89 1,803,633
January 2003...................................... 55.20 49.70 15.66 14.10 1,584,021
February 2003..................................... 50.10 43.40 14.06 12.18 678,390
March 2003........................................ 46.70 40.00 13.93 11.93 1,231,204
April 2003........................................ 44.99 41.02 15.57 14.19 2,366,377
May 2003.......................................... 48.50 44.38 16.35 14.96 2,269,339
--------------
(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 13, 2003, the closing sale price for the preferred shares on
the Sao Paulo Stock Exchange was R$45.25 per 1,000 preferred shares, equivalent
to US$15.84 per ADS translated at the exchange rate of R$2.8570 per US$1.00, the
commercial market rate on such date.
The following table sets forth, for the periods indicated, the reported
high and low sales prices for our ADSs listed on the New York Stock Exchange, in
U.S. dollars and reais:
Calendar Period High Low High Low
--------------- ---- --- ---- ---
US$ Average Daily
53
US$ ADSs R$ ADSs Trading Volume
--------------------- -------------------- --------------
1998............................... 27.00 8.00 31.71 9.48 1,524,131
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:
1st quarter..................... 38.88 28.10 84.03 60.74 5,427,758
2nd quarter..................... 31.20 21.10 71.91 48.63 4,671,256
3rd quarter..................... 23.08 12.50 61.65 33.39 2,410,710
4th quarter..................... 22.00 12.71 51.05 29.49 2,521,992
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
Share prices for the most recent six months are as follows:
December 2002...................... 15.80 14.15 55.83 50.00 1,403,419
January 2003....................... 16.25 14.15 57.29 49.89 1,700,904
February 2003...................... 14.23 12.10 50.70 43.11 1,028,015
March 2003......................... 13.78 11.44 46.21 38.36 1,043,026
April 2003......................... 14.63 13.04 42.28 37.68 1,899,782
May 2003........................... 16.46 14.35 48.81 42.56 2,964,545
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, 2003, the aggregate market capitalization of the 391
companies listed on the Sao Paulo Stock Exchange was equivalent to approximately
US$156 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.
54
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 new 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 new 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.
9D. Selling Shareholders
Not applicable.
9E. Dilution
Not applicable.
9F. Expenses of the Issue
Not applicable.
ITEM 10 ADDITIONAL INFORMATION
10A. Share Capital
Our share capital as of December 31, 2002 is R$2,749.8 million,
represented by 113,186,139,433 shares, of which 63,470,811,399 are common shares
(acoes ordinarias) and 49,715,328,034 are preferred shares (acoes
preferenciais), all nominatives and without par value. We are authorized to
increase our capital upon the decision of our board of directors, without the
need to amend our by-laws, up to 150,000,000,000 shares, limited to
69,712,996,269 preferred shares and 80,287,003,731 common shares. There are no
other classes or series of preferred shares outstanding. Under Brazilian
legislation, the number of preferred non-voting or restricted voting shares
outstanding of public companies existing on March 1, 2002 may not exceed two
thirds of the total number of outstanding shares (except if public companies
elect to be subject to a rule restricting the number of preferred non-voting or
restricted voting shares to one-half of the total number of outstanding shares).
Currently, approximately
55
43.9% of our outstanding shares are preferred shares. See "Item 10B - Memorandum
and Articles of Association - Other Changes Implemented Under the New Brazilian
Corporate Law" for a description of other changes.
10B. Memorandum and Articles of Association
Set forth below is a brief summary of certain significant provisions of
our by-laws and new 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 new
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 new 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 new 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 new 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.
In this sense, our by-laws sets 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; and
(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 new 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
56
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 new 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 New 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 fiscal committee, 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.
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.
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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 new 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;
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
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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 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
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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 new 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 new 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 new 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,
o elect or dismiss members of our board of directors (and members
of the fiscal committee) 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,
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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 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
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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 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 New 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;
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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 accountant of the controlling shareholder;
o our controlling shareholders, the shareholders that elect members
to our board of directors and to the fiscal committee, the
members of our board of directors and fiscal committee 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
new Brazilian corporate law.
10C. Material Contracts
Other than the shareholders' agreement between our controlling
shareholders and the Casino Group 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 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.
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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 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
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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 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
65
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 are not subject to Brazilian
tax.
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%, 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 not subject to tax in Brazil on gains
realized on sales of preferred shares that occur abroad to persons who are not
resident in Brazil or on the proceeds of a redemption of, or a liquidating
distribution with respect to, preferred shares. However, Resolution 2,689
prevents sales of preferred shares outside Brazil. Non-Brazilian holders are
generally subject to income tax imposed at a rate of 15% on gains realized on
sales or exchanges of preferred shares that occur in Brazil to or with a
resident of Brazil, 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. Under the same circumstances, such
exemption is also applicable to transactions performed on Brazilian stock,
future and commodities exchanges. 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 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-
66
Brazilian residents, including holders of ADSs, is subject to Brazilian
withholding income tax at the rate of 15%. 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
(for "gains realized") are not subject to this 25% tax, even if the beneficiary
is resident in a tax haven.
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 generally imposed on bank account debits, at a current rate of
0.38%, despite the fact that, for some cases, transactions involving foreign
investors may be exempt from CPMF The current rate is defined to be charged
until December 31, 2003 and as of January 1, 2004, the applicable rate shall be
0.08% Although the CPMF tax is set to expire on December, 2004, the Government
is discussing the possibility of extending this period or converting this tax
into a permanent tax. The responsibility for the collection of the CPMF tax is
borne by the financial institution that carries out the relevant financial
transaction.
Taxation of Foreign Exchange Transactions (IOF/Cambio)
Pursuant to Decree 2,219 of May 2, 1997, 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, even if these transactions are performed 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.
67
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 political subdivision 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.
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. However, pursuant to recently enacted legislation, dividends in
respect of our preferred shares or ADSs paid to certain U.S. holders (including
individuals) may qualify for preferential rates of U.S. federal income tax.
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
68
Brazilian currency received by the U.S. holder or the depositary is not
converted into U.S. dollars on the date of receipt.
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.
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. 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 significant 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 passive
foreign investment company ("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. 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. 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.
69
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.
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 rate, such as foreign currency exchange rates and interest rates. See
notes 2(r) and 15 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.
70
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.
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 pre-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 over CDI.
71
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, 2002. See notes 2(d),
11, 12 and 15 to our financial statements.
As of December 31, 2002
------------------------------------------------------------------------------------------
Expected Maturity Date
------------------------------------------------------------ Average
There- Fair Interest Rate
2003 2004 2005 2006 2007 after Total Value (Annual Charges)
---- ---- ---- ---- ---- ----- ----- ------ ----------------
(millions of U.S. dollars)
Assets:
Cash and cash equivalents
denominated in reais ............... $ 315.7 - - - - - $ 315.7 $ 315.7 100.6% of CDI
-------- -------- ------- ------- ---- --- -------- --------
Total cash and cash
equivalents ................. 315.7 - - - - - 315.7 315.7
======== ======== ======= ======= ==== === ======== ========
Liabilities:
Short-term debt:
Floating rate, denominated in
U.S. dollars ..................... 4.9 - - - - - 4.9 4.9 Foreign exchange
Floating rate, denominated in
U.S. dollars(1) .................. 104.4 - - - - - 104.4 92.7 102.3% of CDI
Floating rate, denominated in reais.. 272.1 - - - - - 104.5% of CDI
Floating rate, denominated in reais.. 1.8 - - - - - 1.8 1.8 6% over IGP-M
Fixed rate, denominated in reais .... 0.3 - 0.3 0.3 21.9%
-------- -------- ------- ------- ---- --- -------- --------
Total short-term debt ........ 383.5 - - - - - 383.5 371.8
======== ======== ======= ======= ==== === ======== ========
Long-term debt:
Floating rate, denominated in
U.S. dollars ..................... 12.7 4.4 4.4 4.4 2.3 - 28.2 28.2 3.5% over basket
of foreign
currencies (2)
Floating rate, denominated
in U.S. dollars(1) ............... - 6.3 7.9 - - - 14.2 12.9 101.9% of CDI
Floating rate, denominated in reais.. - 116.8 26.1 - - - 142.9 142.9 102.7% of CDI
Floating rate, denominated in reais.. 55.2 37.6 31.7 16.1 13.5 - 154.1 154.1 3.4% over TJLP
Floating rate, denominated in reais.. 6.0 113.6 - - - - 119.6 119.6 1.45% over CDI
Floating rate, denominated in reais.. 5.2 - - - - - 5.2 5.2 13% over IGP-M
Floating rate, denominated in reais.. - 0.8 - - - - 0.8 0.8 3% over TR
-------- -------- ------- ------- ---- --- -------- --------
79.1 279.5 70.1 20.5 15.8 - 465.0 463.7
======== ======== ======= ======= ==== === ======== ========
Capital lease obligations:
Fixed rate, denominated
in U.S. dollars .................. $ 9.2 $ 6.7 $ 2.5 $ - $ - $ - $ 18.4 $ 18.4 10.7%
======== ======== ======= ======= ==== === ======== ========
------------------
(1) Originally U.S. dollar-denominated and swapped to CDI.
