cbd20190326_6k3.htm - Generated by SEC Publisher for SEC Filing

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of March, 2019

           Brazilian Distribution Company           
(Translation of Registrant’s Name Into English)

Av. Brigadeiro Luiz Antonio,
3142 São Paulo, SP 01402-901
     Brazil     
(Address of Principal Executive Offices)

        (Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F)

Form 20-F   X   Form 40-F       

        (Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule
101 (b) (1)):

Yes ___ No   X  

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule
101 (b) (7)):

Yes ___ No   X  

        (Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes ___ No   X  


 

 

 

COMPANHIA BRASILEIRA DE DISTRIBUIÇÃO

CNPJ/MF (Brazilian Taxpayer Id.) No. 47.508.411/0001-56 NIRE (State Registry) No. 35.300.089.901

 

 

 

 

 

 

 

 

 

 

 

 

 

MANAGEMENT'S PROPOSAL AND MANUAL TO ATTEND ANNUAL AND EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 25, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sao Paulo (SP, Brazil), March 25, 2019.

 

 


 

  TABLE OF CONTENTS     
1.  INTRODUCTION  3   
 
2.  REQUIREMENTS FOR SHAREHOLDERS TO ATTEND MEETINGS  4   
 
3.  MANAGEMENT'S PROPOSAL  7   
 
(A)  ANNUAL GENERAL MEETING OF SHAREHOLDERS    7 
 
I.  Comments by the Management on the Company's financial condition    7 
Annex 3(A)I – Financial Condition of the Company (Section 10 of the Reference Form)    7 
 
II.  Allocation of income for the fiscal year ended on December 31, 2018    39 
Annex 3(A)II – Result for the fiscal year ended on December 31, 2018 (Annex 9-1-II of ICVM 481/09)    39 
 
III.  Proposed Global Remuneration of Management and Fiscal Council members    45 
Annex 3(A)III – Proposed Global Remuneration of Management and Fiscal Council members (Section 13 of the Reference Form)    45 
 
IV.  Investment Plan for fiscal year 2019    75 
 
(B)  EXTRAORDINARY GENERAL MEETING    76 
 
I.  Rectification and ratification of the annual global remuneration of the Company's Board of Executive Officers for fiscal year 2018    76 
 
II.  Proposal to amend the Stock Option Plans and Equity Compensation Plan of the Company    77 
Annex 3(B)II(a) – Description of the Stock Option Plan (Appendix 13 of the CVM Standard 481/09)    78 
Annex 3(B)II(b) – Description of the Equity Compensation Plan (Appendix 13 of the CVM Standard 481/09)    83 
Annex 3(B)II(c) – Final Restated Version of the Stock Option Plan, Containing the Proposed Amendments    88 
Annex 3(B)II(d) – Final Restated Version of the Equity Compensation Plan, containing the highlighted Proposed Amendments    96 
 
III.  Proposal to amend Article 4th of the Company's Bylaws and consolidate the Company's Bylaws    103 
Annex 3(B)III(a) – Report detailing the origin and justification of the proposed amendment    104 
Annex 3(B)III(b) – Restated Bylaws, reflecting the proposed amendment    105 

 


 

 

1.             INTRODUCTION

 

Dear shareholders,

 

The Management of Companhia Brasileira de Distribuição (hereinafter, the "Company") hereby submits below information on the matters to be resolved by the Management's proposal at the Company's Annual and Extraordinary General Meeting of Shareholders (the "Meetings") to be held on April 25, 2019 at 3.00 p.m., at Avenida Brigadeiro Luís Antonio, No. 3,227, 7th floor, in the City of Sao Paulo, State of Sao Paulo, Brazil, as well as the clarifications necessary for the shareholders to attend such meetings.

 

The Company prepared this Management's Proposal and Manual to Attend such Meeting (the "Proposal") in compliance with good corporate governance and transparency practices, aiming at guiding and clarifying to all its Shareholders about the matters to be addressed, and also the Company's Investor Relations Board of Executive Officers is fully made available for them to answer any further questions.