(2) Based on a basket of foreign currencies to reflect BNDES's funding
portfolio.
72
The annual TJLP, which is modified quarterly, has been fixed as
follows:
2002 2001 2000
---- ---- ----
First quarter......................... 10.00% 9.25% 12.00%
Second quarter........................ 9.50 9.25 11.00
Third quarter......................... 10.00 9.50 10.25
Fourth quarter........................ 10.00 10.00 9.75
The TJLP was fixed at 11.00% as of the first quarter of 2003.
Annualized Rate at December 31, 2002
------------------------------------
Three months ended
March 31, 2003 2002 2001 2000
-------------- ---- ---- ----
IGP-M (1).......... 6.3% 25.3% 10.4% 9.9%
CDI (2)............ 26.2% 24.8% 19.0% 15.7%
--------------
(1) Indice Geral de Precos -- Mercado (general price index) compiled by the
Fundacao Getulio Vargas.
(2) Certificado de Deposito Interbancario (interbank variable interest rate).
We have not experienced, and we do not expect to experience, difficulty
obtaining financing or refinancing existing debt. As of December 31, 2002, 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, 2002, the real
depreciated by 192.3% against the U.S. dollar, and as of December 31, 2002, the
commercial market rate for purchasing U.S. dollars was R$3.5333 to US$1.00 The
significant variations in 2002 reflect the swap devaluation of 67.8% through
September 30, 2002, followed by an appreciation of 9.3% in the last quarter of
2002. In the first quarter of 2003, the real appreciated by 5.1% against the
U.S. dollar, and as of March 31, 2003, the commercial market rate for purchasing
U.S. dollars was R$3.3531 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, 2002 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$13.7 million at December 31, 2002 compared to
US$55.7 million in 2001. 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, 2002. The amounts have been translated into U.S. dollars based on
the exchange rate prevailing on December 31, 2002 determined by the Brazilian
Central Bank (R$3.5333 to US$1.00).
73
As of December 31, 2002
---------------------------------------------------------------------------------------
Expected Maturity Date
-----------------------------------------------------------------
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
-------- -------- -------- -------- -------- ---------- -------- --------
(millions of U.S. dollars)
Short-term debt:
U.S. dollars................... $ 4.9 - - - - - $ 4.9 $ 4.9
U.S. dollars (1)............. 104.4 - - - - - 104.4 92.7
Reais.......................... 274.2 - - - - - 274.2 274.2
-------- -------- -------- -------- -------- -------- -------- --------
Total short-term debt.... 383.5 - - - - - 383.5 371.8
======== ======== ======== ======== ======== ======== ======== ========
Long-term debt:
U.S. dollars (1).............. - 6.3 7.9 - - - 14.2 12.9
Foreign currencies (2)......... 12.7 4.4 4.4 4.4 2.3 - 28.2 28.2
Reais......................... 66.4 268.8 57.8 16.1 13.5 - 422.6 422.6
-------- -------- -------- -------- -------- -------- -------- --------
79.1 279.5 70.1 20.5 15.8 - 465.0 463.7
======== ======== ======== ======== ======== ======== ======== ========
Capital lease obligations:
Fixed rate denominated in U.S.
dollars....................... $ 9.2 $ 6.7 $ 2.5 - - - $ 18.4 $ 18.4
======== ======== ======== ======== ======== ======== ======== ========
--------------------
(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
11, 12 and 15 to the financial statements. As of December 31, 2002, the U.S.
dollar-denominated short-term and long-term debt balance of US$538.5 million
(2001 - US$569.0 million) includes US$533.6 million (2001 - US$559.8 million),
which were covered by floating rate swaps in Brazilian reais, based on the CDI
rate, including 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.
74
The table below provides information about our cross-currency interest
rate swaps:
As of December 31, 2002
------------------------------------------------------------------------------------------------
Expected Maturity Date
---------------------------------------
Average
Fair Value Paying
There- of Assets Rate in Average
2003 2004 2005 2006 2007 after Total (Liabilities) Reais Receiving Rate
---- ---- ---- ---- ---- ----- ----- ------------- -------- --------------
(millions of U.S. dollars)
Cross-currency and interest
rate swap contracts
notional amount:
Current assets:
U.S. dollar to reais... $ 3.4 - - - - - $ 3.4 $ 1.9 95.9% of CDI 9.1% over U.S. dollar
Other assets:
U.S. dollar to reais... - 2.2 - - - - 2.2 1.1 99.9% of CDI 11.5% over U.S. dollar
Short-term debt:
U.S. dollars to reais.. 104.4 - - - - - 104.4 11.7 102.3% of CDI 11.1% over U.S. dollar
Long-term debt:
U.S. dollars to reais.. - 6.3 7.9 - - - 14.2 1.3 101.9% of CDI 12.6% over U.S. dollar
75
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
No matters to report.
ITEM 15 CONTROLS AND PROCEDURES
Our chief executive officer and our acting chief financial officer,
after evaluating the effectiveness of our disclosure controls and procedures (as
defined in the U.S. Securities Exchange Act of 1934 under Rules 13a-14(c))
within 90 days of the date of this annual report, have concluded that, as of
that date, our disclosure controls and procedures were effective to ensure that
material information relating to us was made known to them by others within our
company particularly during the period in which this annual report and accounts
was being prepared.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls and procedures subsequent
to the date our chief executive officer and our chief financial officer
completed their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls requiring corrective actions.
ITEM 16 [Reserved]
PART III
ITEM 17 FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
ITEM 18 FINANCIAL STATEMENTS
The following financial statements, together with the Report of
Independent Accountants thereon, are filed as part of this annual report:
Report of Independent Accountants................................. F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001...... F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000................................ F-7
Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000.......................... F-9
76
Notes to Consolidated Financial Statements........................ F-13
ITEM 19 EXHIBITS
Exhibit Number Description
-------------- -----------
1. 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) 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.**
6. See notes 2(q) and 14(g) to our financial statements for
information explaining how earnings per share information
was calculated.
8. See note 2(c) to our financial statements for information
regarding our subsidiaries.
12.(a) CEO and acting CFO Certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
--------------
* Incorporated herein by reference to our registration statement on Form
F-1 (No. 333-6860).
** Incorporated herein by reference to our registration statement on Form
20-F filed on May 10, 2002.
77
Item 18 Financial Statements
Companhia Brasileira
de Distribuicao
Consolidated Financial Statements at
December 31, 2002 and 2001
and Report of Independent Accountants
Index
Report of Independent Accountants F-1
Consolidated Balance Sheets at December
31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000 F-7
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000 F-9
Notes to the Consolidated Financial Statements F-13
Report of Independent Accountants
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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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 auditing standards generally accepted in the United States of
America, which 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 2(h) 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 14, 2003
F-1
Companhia Brasileira de Distribuicao
Consolidated Balance Sheets
Expressed in thousands of U.S. dollars, except number of shares
--------------------------------------------------------------------------------
December 31
---------------------------------------
Assets 2002 2001
------------------ ------------------
Current assets
Cash and cash equivalents 315,712 451,685
Unrealized gains from cross-currency interest rate swaps 13,587
Accounts receivable, net 307,897 420,439
Inventories 277,586 295,683
Recoverable taxes 98,461 33,369
Prepaid expenses 4,674 7,268
Deferred income tax 5,290 4,693
Other 44,477 35,490
------------------ ------------------
Total current assets 1,067,684 1,248,627
------------------ ------------------
Property and equipment, net 1,062,707 1,342,004
------------------ ------------------
Other assets
Unrealized gains from cross-currency interest rate swaps 2,455
Goodwill and other acquired intangible assets, net 203,768 295,955
Customer credit financing 5,431 16,515
Other receivables 67,796 60,055
Restricted deposits for legal proceedings 33,739 35,148
Deferred income tax, net 81,840 54,469
Related parties 73 986
Other 2,218 2,603
------------------ ------------------
397,320 465,731
------------------ ------------------
Total assets 2,527,711 3,056,362
================== ==================
F-2
Companhia Brasileira de Distribuicao
Consolidated Balance Sheets
Expressed in thousands of U.S. dollars, except number of shares (continued)
--------------------------------------------------------------------------------
December 31
---------------------------------------
Liabilities and shareholders' equity 2002 2001
------------------ ------------------
Current liabilities
Short-term debt 383,502 484,942
Current portion of long-term debt 79,132 70,905
Capital lease obligations 9,178 6,401
Accounts payable 398,952 350,597
Payroll and related charges 27,745 43,642
Taxes, other than on income 9,439 17,389
Related parties 444 96
Other 14,982 32,148
------------------ ------------------
Total current liabilities 923,374 1,006,120
------------------ ------------------
Long-term liabilities
Long-term debt 385,847 381,588
Capital lease obligations 9,189 7,669
Taxes, other than on income 3,494 949
Accrued liability for legal proceedings 269,717 263,385
Other 3,534
------------------ ------------------
Total long-term liabilities 671,781 653,591
------------------ ------------------
Total liabilities 1,595,155 1,659,711
------------------ ------------------
Commitments and contingencies (Note 16)
F-3
Companhia Brasileira de Distribuicao
Consolidated Balance Sheets
Expressed in thousands of U.S. dollars, except number of shares (continued)
--------------------------------------------------------------------------------
December 31
---------------------------------------
2002 2001
------------------ ------------------
Shareholders' equity
Preferred shares - no par value, 49,715,328,034 shares issued and
outstanding and 69,712,996,269 shares authorized at
December 31, 2002 (49,590,328,034 shares issued and
outstanding and 69,712,996,269 shares authorized at
December 31, 2001) 1,014,640 804,992
Common shares - no par value, 63,470,811,399 shares
issued and outstanding and 80,287,003,731 shares
authorized at December 31, 2002 (63,470,811,399 shares
issued and outstanding and 80,287,003,731 shares
authorized at December 31, 2001) 483,588 483,588
Additional paid-in capital 204,719 203,667
Deferred compensation (1,504) (1,364)
Appropriated retained earnings 25,485 37,381
Unappropriated retained earnings 318,337 476,130
Accumulated other comprehensive income
Cumulative translation adjustment (1,112,709) (607,743)
------------------ ------------------
Total shareholders' equity 932,556 1,396,651
------------------ ------------------
Total liabilities and shareholders' equity 2,527,711 3,056,362
================== ==================
The accompanying notes are an integral part of these financial statements.
F-4
Companhia Brasileira de Distribuicao
Consolidated Statements of Operations
Expressed in thousands of U.S. dollars, except per-share amounts
--------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Gross sales 3,843,686 4,153,389 4,965,217
Sales and value-added tax (586,120) (638,001) (775,247)
------------------ ------------------ ------------------
Net sales revenue 3,257,566 3,515,388 4,189,970
Cost of sales (2,345,245) (2,506,791) (3,015,687)
------------------ ------------------ ------------------
Gross profit 912,321 1,008,597 1,174,283
Selling, general and administrative expenses (660,395) (743,706) (892,486)
Depreciation and amortization (107,828) (146,248) (135,383)
------------------ ------------------ ------------------
Operating income 144,098 118,643 146,414
Non-operating income (expenses)
Financial income 158,300 142,339 188,304
Financial expenses (222,869) (161,722) (172,533)
Other 1,567 728 3,974
------------------ ------------------ ------------------
Income before income taxes 81,096 99,988 166,159
------------------ ------------------ ------------------
Income tax benefit (expense)
Current (11,824) (16,471) (9,154)
Deferred (8,795) 17,154 3,177
------------------ ------------------ ------------------
(20,619) 683 (5,977)
------------------ ------------------ ------------------
Net income 60,477 100,671 160,182
================== ================== ==================
Net income applicable to each class of shares
Preferred 26,547 42,887 60,446
Common 33,930 57,784 99,736
------------------ ------------------ ------------------
Net income 60,477 100,671 160,182
================== ================== ==================
F-5
Companhia Brasileira de Distribuicao
Consolidated Statements of Operations
Expressed in thousands of U.S. dollars, except per-share amounts (continued)
--------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Weighted-average number of shares outstanding
(thousands)
Basic
Preferred 49,660,891 46,883,772 38,095,701
Common 63,470,811 63,168,975 62,858,755
Diluted
Preferred 51,411,575 48,773,314 39,841,553
Common 76,042,562 75,740,726 75,430,506
Earnings per thousand of preferred and common
shares
Basic - U.S.$ 0.53 0.91 1.59
Diluted - U.S.$ 0.47 0.81 1.39
The accompanying notes are an integral part of these financial statements.
F-6
Companhia Brasileira de Distribuicao
Consolidated Statements of Cash Flows
Expressed in thousands of U.S. dollars
--------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Cash flows from operating activities
Net income 60,477 100,671 160,182
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation 104,109 118,216 106,424
Amortization of goodwill and tradenames 3,719 28,032 28,959
Loss (gain) on sale of property and
equipment 234 (60) 162
Unrealized gains from cross-currency
interest rate swaps (19,230)
Stock based compensation 912 1,853 2,083
Deferred income tax (benefit) expense 8,795 (17,154) (3,177)
Unrealized foreign exchange losses 11,865 4,307 1,152
Decrease (increase) in assets
Accounts receivable (33,257) (50,706) (241,379)
Inventories (52,916) 72,242 (140,756)
Recoverable taxes (79,957) (10,870) 16,275
Other (40,988) 2,281 (15,620)
Increase (decrease) in liabilities
Accounts payable 103,589 (138,257) 103,178
Payroll and related charges (4,566) 724 10,026
Taxes payable (308) (8,795) (12,665)
Accrued liability for legal proceedings, net of
restricted deposits 90,270 42,144 107,593
Accrued interest 22,413 (20,214) 483
Other (8,718) (5,192) (807)
------------------ ------------------ ------------------
Net cash provided by operating activities 166,443 119,222 122,113
------------------ ------------------ ------------------
Cash flows from investing activities
Property and equipment (254,078) (234,748) (586,997)
Purchase of subsidiaries, less cash acquired (94,274) (40,414) (133,512)
Proceeds from sale of property and equipment 149 592 3,437
------------------ ------------------ ------------------
Net cash used in investing activities (348,203) (274,570) (717,072)
------------------ ------------------ ------------------
F-7
Companhia Brasileira de Distribuicao
Consolidated Statements of Cash Flows
Expressed in thousands of U.S. dollars (continued)
--------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Cash flows from financing activities
Loans with original maturities of less than
90 days, net (8,790) (53,575) 33,691
Short-term debt
Issuances 362,756 442,165 494,592
Repayments (483,608) (331,107) (268,992)
Long-term debt
Issuances 392,412 223,938 218,593
Repayments (60,591) (112,676) (177,144)
Dividends paid (21,232) (8,860)
Interest attributed to equity paid (59,114)
Proceeds from stock options exercised 714 4,126 1,398
------------------ ------------------ ------------------
Net cash provided by financing activities 181,661 113,757 293,278
------------------ ------------------ ------------------
Effect of exchange rate changes on cash (135,874) 37,084 53,270
------------------ ------------------ ------------------
Net decrease in cash and cash equivalents (135,973) (4,507) (248,411)
Cash and cash equivalents, beginning of year 451,685 456,192 704,603
------------------ ------------------ ------------------
Cash and cash equivalents, end of year 315,712 451,685 456,192
================== ================== ==================
Cash paid during the year for
Interest (net of amount capitalized) 122,272 102,636 109,061
Non-cash transactions (Note 18)
The accompanying notes are an integral part of these financial statements.