 

At the Annual Shareholders' Meeting, the following matters on the agenda will be resolved:

 

I.               Review of the accounts as rendered by the Management, as well as examination, discussion and voting of the Company's Management Report and Financial Statements for the fiscal year ended on December 31, 2018;

II.            Proposal for allocation of profit for the fiscal year ended on December 31, 2018;

III.          Determination of the annual global compensation of the members of both the Management and the Fiscal Council of the Company, in case shareholders require the installation of such Council; and

IV.         Proposal of an investment plan for fiscal year 2019;

 

At the Annual General Meeting of Shareholders, the following matters on the agenda will be resolved:

 

I.               Rectification and ratification of the annual global remuneration of the Company's Board of Executive Officers for fiscal year 2018;

II.            Proposal to amend the Stock Option Plans and Equity Compensation Plan of the Company; and

III.          Proposal to amend Article 4 of the Company's Bylaws and consolidate the Company's Bylaws.

 

The Management's proposals on the agendas of such Meetings, as well as the information about each of the topics, are detailed in section 3 of this Proposal.

 

Sao Paulo (SP, Brazil), March 25, 2018.

The Management
Companhia Brasileira de
Distribuição

 

 


 

2.             REQUIREMENTS FOR SHAREHOLDERS TO ATTEND MEETINGS

 

Shareholder can attend Meeting whether (a) being personally present at them, (b) by a duly appointed proxy, or (c) by distance votes cast by means of remote ballots through their corresponding custodian agents (if they provide such type of service), or by an appointed bookkeeping agent, or directly to the Company, as shown below:

 

2.1.       Personal Attendance

 

Shareholders that are interested in attend in person at the Meeting must send to the Corporate Legal Department at the Company's headquarters, upon delivery receipt, 72 (seventy-two) hours in advance from the date of the corresponding Meeting, a certified copy of the documents (physical copies with notarized signatures) proving the status of Company's shareholder, under article 126, II of Law 6,404/76 accompanied of a certified copy of the following documents:

 

(a)           For individuals: shareholder's identification document with photo;

 

(b)          For organizations: (i) restated bylaws or articles of association, in addition to the corporate documents proving that such shareholder is duly represented pursuant to the law; and (ii) identification document with photo of such organizations' legal representative; and

 

(c)          For investment funds: (i) restated rules of such fund; (ii) the bylaws or articles of association of its manager or administrator, as the case may be, subject to the voting policy of the fund and corporate documents proving the powers/authority of representation; and (iii) identification document with photo of the fund's legal representative.

 

The Company shall not require the certified translation of documents originally drawn up in Portuguese, French, English or Spanish, or that are submitted accompanied of a translation in those languages; being required in all other cases. The following identification documents will be accepted, provided they bear a photo and are still effective: RG (Brazilian citizen's identification document), RNE (Brazilian identification document for foreigners), CNH (driver's license), passport or officially recognized professional class identification documents (like identification documents for lawyers, engineers, physicians etc.).

 

It is worth emphasizing that shareholders may attend the Meeting even without having submitted such documents beforehand, being enough for them to provide such documents at the beginning of the Meetings, at the place, date, and time set forth in section 1 of this Proposal, pursuant to article 5, paragraph 2 of CVM (Securities and Exchange Commission) Instruction No. 481, of December 17, 2009, as amended ("CVM Instruction 481/09").

 

2.2.       Participation by Proxy

 


 

Shareholders that want to be represented by proxy at the Meeting must send to the Corporate Legal Department at the Company's headquarters, upon delivery receipt, 72 (seventy-two) hours prior to the date of such Meetings, a certified copy of the (i) corresponding documents able to prove the status of shareholder of the Company (physical copies with notarized signatures); (ii) documents containing the corresponding powers and authority of representation/proxy (physical copies with notarized signatures); (iii) identification documents of the proxy to attend the Meeting, as well as, in the case of an organization or an investment fund, certified copies of the identification document and minutes of election of the corresponding legal representative(s)'s who had undersigned the power of attorney evidencing the proxy's authority to represent those shareholders (physical copies with notarized signatures); and (iv) the documents referred to in section 2.1 above. The Company does not accept instruments of power of attorney granted by Shareholders by electronic means.