F-8
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
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Share capital
Preferred shares
At beginning of year 804,992 718,928 439,316
Permanent capitalization of retained earnings 208,934
Capital issued for interest attributed to equity
(2001 - 310,993,184 shares) 8,505
Stock options exercised (2002 - 125,000,000
shares; 2001 - 591,385,000 shares;
2000 - 172,100,000 shares) 714 4,126 9,298
Debenture conversion (2001 - 4,174,671,130
shares; 2000 - 9,938,659,642 shares) 73,433 270,314
------------------ ------------------ ------------------
At end of year 1,014,640 804,992 718,928
================== ================== ==================
Common shares
At beginning of year 483,588 461,829 461,829
Capital issued for interest attributed to equity
(2001 - 612,056,784 shares) 21,759
------------------ ------------------ ------------------
At end of year 483,588 483,588 461,829
================== ================== ==================
Additional paid-in capital
Share warrants
Preferred shares (4,127 warrants) 47 47 47
Common shares (12,571,751 warrants) 181,868 181,868 181,868
------------------ ------------------ ------------------
At beginning and end of year 181,915 181,915 181,915
------------------ ------------------ ------------------
F-9
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
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Other
At beginning of year 21,752 24,389 35,845
Stock issuance costs, net of taxes (3,055) (3,588)
Stock options 1,052 418 (7,868)
------------------ ------------------ ------------------
At end of year 22,804 21,752 24,389
------------------ ------------------ ------------------
Total at end of year 204,719 203,667 206,304
================== ================== ==================
Deferred compensation
At beginning of year (1,364) (2,799) (4,850)
Stock options issued (1,052) (418) (32)
Amortization of deferred compensation 912 1,853 2,083
------------------ ------------------ ------------------
At end of year (1,504) (1,364) (2,799)
================== ================== ==================
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
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Appropriated retained earnings
Statutory reserve
At beginning of year 27,548 26,279 19,437
Transfer (to) from unappropriated retained
earnings (5,988) 1,269 6,842
------------------ ------------------ ------------------
At end of year 21,560 27,548 26,279
------------------ ------------------ ------------------
Tax incentive reserve
At beginning of year 1,746 2,071 2,264
Capital increase (1,710)
Transfer to unappropriated retained earnings (36) (325) (193)
------------------ ------------------ ------------------
At end of year 1,746 2,071
------------------ ------------------ ------------------
Unrealized income reserve
At beginning of year 8,087 12,102 15,966
Transfer to unappropriated retained earnings (4,162) (4,015) (3,864)
------------------ ------------------ ------------------
At end of year 3,925 8,087 12,102
------------------ ------------------ ------------------
Total at end of year 25,485 37,381 40,452
================== ================== ==================
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
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Unappropriated retained earnings
At beginning of year 476,130 372,388 323,577
Net income for year 60,477 100,671 160,182
Capital increase (207,224)
Dividends declared, per thousand shares
(2002 - U.S.$ 0.19; 2000 - U.S.$ 0.09) (21,232) (8,860)
Interest attributed to equity, per thousand shares
(similar to a declared dividend)
(2000 - U.S.$ 0.93) (99,726)
Transfers (to) from appropriated retained earnings
and additional paid-in-capital 10,186 3,071 (2,785)
------------------ ------------------ ------------------
At end of year 318,337 476,130 372,388
================== ================== ==================
Cumulative translation adjustment
At beginning of year (607,743) (392,362) (255,165)
Net translation loss (504,966) (215,381) (137,197)
------------------ ------------------ ------------------
At end of year (1,112,709) (607,743) (392,362)
================== ================== ==================
Total shareholders' equity 932,556 1,396,651 1,404,740
================== ================== ==================
Comprehensive income (loss)
Net income 60,477 100,671 160,182
Cumulative translation adjustment (504,966) (215,381) (137,197)
------------------ ------------------ ------------------
Comprehensive income (loss) (444,489) (114,710) 22,985
================== ================== ==================
The accompanying notes are an integral part of these financial statements.
F-12
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.
On September 24, 1999, the Casino Guichard Perrachon Group ( the "Casino
Group") acquired 23.98% of the common shares and 21.96% of the total
capital of the Company. At December 31, 2002, the Casino Group is owner of
record of 23.98 % (2001 - 23.98%) of the common shares and 25.48 % (2001 -
25.26%) of the total capital of the Company.
(b) Business combinations
On June 30, 2002, the Company acquired Se Supermercados Ltda.("Se") and
Companhia Pernambucana de Alimentacao ("CIPAL").
During 2001, the Company acquired the following companies: ABC
Supermercados S.A. ("ABC"), Ponte do O Veiculos e Pecas Ltda. ("Ponte do
O"), Supermercados Mirambava Ltda. ("Mirambava") and Companhia Progresso de
Alimentos ("Progresso").
The acquisitions have been 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
were being amortized through December 31, 2001 on a straight-line basis
over periods from five to twenty years. Amortization of goodwill ceased on
January 1, 2002 upon adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets", including acquisitions after June 30, 2001.
F-13
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
the more significant companies (in 2002 - Se; in 2001 - ABC, Ponte do O and
Progresso), the total purchase consideration and allocated and unallocated
goodwill are summarized below:
2002 2001
-------- --------
Current assets 32,679 15,091
Property and equipment, net 89,733 20,161
Other assets 926 172
Deferred tax assets, net 59,167 9,718
Current liabilities (53,050) (61,121)
Long-term liabilities (24,264) (972)
-------- --------
Net assets (liabilities) at fair value 105,191 (16,951)
Less: Purchase consideration 135,841 11,359
-------- --------
Goodwill on acquisition detailed above 30,650 28,310
Goodwill from other acquisitions 720 826
-------- --------
Total goodwill arising from acquisitions
in the year (Note 9) 31,370 29,136
======== ========
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.$ 0.03 0.41
============ ============
In management's opinion, the unaudited pro forma combined results of
operations may not be indicative of the actual results that would have
occurred had the acquisitions been consummated on January 1, 2001.
F-14
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.
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$) against the United States dollar and the indexes mandated for
indexation of statutory financial statements in Brazil, through 1995, and
adjustments made to reflect the requirements of accounting principles
generally accepted in the United States of America.
(b) Translation of financial statements
The Company transacts the majority of its business in Brazilian reais and
has selected the United States dollar as its reporting currency. The U.S.
dollar amounts for all periods presented have been remeasured (translated)
from reais amounts in accordance with the criteria set forth in U.S.
accounting standards (Statements of Financial Accounting Standards ("SFAS")
No. 52 "Foreign Currency Translation"). As the Brazilian economy ceased to
be highly-inflationary as from 1998, the Company adopted the Brazilian real
as the functional currency, and applied the following translation method:
o Assets and liabilities are translated from the functional currency to
the reporting currency using the official exchange rates reported by
the Brazilian Central Bank at the balance sheet date (R$ 3.5333 and R$
2.3204 to U.S.$ 1.00 at December 31, 2002 and 2001, respectively);
o 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;
o Capital transactions, warrants, dividends and interest attributed to
equity distributions are recorded at historical exchange rates;
F-15
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
o Translation gains and losses are recorded in the cumulative
translation adjustment account in shareholders' equity; and
o 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. ("CBD Tech"), 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.
(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.
(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-16
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 (2001 - three)
monthly installments. 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.
Customer credit financing is generally for a term of up to 24 months.
(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) 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-17
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 25-30
Refurbishments and improvements 3-20
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 varies between 3 to 5 years. The Company
capitalized U.S.$ 1,038 and U.S.$ 8,115 of software and website development
costs in the years ended, December 31, 2001 and 2000, respectively. No
costs were capitalized in the year ended December 31, 2002.
F-18
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(h) 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.
SFAS No. 142, "Goodwill and Other Intangible Assets", became effective for
the acquisitions after June 30, 2001. Additionally, SFAS No. 142 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 of 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 2002 and as a result has determined that none of its
intangible assets, other than goodwill, have indefinite lives. As discussed
in Note 9, management reduced the expected useful lives of certain
tradenames following a strategy review.
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.
F-19
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(i) 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.
(j) Compensated absences
The liability for future compensation for employee vacations is fully
accrued as earned.
(k) 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.
(l) 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, the amount originally recorded as additional
paid-in capital is transferred to share capital (Note 14(c)).
F-20
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(m) 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 bonifications and
discounts received from suppliers in the form of product are recorded as
zero-cost additions to inventories and the benefit recognized as 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.
(n) Advertising costs
Advertising costs are expensed as incurred. Selling, general and
administrative expenses for the years ended December 31, 2002, 2001 and
2000 include U.S.$ 74,230, U.S.$ 79,780 and U.S.$ 95,312, respectively, for
advertising expenses. No advertising-related assets are deferred at the
balance sheet dates.
(o) 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)).
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.
F-21
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(p) 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 value of the
option is determined when the option is granted but is charged ratably to
compensation cost and shareholders' equity over a period of the expected
average lives of four years from grant-date, the period over which the
employee services are rendered. Beginning in 2000, 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.