 

It is worth emphasizing that shareholders may be represented by proxy at the Meeting even without having submitted such documents beforehand, being enough for them to provide such documents at the beginning of the Meetings, at the place, date, and time set forth in section 1 of this Proposal, pursuant to article 5, paragraph 2 of CVM Instruction 481/09.

 

2.3.       Participation by means of a Distance Voting Ballot

 

Shareholders who want to exercise their voting right by means of a distance voting ballot, pursuant to CVM Instruction 481/09, must (a) fill in the Distance Voting Ballots related to the Meetings, according to the filling-in instructions contained therein as available in the Company's Investor Relations website (the "Ballots"), and (b) send them (i) directly to the Company; (ii) to the Company's bookkeeping agent, or (iii) to its corresponding custodian agent (if this type of service is provided), observing the following instructions:

 

I.          Submitting the Voting Ballots directly to the Company: the Shareholder must send to the Corporate Legal Department, at the Company's headquarters, by mail service, the physical and printed form of such Ballots (filled in, initialed and signed, according to the filling-in instructions included therein) accompanied of a certified copy of the documents listed hereinabove in section 2.1; or

 

II.       Submitting the voting Ballots to the Company's Bookkeeping Agent or Custodian Agent: Shareholders holding shares issued by the Company deposited in a central securities depository may transmit their voting instructions to fill in the Ballots, through their corresponding custody agents, if they provide such kind of service. Shareholders who do not have their shares deposited with a central depository may transmit their voting instructions to the Company's bookkeeping agent, Itaú Corretora de Valores S.A., a financial entity contracted by the Company to provide securities bookkeeping services, through channels available. The delivery of such Ballots will be subject to the rules, guidelines and deadlines set by each custodian or by Itaú, as the case may be. For that purpose, every Shareholder should contact them and verify the procedures, documents and information provided for by them to issue voting instructions through Ballots.

 


 

In all cases, for such Ballots to produce valid effect, April 18, 2019 (that is, up to seven (7) days before the date of the Meetings, pursuant to Article 21-B of CVM Instruction 481/209) shall be the last day allowed for such Ballots to be received through one of the forms pointed out hereinabove, and not the last day for sending them. If the Ballots are received after April 18, 2019, such votes will not be counted.

 

2.3.1. Establishing the Fiscal Council

 

It is worth highlighting that the establishment of the Fiscal Council, which will be included in the Ballot referring to the Annual General Meeting, is not included in this Proposal, as it was included in the Ballot due to a regulatory requirement.

 

In this sense, the Management hereby clarifies that, under the terms of its Bylaws, the Company already has a Statutory Audit Committee the members of which are appointed by the Board of Directors - consisting of independent members of the Board and external ones - and that is complies with (i) the mandatory requirements set forth in CVM Instruction No. 308 of May 14, 1999 and (ii) the regulatory requirements set forth by the Securities and Exchange Commission (SEC), considering that the Company has shares admitted and listed on the New York Stock Exchange - NYSE (ADR Level III) in the United States since May 29, 1997.

 

The Statutory Audit Committee has the legal authorities of the Fiscal Council, including those ones required by the Sarbanes-Oxley Act, in line with the requirements of the companies listed on NYSE.

 


 

3.             MANAGEMENT'S PROPOSAL

 

The Company's Management hereby submits to the Meeting the following proposals.

 

(A)         ANNUAL GENERAL MEETING OF SHAREHOLDERS

 

I.              COMMENTS BY THE MANAGEMENT ON THE COMPANY'S FINANCIAL CONDITION

 

The Management proposes that the Management's accounts, the Management Report, the Financial Statements, and the Independent Auditors' Report for the fiscal year ended on December 31, 2018 be approved, which counted on a favorable opinion by the Company's Audit Committee, as (a) disclosed on February 20, 2019 and February 21, 2019, respectively, on the Company's Investor Relations page and on the websites of the Brazilian Securities and Exchange Commission ("CVM") and B3 S.A. – Brasil, Bolsa, Balcão, and (b) published on February 26, 2019 in the "Official Gazette of the State of São Paulo" and "Folha de S. Paulo" newspapers.

 

Pursuant to article 9, section III, of CVM Instruction 481/09, the information set out below is set forth in section 10 of the Reference Form, pursuant to section 10 of Appendix 24 of CVM Standard 480, of December 7, 2009, as amended ("CVM Instruction 480/09"), reflect the Management's comments on the Company's financial condition:

 

Annex 3 (A) I

Financial Condition of the Company

(Section 10 of the Reference Form)

 

10.1     General financial and equity conditions

 

Introduction

 

The following comments should be considered together with our individual and consolidated financial statements for the year ended December 31, 2018, issued on February 20, 2019, including Notes to the financial statements, as well as other financial information contained herein.

 

In the consolidated financial statements of Companhia Brasileira de Distribuição (“GPA” or “Company”) of December 31, 2018, due to the ongoing divestment of the interest held by GPA in Via Varejo S.A., the operations of Via Varejo are being treated as discontinued operations. Accordingly, net sales and other income/expense lines were adjusted retrospectively from January 1, 2016, as defined in CPC31, approved by CVM Resolution 598/09 - Sale of non- current assets and discontinued operations, equivalent to IFRS 5. Consequently, the following comments do not include the performance of Via Varejo.

 

(a)           general financial and equity conditions

 

The year 2018 brought excellent results for GPA, with important market share gains and consistent results for the businesses of the Group. The accelerated store expansion at Assaí in recent years drove strong sales and substantial net income growth. Multivarejo registered a

 


 

sequential improvement in sales, accompanied by higher profitability. Our multi-channel, multi- format and multi-region portfolio, combined with the optimization of our store portfolio through conversions, renovations and new concepts, has ensured a better offering of products and services for our customers, further empowering their power of choice. The Company also advanced in the digital transformation of our businesses, reinforcing GPA’s pioneering role in fronts such as food e-commerce and loyalty programs, which ensure greater efficiency in our search for new revenue streams.

 

In 2018:

·         Gross sales came to R$ 53.6 billion, increasing 10.7% compared to 2017, with market share gains in Multivarejo and Assaí.

·         EBITDA adjusted by “Other Operating Income and Expenses” and excluding non- recurring effects came to R$ 2.801 billion, improving 27.8% from 2017. At GPA Food, EBITDA was R$ 2.846 billion, advancing 22.3% on 2017, with margin of 5.8% (vs. 5.2% in 2017), due to:

ü  Multivarejo: Adjusted EBITDA was R$ 1.467 billion with margin of 5.5% in 2018, expanding 50 bps compared to 2017, basically due to the reduction in personnel expenses as a result of the operational efficiency program and the labor reform, as well as strict control over general expenses;

ü  Assaí: Adjusted EBITDA grew 34.1% to R$ 1.379 billion, with margin of 6.0% (+40 bps from 2017), above the guidance for 2018, due to the quicker maturation of the stores opened in recent years.

·         The financial result was negative at R$ 474 million, accounting for 1.0% of net revenue, advancing 60 bps from the previous year;

·         Consolidated net income attributable to controlling shareholders was R$ 1.2 billion, increasing 106% from 2017, with margin of 2.4%. Net income attributable to the controlling shareholders of GPA Food was R$ 1.3 billion, while net margin doubled to 2.6% (vs. 1.3% in 2017).