(q) 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 14(g)). Earnings per
share is 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.
Each share of each class of stock participates equally in distributed and
undistributed earnings and losses, and, accordingly, earnings per share are
of equal amounts for all classes. The Company computes basic earnings per
share by dividing net income by the weighted-average number of shares
outstanding during each period.
From 1997 to 2000, the Company issued debentures convertible into preferred
shares (Note 12(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. As the effects of applying the
"if-converted" method are antidilutive when the interest expense (net of
tax and nondiscretionary adjustments) which would not accrue if converted
is excluded in determining earnings per share, diluted earnings per share
are not affected by the convertible securities.
F-22
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
The Company has issued employee stock options (Note 14(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 and as if the funds
received were used to purchase the Company's own stock. During 1999, the
Company issued warrants giving the holder the right to subscribe capital
from August 31, 2001 over a period of two to three years.
Potentially dilutive shares arising from the share warrants and options at
December 31, 2002, which have been considered in the diluted earnings per
share calculation, totaled 14,322,435 thousand preferred and common shares
(2001 - 14,461,293 thousand shares) (Note 14(g)).
(r) 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", 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 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 15). 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
---------------------------------------------------------------------------
(s) 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, tax valuation allowances and contingencies.
(t) 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.
(u) Recently issued accounting pronouncements not yet adopted
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. SFAS No. 143 requires recording the fair market value of an
asset retirement obligation as a liability in the period in which a legal
obligation associated with the retirement of tangible long-lived assets is
incurred. The Company is required to adopt the provision of SFAS No. 143
effective January 1, 2003 and has determined that it will not have a
significant effect on its financial statements or disclosures.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 requires that a liability for
the fair value of costs associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of SFAS No. 146
are effective for exit or disposal activities initiated after December 31,
2002. The adoption of SFAS No. 146 is not currently expected to have a
material effect on the financial position, results of operations or cash
flows of the Company upon adoption.
F-24
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
the guarantor to recognize a liability for the contingent and
non-contingent component of a guarantee; which means (a) the guarantor has
undertaken an obligation to stand ready to perform in the event that
specified triggering events or conditions occur and (b) the guarantor has
undertaken a contingent obligation to make future payments if such
triggering events or conditions occur. The Company has evaluated the
effects of the disclosure, recognition and measurement provisions of FIN
45, which are not anticipated to have a material effect on its financial
statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company has included the disclosure
requirements of SFAS No. 148 in its financial statements and its currently
evaluating the impact of the fair value transition alternatives.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No.
51". FIN 46 provides a new framework for identifying variable interest
entities ("VIEs") and determining when a company should include the assets,
liabilities, non-controlling interests and results of activities of a VIE
in its consolidated financial statements. FIN 46 is effective for VIEs
created after January 31, 2003 and is effective in the first fiscal year or
interim period beginning after June 15, 2003. The adoption of FIN 46 is not
currently expected to have a significant effect on the financial statements
or disclosures.
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 16(a)(iii)). Accordingly, no
social contribution tax has been provided by the Company for the periods
presented.
F-25
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(b) Analysis of tax balances
The major components of the deferred tax accounts in the balance sheet are
as follows:
December 31
----------------------
2002 2001
--------- ----------
Current deferred income tax asset
Allowance for doubtful accounts 2,234 4,481
Other 3,056 212
--------- ---------
5,290 4,693
--------- ---------
Non-current net deferred income tax asset
Net operating loss carryforward 52,994 39,667
Temporary differences
Provisions 13,401 12,825
Goodwill on acquisitions 25,233 7,722
Interest capitalization 1,046 1,799
Other 12,059 15,518
Valuation allowance (22,893) (23,062)
--------- ---------
81,840 54,469
--------- ---------
Total net deferred income tax asset 87,130 59,162
========= =========
F-26
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(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.
2002 2001
-------- --------
At beginning of year 39,667 9,362
Current net operating losses, net (*) 32,296 31,540
Translation losses (18,969) (1,235)
------- -------
At end of year 52,994 39,667
======= =======
(*) Including pre-acquisition losses (before valuation allowances) of
subsidiaries acquired in the year (2002 - U.S.$ 43,587; 2001 - U.S.$
20,489) which were considered in the determination of goodwill.
(d) Valuation allowances
The valuation allowance relates primarily to income tax and social
contribution losses available for offset and against certain temporary tax
differences:
2002 2001
------- -------
At beginning of year (23,062) (28,408)
Reversal (provision) of valuation allowance, net (*) (9,287) 871
Translation gains 9,456 4,475
------- -------
At end of year (22,893) (23,062)
======= =======
(*) Including valuation allowances against net operating loss carryforwards
of subsidiaries acquired in the year (2002 - U.S.$ 22,893; 2001 - U.S.$
11,765) which, if in the future are no longer considered to be necessary,
will be released against goodwill.
F-27
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(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:
2002 2001 2000
-------- -------- --------
Income before income taxes 81,096 99,988 166,159
Federal income tax statutory rate 25% 25% 25%
Tax expense at statutory rates (20,274) (24,997) (41,540)
Adjustments to derive effective rate
Benefit from tax deduction of interest
attributed to equity 26,823
Reversal of tax provision (i) 2,653 9,681
Partial reversal of valuation allowance (ii) 18,702
Nondeductible expenses (725) (1,615) (3,580)
Tax incentives 36 844 1,654
Prepayment of inflationary profit 1,508
Other permanent and tax rate differences 344 3,588 985
-------- -------- --------
Tax benefit (expense) per statement
of operations (20,619) 683 (5,977)
======== ======== ========
(i) In 2001, following the expiration of the prescriptive period for
the tax authorities to have contested the Company's interpretation of
the deductibility of certain indirect taxes in determining income
taxes in the past, the Company reversed part of the provision to
income. In 2000, the Company received a favorable court decision
relating to a claim against the tax authorities alleging that a tax
inflation index had been understated in prior periods, and it
partially reversed the provision previously provided.
(ii) 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-28
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
--------------------------------
2002 2001 2000
-------- -------- --------
Financial income
Interest income 119,467 84,063 109,996
Credit card and customer credit financing 32,161 48,810 55,260
Interest on post-dated check program 6,506 9,293 22,571
Related parties 98
Other 166 173 379
-------- -------- --------
158,300 142,339 188,304
-------- -------- --------
Financial expense
Interest expense (193,993) (151,028) (149,370)
Foreign exchange losses (24,464) (8,013) (2,478)
Related parties debenture interest (Note 17) (2,180) (1,582) (17,806)
Other financial charges (2,232) (1,099) (2,879)
-------- -------- --------
(222,869) (161,722) (172,533)
-------- -------- --------
Net financial income (expense) (64,569) (19,383) 15,771
======== ======== ========
F-29
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
5 Accounts Receivable
2002 2001
-------- --------
Current assets
Customer credit financing 73,134 143,470
Post-dated check credit sales 32,918 45,836
Unrealized interest income (6,960) (13,391)
Credit card companies 182,291 222,937
Purchase vouchers and others 35,097 39,585
Related parties 244
Allowance for doubtful accounts (8,827) (17,998)
-------- --------
307,897 420,439
======== ========
Other assets
Customer credit financing (non-current) 5,431 16,515
======== ========
Customer credit financing accrues interest from 4.0% to 7.5% per month
(2001 - 2.5% to 7.9%) and with payment terms of up to 24 months for
installment plans. Credit card sales relate to sales paid 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 (2001 - 6.9% per month) for
settlement in up to 60 days.
Activity relating to the allowance and analysis of the balance was as
follows:
2002 2001
-------- --------
At beginning of year (17,998) (15,759)
Provision for doubtful accounts (27,725) (52,082)
Recoveries and provision written off 32,100 46,741
Translation gain 4,796 3,102
------- -------
At end of year (8,827) (17,998)
======= =======
Customer credit financing (8,089) (16,960)
Post-dated check credit sales (738) (1,038)
======= =======
F-30
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
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 Inventories
2002 2001
------- -------
Stores 178,213 199,971
Distribution centers 99,373 95,712
------- -------
277,586 295,683
======= =======
7 Recoverable Taxes
2002 2001
------ ------
Income tax and value-added sales taxes recoverable 93,715 27,250
Other 4,746 6,119
------ ------
98,461 33,369
====== ======
F-31
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
8 Property and Equipment
2002 2001
-------------------------------------- ----------------------------------
Accumulated Accumulated
Cost depreciation Net Cost depreciation Net
--------- ------------ --------- --------- ------------ ---------
Land 223,074 223,074 307,970 307,970
Buildings 511,588 58,104 453,484 589,910 65,495 524,415
Refurbishments and
improvements 317,843 116,291 201,552 351,029 115,630 235,399
Equipment and software 226,839 121,046 105,793 279,824 134,644 145,180
Equipment under capital lease 23,189 13,150 10,039 42,001 10,560 31,441
Fixtures and installations 139,043 78,293 60,750 165,324 81,788 83,536
Vehicles 7,658 5,762 1,896 11,053 6,977 4,076
Other 2,771 553 2,218 4,769 905 3,864
Construction in progress 3,901 3,901 6,123 6,123
--------- --------- --------- --------- --------- ---------
1,455,906 393,199 1,062,707 1,758,003 415,999 1,342,004
========= ========= ========= ========= ========= =========
Interest capitalized on construction in progress during the year ended
December 31, 2002 totaled U.S.$ 10,666 (U.S.$ 12,913 and U.S.$ 20,434, for
2001 and 2000, respectively).
9 Goodwill and Other Acquired Intangible Assets
Goodwill and identifiable intangible assets determined on acquisition are
as follows:
2002 2001
-------- --------
Goodwill 222,782 320,474
Tradenames 30,445 46,231
-------- --------
253,227 366,705
Amortization (49,459) (70,750)
-------- --------
Net 203,768 295,955
======== ========
F-32
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
Gross goodwill and other intangible assets are as follows:
Gross
--------
Goodwill and other intangible assets acquired in 1998 234,741
Goodwill and other intangible assets acquired in 1999 104,702
Goodwill and other intangible assets acquired in 2000 153,049
Goodwill and other intangible assets acquired in 2001 (Note 1(b)) 29,136
Goodwill and other intangible assets acquired in 2002 (Note 1(b)) 31,370
Accumulated translation loss (299,771)
--------
Total goodwill and other intangible assets, gross 253,227
========
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 years ended December 31, 2001 and 2000, net income and
basic and diluted earnings per thousand shares would have been as follows:
Year ended December 31
-----------------------------------
2002 2001 2000
--------- ---------- ----------
Net income - as reported 60,477 100,671 160,182
Add back: Goodwill amortization 25,617 25,870
--------- ---------- ----------
Adjusted net income 60,477 126,288 186,052
========= ========== ==========
Earnings per thousand shares:
Basic - as reported 0.53 0.91 1.59
Basic - adjusted 0.53 1.15 1.84
Diluted - as reported 0.47 0.81 1.39
Diluted - adjusted 0.47 1.01 1.61
Following a strategy review in 2002, the expected useful lives of certain
tradenames were 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
---------------------------------------------------------------------------
10 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, 2002, 17 stores are leased
pursuant to this agreement and subsequent contract amendments. The
operating lease annual rental payments are equivalent to U.S.$ 2,300 in
2002 (2001 - U.S.$ 2,821; 2000 - U.S.$ 3,329) including an additional
contingent rent based on 0.5% to 2.5% of store revenues. The contingent
rental element totaled U.S.$ 355, U.S.$ 109 and U.S.$ 828 in each of the
periods ended December 31, 2002, 2001 and 2000, 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 25.3% (2001 - 10.4%) in nominal reais in 2002. The Company
continues to discharge obligations to third parties on behalf of Paes
Mendonca S.A. under the agreement. Total receivables at December 31, 2002,
which will be due at the end of the lease term, are 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. once 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 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
---------------------------------------------------------------------------
11 Short-term Debt
Annual charges (i) 2002 2001
---------------------------------- -------- --------
Foreign-currency-denominated
Import financing Foreign exchange (U.S.$) 4,918 9,199
Brazilian reais
Working capital (ii) U.S. dollars + 3.3 to 33.9%
swapped to 96.5 to 108.9%
of CDI 376,540 434,639
Unrealized losses from cross-
currency interest rate swaps 23,289
Other 2,044 17,815
-------- --------
383,502 484,942
======== ========
(i) Annualized benchmark rate at December 31, 2002: CDI - Certificado
de Deposito Interbancario, an interbank variable interest rate -
24.81% (2001 - 19.02%).
(ii) Substantially U.S. dollar-denominated which was swapped into
obligations denominated in Brazilian reais. The Company utilizes
cross-currency interest rate swaps to manage its exposure on certain
loans (Note 15(b)). Pursuant to Emerging Issue Task Force ("EITF") No.
02-02 "When Separate Contracts That Meet the Definition of Financial
Instruments Should Be Combined for Accounting Purposes", although the
loan balances at December 31, 2002 of U.S.$ 272,063 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.
Working capital financing is obtained from local banks and is used
primarily to fund customer credit. Working capital financings are mostly
secured by promissory notes and shareholders' sureties. Collateral for
other borrowings comprises liens and mortgages on properties and
shareholders' sureties.
F-35
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
12 Long-term Debt
Annual charges 2002 2001
------------------------------- --------- --------
Foreign-currency-denominated
BNDES lines of credit (i) below 28,232 32,402
Brazilian reais
Working capital (*) U.S. dollars + 5.0 to 18.7%
swapped to 100.0 to 104.8% of
CDI 157,072 125,205
Unrealized losses from cross-
currency interest rate swaps 11,456
BNDES lines of credit (i) below 120,037 211,398
Debentures (ii) below 157,430 59,095
Other 2,208 12,937
-------- --------
464,979 452,493
Current portion of long-term debt (79,132) (70,905)
-------- --------
385,847 381,588
======== ========
(*) Substantially U.S. dollar-denominated which was swapped into
obligations denominated in Brazilian reais (Note 15(b)). Pursuant to
EITF No. 02-02, although the loan balances at December 31, 2002 of
U.S.$ 142,885 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.
Grace Number of At December 31
period in monthly Due -------------------
Contract dated Annual finance charge months installments monthly through 2002 2001
-------------------- ------------------------- ----------- ------------- --------------- --------- ---------
October 23, 1997 TJLP + 3.5% 12 60 August 2003 5,947 21,883
October 23, 1997 Foreign currencies + 3.5% 12 60 November 2003 8,104 16,453
October 23, 1997 TJLP + 3.5% 12 60 August 2004 16,168 38,004
November 16, 1999 TJLP + 3.5% 12 60 December 2005 25,017 48,791
January 13, 2000 TJLP + 3.5% 12 72 January 2007 10,662 19,415
November 10, 2000 TJLP + 1 to 3.5% 20 60 May 2007 47,355 78,418
November 10, 2000 Foreign currencies + 3.5% 20 60 July 2007 15,057 15,949
December 14, 2000 TJLP + 2.0% 20 60 June 2007 3,006 4,887
April 16, 2001 (**) TJLP + 3.5% 60 April 2006 4,680
April 16, 2001 (**) Foreign currencies + 3.5% 60 April 2006 2,011
March 12, 2002 (**) Foreign currencies + 3.5% 12 48 March 2007 1,192
April 25, 2002 (**) TJLP + 3.5% 6 60 October 2007 7,202
April 25, 2002 (**) Foreign currencies + 3.5% 6 60 October 2007 1,868
-------- --------
148,269 243,800
======== ========
(**) The Company assumed these BNDES lines of credits on the acquisition of
Se.
In the event the TJLP exceeds 6% per annum, the excess is added to the
principal. In 2002 and 2001, U.S.$ 5,254 and U.S.$ 7,266, 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 accounting
practices adopted in Brazil, 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-37
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(ii) Debentures
Number of
debentures Amount
---------- --------
At December 31, 2000 252,056 162,426
-------- --------
Conversion
Second issue/First series (125,206) (73,390)
Fourth issue (92) (43)
Amortization - Second issue/First series (368)
Amortization - Second issue/Second series (4,966)
Interest, net of payments (3,770)
Translation gain (20,794)
-------- --------
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
======== ========
Current portion 22,639
--------
Long-term portion 134,791
========
. Second issue - In 1998, two series, comprising 175,000 debentures
convertible into preferred shares and 25,000 non-convertible
debentures (total nominal value of R$ 200,000 thousand). The
debentures accrue annual interest of 13%, payable annually and indexed
by the IGP-M, and are collateralized by certain cash equivalents and
accounts receivable. The Company received proceeds equivalent to U.S.$
168,427. At the option of the debentureholder, these may be converted
into preferred shares based on the following ratios: (i) by July 1,
2001 - 33,333 shares per R$ 1,000 principal amount, (ii) July 1, 2001
to July 1, 2002 - 22,233 shares per R$ 1,000 principal amount and
(iii) July 2, 2002 to July 1, 2003 - 11,133 shares per R$ 1,000
principal amount. The non-convertible debentures fall due up to July
2003.