·         Solid financial structure due to the low leverage maintained, which reached -0.32 times EBITDA;

·         Shareholders’ equity amounted to R$ 13.939 billion, increasing R$ 897 million. For more information, see item 10.1.h.

 

(b)           capital structure and eventual redemption of shares

 

GPA CONSOLIDATED

 

(R$ million)

12.31.2018

AV

12.31.2017

AV

12.31.2016

AV

Liabilities (Current and Non-Current)

38,910

73.6%

34,666

72.7%

32,634

72.4%

Total Shareholders' Equity

13,939

26.4%

13,041

27.3%

12,417

27.6%

Total Liabilities and Shareholders' Equity

52,849

100.0%

47,707

100.0%

45,051

100.0%

 

Above is GPA’s capital structure for the periods mentioned, considering as a percentage of equity, the amount resulting from total consolidated shareholders’ equity divided by total liabilities (current and non-current) and shareholders’ equity, and as a percentage of debt capital, the amount resulting from the sum of current and noncurrent liabilities divided by total liabilities (current and non-current) and shareholders' equity:

 

 

Debt

 


 

 

 

GPA Consolidated

(R$ million)

12.31.2018

12.31.2017

12.31.2016

Short Term Debt

(1,973)

(1,250)

(2,957)

Loans and Financing

(905)

(770)

(2,389)

Debentures and Promissory Notes

(1,068)

(481)

(568)

Long Term Debt

(3,465)

(3,309)

(2,912)

Loans and Financing

(387)

(775)

(1,008)

Debentures

(3,078)

(2,534)

(1,904)

Total Gross Debt

(5,438)

(4,559)

(5,869)

Cash and Financial investments

4,369

3,792

5,112

Net Debt

(1,069)

(767)

(757)

EBITDA(1)

3,066

2,315

1,580

Net Debt / EBITDA(1)

-0.35x

-0.33x

-0.48x

On balance Credit Card Receivables not discounted

96

402

235

Net Debt incl. Credit Card Receivables not discounted

(973)

(366)

(522)

Net Debt incl. Credit Card Receivables not discounted / EBITDA(1)

-0.32x

-0.16x

-0.33x

 

The Company ended 2018 with a low level of leverage, with net debt/EBITDA ratio of -0.32 times, compared to -0.16 times in 2017. Net debt, adjusted by the balance of receivables not sold, totaled R$ 973 million in December 2018.

 

Cash position and receivables not sold totaled R$ 4.4 billion and R$ 96 million respectively, amounting to R$ 4.5 billion in cash and cash equivalents, in addition to approximately R$ 1.8 billion in pre-approved/confirmed credit lines.

 

Gross debt increased R$ 879 million to R$ 5.438 billion in the period. Of this total, around R$

2.0 billion refers to the issue of debentures at a coupon of 104.75% of the CDI rate  and maturing in 2021 (15th issue) and and two series referring the 16th issue, which the 1st at a coupon of 106.0% of the CDI maturing in 2021 and the second at a coupon of 107.4% of the CDI maturing in 2022.

Early redemption is allowed only in accordance with the terms of the indenture.

 

(c)           ability to pay financial commitments

 

The Management believes that the cash flow and the funds currently available fully ensure the GPA to pay all its short- and long-term financial commitments.

 

(d)           sources of financing for working capital and investments in non-current assets utilized by GPA

 

The Company raised funds in 2018, 2017 and 2016 through: (A) financial agreements that represent: (i) Brazilian reais denominated loans with obligation to payment principal and DI (interbank deposit)-pegged interest rates; (ii) foreign currency-denominated loans, which are immediately and fully “swapped,” with Brazilian reais denominated payment obligations with DI-pegged interest rates, through swap operations; and (B) funding on capital markets, through the issue of debentures, promissory notes and agribusiness receivables certificates; (C) cash generation through its operations; and (D) anticipation of receivables.

 


 

In 2018, 2017 and 2016, we had no difficulties in obtaining loans or refinancing its current debt.