F-38
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
In 1999, 23,375 of the 175,000 convertible debentures were converted
into 779,158,875 preferred shares. In 2000, 24,569 convertible
debentures were converted into 818,958,477 preferred shares. In 2001,
125,206 convertible debentures were converted into 4,173,491,598
preferred shares.
. Third issue - In August 1999, the shareholders approved the third
issue of subordinated debentures up to the limit of R$ 600,000
thousand (equivalent to U.S.$ 325,100 at issue date). The first series
comprised 297,000 debentures convertible into preferred shares,
matured on September 1, 2000 and were fully subscribed on September
24, 1999. The Company received proceeds equivalent to U.S.$ 154,818,
net of commissions of U.S.$ 3,404. The Company's controlling
shareholders assigned the right to subscribe the first series of this
third issue debentures to the minority shareholder, the Casino Group.
On August 30, 2000, all 297,000 debentures were converted by the
holders into 5,999,994,000 preferred shares.
. 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.
F-39
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
. 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 required to
comply with certain negative covenants measured in accordance with
accounting practices adopted in Brazil: (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.
The balance of debentures outstanding was as follows:
Outstanding Annual charges 2002 2001
------------ -------------- -------- -------
2nd issue - 1st series 1,850 IGP-M + 13% 654 823
2nd series 25,000 IGP-M + 13% 4,578 11,123
4th issue - single series 99,908 TJLP + 3.5% 32,580 47,149
5th issue - 1st series 40,149 CDI + 1.45% 119,618
-------- -------
157,430 59,095
======== =======
Current portion 22,639 5,595
-------- -------
Long term portion 134,791 53,500
======== =======
F-40
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
--------------------------------------------------------------------------
(iii) Maturities
Long-term portion of long-term debt maturities:
2002 2001
------- -------
2003 232,175
2004 279,330 62,830
2005 70,151 52,808
2006 20,538 23,741
2007 15,828 10,034
------- -------
385,847 381,588
======= =======
13 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, 2002, the
effective rate of rentals was 1.66% (2001 - 1.76%) of gross sales. Also,
certain leases provide for the payment by the lessee of certain costs
(taxes, maintenance and insurance). Some selling space has been sublet to
other retailers in certain of the Company's leased facilities. Penalties
are incurred on lease cancellations.
F-41
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
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, 2002 are summarized below:
Capital Operating
leases leases
------- ---------
2003 10,622 52,182
2004 7,397 46,425
2005 2,555 37,487
2006 32,462
2007 28,805
Thereafter 66,447
------- -------
Total minimum lease payments 20,574 263,808
======= =======
Imputed interest (2,207)
-------
Present value of minimum capitalized lease payments 18,367
=======
Current portion 9,178
-------
Long-term capitalized lease obligations 9,189
=======
Net rental expense included in selling, general and administrative
expenses, consists of the following:
2002 2001 2000
------- ------- -------
Minimum rentals 60,092 68,021 71,789
Contingent rentals 13,264 11,759 9,982
Sublease rentals (9,616) (6,651) (8,084)
------- ------- -------
63,740 73,129 73,687
======= ======= =======
F-42
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
14 Shareholders' Equity
(a) Share capital
At December 31, 2002, subscribed and paid-in capital was comprised of
49,715,328 thousand (2001 - 49,590,328 thousand) preferred shares and
63,470,811 thousand (2001 - 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 capital account and number of shares in 2002:
Number of shares - thousand
---------------------------
Preferred Common
---------- ----------
At January 1, 2002 49,590,328 63,470,811
Subscription - stock options (Note 14(d))
Series 2 120,900
Series 3 4,100
---------- ----------
125,000
---------- ----------
At December 31, 2002 49,715,328 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-43
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 Corporate Law, 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.
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 and
the Company's common shares in equal amounts per share 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, 2002, the proposed dividend was U.S.$ 16,823 (Note 14(f)),
which is only reflected as an obligation once approved and declared by the
shareholders.
F-44
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.
In the two-year period ending August 31, 2003, 6,285,876 common share
warrants may be exercised and the remaining 6,285,875 common share warrants
may be exercised as from August 31, 2002 through August 31, 2004. This
ratio will be adjusted proportionately in the event of any reverse splits,
splits or distribution of stock dividends. The preferred and 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-45
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 issued 305,975 options with an exercise price
of U.S.$ 30.69 per thousand shares. On April 2, 2001, the Company issued
361,660 stock options with an exercise price of U.S.$ 29.65 per thousand
shares. On March 15, 2002, the Company issued 412,600 stock options with an
exercise price of U.S.$ 19.96 per thousand shares.
Share options (thousands)
------------------------
2002 2001
---------- ----------
Granted
Options outstanding at beginning of year 1,424,074 1,653,799
Options exercised
Series 1 - December 7, 2001 - capital increase of U.S.$ 613 (90,600)
Series 3 - December 7, 2001 - capital increase of U.S.$ 3,513 (500,785)
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 5 (issued April 2, 2001) 361,660
Series 6 (issued March 15, 2002) 412,600
---------- ----------
Outstanding options granted at end of year 1,711,674 1,424,074
========== ==========
Share options available at end of year for future grants 2,319,765 2,732,365
========== ==========
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. Beginning in 2000, 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. The compensation cost
relates only to the fixed plans. No costs were determined for the variable
plans as the year-end exercise price exceeded the quoted market prices.
F-46
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
U.S.$
----------------------------------------
2002 2001 2000
------------ ----------- -----------
Range of year-end exercise prices for outstanding
options at balance sheet date exchange rates
(U.S.$ per thousand shares) 10.69-24.50 5.43-27.58 6.45-30.69
Weighted average grant-date exercise price of
options (U.S.$ per thousand shares) 17.49 17.05 14.74
Weighted average grant-date quoted market price of
shares (U.S.$ per thousand shares)
(based on quoted market value at date
granted) 21.07 20.82 18.98
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) 15.42 21.33 36.46
Compensation cost recognized for the year
ended December 31 912 1,853 2,083
F-47
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
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
--------------------------------
2002 2001 2000
-------- -------- --------
Net income - as reported 60,477 100,671 160,182
Add: stock-based employee compensation
included in reported net income 912 1,853 2,083
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards (4,182) (6,388) (5,631)
-------- -------- --------
Net income - pro forma 57,207 96,136 156,634
======== ======== ========
Earnings per thousand shares:
Basic - as reported 0.53 0.91 1.59
Basic - pro forma 0.51 0.87 1.55
Diluted - as reported 0.47 0.81 1.39
Diluted - pro forma 0.45 0.77 1.36
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 1.65% in 2002, 1.78% in 2001, 2.70% in 2000, expected volatility
of approximately 40.85% in 2002, 53.36% in 2001, 69.90% in 2000, weighted
average risk-free interest rate of 13.43% in 2002, 12.57% in 2001, 14.00%
in 2000 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 the Brazilian Corporate Law, 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.
F-48
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
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 the Brazilian Corporate Law.
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 the Brazilian Corporate
Law 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 Corporate Law 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 Corporate Law. Distributable
retained earnings (summation of the following accounts in the statutory
financial statements: Reserva para expansao de lucros and Reserva de
retencao de lucros), net of the proposed dividend distribution of R$ 59,441
(U.S.$ 16,823 at December 31, 2002), aggregated R$ 407,978 thousand at
December 31, 2002, equivalent to U.S.$ 115,467 at the current rate of
exchange. Accordingly, the unappropriated retained earnings balance in the
U.S. GAAP balance sheet at December 31, 2002 of U.S.$ 318,337 is not
immediately available for distribution.
F-49
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, 2002 Year ended December 31, 2001
-------------------------------------- --------------------------------------
Preferred Common Total Preferred Common Total
---------- ---------- ----------- ---------- ---------- -----------
Basic numerator
Actual dividends declared 9,320 11,912 21,232
Basic allocated undistributed earnings 17,227 22,018 39,245 42,887 57,784 100,671
---------- ---------- ----------- ---------- ---------- -----------
Allocated net income available for
common and preferred shareholders 26,547 33,930 60,477 42,887 57,784 100,671
========== ========== =========== ========== ========== ===========
Basic denominator (in thousands of
shares)
Weighted-average number of
shares 49,660,891 63,470,811 113,131,702 46,883,772 63,168,975 110,052,747
========== ========== =========== ========== ========== ===========
Basic earnings per thousand
shares (U.S.$) 0.53 0.53 0.91 0.91
========== ========== ========== ==========
Diluted numerator
Actual dividends declared 8,564 12,668 21,232
Diluted allocated undistributed earnings 15,830 23,415 39,245 39,434 61,237 100,671
---------- ---------- ----------- ---------- ---------- -----------
Allocated net income available for
common and preferred shareholders 24,394 36,083 60,477 39,434 61,237 100,671
========== ========== =========== ========== ========== ===========
Diluted denominator (in thousands of
shares)
Weighted-average number of
shares 49,660,891 63,470,811 113,131,702 46,883,772 63,168,975 110,052,747
Stock options 1,746,557 1,746,557 1,885,415 1,885,415
Share warrants 4,127 12,571,751 12,575,878 4,127 12,571,751 12,575,878
---------- ---------- ----------- ---------- ---------- -----------
Diluted weighted-average number of
shares 51,411,575 76,042,562 127,454,137 48,773,314 75,740,726 124,514,040
========== ========== =========== ========== ========== ===========
Diluted earnings per thousand
shares (U.S.$) 0.47 0.47 0.81 0.81
========== ========== ========== ==========
F-50
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
Year ended December 31, 2000
---------------------------------------
Preferred Common Total
----------- ----------- -----------
Basic numerator
Actual dividends declared 40,976 67,610 108,586
Basic allocated undistributed earnings 19,470 32,126 51,596
----------- ----------- -----------
Allocated net income available for common and
preferred shareholders 60,446 99,736 160,182
=========== =========== ===========
Basic denominator (in thousands of shares)
Weighted-average number of shares 38,095,701 62,858,755 100,954,456
=========== =========== ===========
Basic earnings per thousand shares (U.S.$) 1.59 1.59
=========== ===========
Diluted numerator
Actual dividends declared 37,531 71,055 108,586
Diluted allocated undistributed earnings 17,833 33,763 51,596
----------- ----------- -----------
Allocated net income available for common and
preferred shareholders 55,364 104,818 160,182
=========== =========== ===========
Diluted denominator (in thousands of shares)
Weighted-average number of shares 38,095,701 62,858,755 100,954,456
Stock options 1,741,725 1,741,725
Share warrants 4,127 12,571,751 12,575,878
----------- ----------- -----------
Diluted weighted-average number of shares 39,841,553 75,430,506 115,272,059
=========== =========== ===========
Diluted earnings per thousand shares (U.S.$) 1.39 1.39
=========== ===========
F-51
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
15 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, 2002 and 2001 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, 2002, the Company
has cross-currency interest rate swaps outstanding of which the fair value
asset (liability) amount was U.S.$ 16,042 (2001 - U.S.$ (34,745)).
The cross-currency interest rate swaps also permit the Company to exchange
fixed rate interest in U.S. dollars on short-term debt (Note 11) and
long-term debt (Note 12) for floating rate interest in Brazilian reais. As
of December 31, 2002, the U.S. dollar-denominated short-term and long-term
debt balances of U.S.$ 538,530 (2001 - U.S.$ 569,043), include financings
of U.S.$ 533,612 (2001 - U.S.$ 559,844) at weighted average interest rates
of 11.8% per annum (2001 - 6.9%) 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 103.6% of CDI (2001 -
101.4% of CDI). Pursuant to EITF No. 02-02, the amount of 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-52
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 interest rate
swaps from U.S. dollar-denominated contractual amounts were as follows:
Notional Fair market
outstanding value - asset
amount (liability) (*)
----------- ---------------
2001 Short-term debt 434,639 (23,289)
2001 Long-term debt 125,205 (11,456)
---------------
(34,745)
===============
2002 Cross-currency interest rate swaps (current assets) (**) 3,363 1,890
2002 Cross-currency interest rate swaps (other assets) (**) 2,199 1,170
2002 Short-term debt 104,477 11,697
2002 Long-term debt 14,187 1,285
---------------
16,042
===============
(*) Fair market value gain (loss) under outstanding cross-currency
interest rate swaps.
(**) Cross-currency interest rate swaps on the BNDES lines denominated
based on a basket of foreign currencies and capital leases.
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.$ 147,429, U.S.$ (24,195), and U.S.$ 4,678 in the
years ended December 31, 2002, 2001, and 2000, 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.
F-53
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
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. The carrying amounts approximate the fair value of
the liabilities.
16 Commitments and Contingencies
The following probable losses have been identified based on the advice of
outside legal counsel and are provided in Accrued liability for legal
proceedings:
2002 2001
-------- --------
Taxes
Taxes on revenues and income 167,087 148,398
Tax on bank account transactions and other 32,347 28,332
Labor claims and social security 70,283 86,655
-------- --------
Total accrued liability for legal proceedings 269,717 263,385
======== ========
(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 and income
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-54
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
--------------------------------------------------------------------------
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, 2002 and 2001 was
U.S.$ 12,458 and U.S.$ 11,182, respectively. In 2000 the Company reversed
U.S.$ 9,681 of the provision as a result of a partial favorable court
ruling.
Other possible (unprovided) income tax related contingencies include the
following:
. The Company is 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 is challenging this limitation on the
grounds that it is unconstitutional, and has obtained a legal
injunction providing protection against possible fines. In the event
that the Company's position does not prevail, interest on late payment
of taxes, not exceeding U.S.$ 2,500, would be charged.
(ii) Tax on bank account transactions
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 2002. The Company, based on
advice of legal counsel, is 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 has
obtained an injunction to avoid the withholding and payment of the CPMF
taxes. The amounts have been fully provisioned and totaled U.S.$ 28,548 at
December 31, 2002 (2001 - U.S.$ 26,138).
(iii) 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.
F-55
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(iv) 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 and social security
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, 2002, such lawsuits collectively involve claims
equivalent to U.S.$ 27,857 (2001 - U.S.$ 35,287). At December 31, 2002 the
Company has a provision of U.S.$ 3,581 (2001 - U.S.$ 4,400) 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.
The Company is 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 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.$ 66,702 at December 31,
2002 (2001 - U.S.$ 82,255) which will be maintained until a favorable
ruling is obtained against which the authorities are unable to appeal.
F-56
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
(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.$ 11,293, U.S.$ 14,467 and U.S.$ 12,604 for the years
ended December 31, 2002, 2001 and 2000, respectively.
(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.$ 2,636 and U.S.$ 3,825 at December 31, 2002 and 2001, 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-57
Companhia Brasileira de Distribuicao
Notes to the Consolidated Financial Statements
Expressed in thousands of U.S. dollars, unless otherwise stated
---------------------------------------------------------------------------
17 Related Party Balances and Transactions
Leases - The Company currently leases properties from certain shareholders
and their immediate families. Aggregate payments in 2002 under these
operating leases were U.S.$ 4,610 (2001 - U.S.$ 5,284 and 2000 - U.S.$
6,388).
In 1999, the Casino Group subscribed to convertible debentures issued by
the Company. In August 2000, these debentures were converted into 5,999,994
thousand preferred shares (Note 12(ii)). In November 2000, the Casino Group
subscribed 41,962 convertible debentures issued by the Company. Interest
expense related to the debentures was U.S.$ 2,180, U.S.$ 1,582 and U.S.$
17,806 in 2002, 2001 and 2000, respectively.
Financial income arose from certain current account balances with the
controlling shareholders (Note 4).
18 Major Non-cash Transactions
In 2002, the Company financed certain purchases of real estate and other
acquisitions through seller financing in the amount of U.S.$ 5,994 (2001 -
U.S.$ 25,853 and 2000 - U.S.$ 56,142).
In 2002, the Company acquired equipment under capital lease agreements in
the amount of U.S.$ 13,075 (2001 - U.S.$ 8,275 and 2000 - U.S.$ 9,321).
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 12(ii)).
* * *
F-58
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 18, 2003
CERTIFICATION UNDER SECTION 302 OF THE U.S. SARBANES-OXLEY ACT OF 2002
I, Augusto Marques da Cruz Filho, certify that:
1. I have reviewed this annual report on Form 20-F of Companhia
Brasileira de Distribuicao;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (and
persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls.
The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or any
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Augusto Marques da Cruz Filho
---------------------------------
Augusto Marques da Cruz Filho
Chief Executive Officer and acting Chief Financial Officer
June 18, 2003