 

(e)           sources of financing for working capital and investments in non-current assets that GPA plans to utilize to cover liquidity deficiencies

 

In the opinion of the magement, the funding sources used in the fiscal years ended December 31, 2018, 2017 and 2016 are adequate, and will continue to be used by GPA as sources of financing, if necessary.

 

(f)           debt levels and debt characteristics, as well as if the issuer has complied with these restrictions

 

i.                    Relevant loans and financing agreements

 

The tables below present the GPA’s debt with financial institutions and the funding transactions performed on capital markets on December 31, 2018, 2017 and 2016. Debt breakdown, including: (i) loans and financing; and (ii) debentures.

 

In R$ million:

 

   Consolidated
 
  Weighted  12.31.2018  12.31.2017  12.31.2016 
  Average rate       
Debentures         
Debentures, CRA andpromissory note  101.22% of CDI  4,146  3,015  2,472 
    4,146  3,015  2,472 
Loans and Financing         
Local currency         
a. BNDES  3.91% per year  37  45  51 
Working Capital  94.94% of CDI  238  285  1,302 
Working Capital  TR+ 9.80% per year  112  125  135 
Financial lease    152  195  215 
SWAP contract  101.44% of CDI  (11)  (19)  (10) 
Borrowing cost    (3)  (4)  (6) 
    525  627  1,687 
Foreign currency         
Working Capital  USD + 3.26% per year  843  664  1,361 
Working Capital    -  200  172 
SWAP contract  102.59% of CDI  (76)  55  177 
Borrowing cost    -  (1)  - 
    767  918  1,710 
Total Debt    5,438  4,560  5,869 

 

 

The assets and liabilities of Via Varejo now presented net in the line "assets held for sale" and "liabilities related to assets held for sale”.

 

Maturity schedule of loans and financing, including derivatives in the assets and long term liabilities.

 


 

Year  Consolidated 
From 1 to 2 years  1,306 
From 2 to 3 years  1,559 
From 3 to 4 years  528 
From 4 to 5 years  24 
After 5 years  52 
Subtotal  3,469 
 
Borrowing costs  (4) 
Total  3,465 

 

Financing of working capital, swap and direct consumer credit - CDCI

 

Financing of working capital

 

GPA and its subsidiaries raise loans and financing with major financial institutions to meet cash needs for investments.

 

GPA is required to maintain certain debt financial covenants. These ratios are calculated based on consolidated financial statements of the Company prepared in accordance with accounting practices adopted in Brazil, in the respective issuing Company as follows: (i) net debt (debt minus cash and cash equivalents and trade accounts receivable) not greater than equity and (ii) consolidated net debt/EBITDA ratio (debt less cash and cash equivalents and accounts receivable) lower than or equal to 3.25. On December 31, 2018, GPA complied with these ratios.

 

Swap contracts

 

In terms of foreign currency, GPA contracts swap operations to exchange liabilities denominated in U.S. dollar or other foreign currency and fixed interest rates for Real pegged to CDI floating interest rates. The average annual CDI rate was 6.42% in 2018 (9.93% in 2017 and 14% in 2016).

 

Debentures, promissory note and agribusiness receivables certificates

 

GPA is required to maintain certain debt financial covenants in connection with the issues made. These ratios are calculated based on consolidated financial statements of the Company prepared in accordance with accounting practices adopted in Brazil, in the respective issuing Company as follows: (i) net debt (debt minus cash and cash equivalents and trade accounts receivable) not greater than equity and (ii) consolidated net debt/EBITDA ratio lower than or equal to 3.25. On December 31, 2018, GPA complied with these ratios.

 

In R$ million:

 


 

        Date     Consolidated
   Type   Issue Amount Outstanding
debentures
 Issue  Maturity   Annual
financial
changes
 Unit price   12.31.2018  12.31.2017 
 
12th issue of Debentures - CBD  No preference  900  -  09.17.2014  09.12.2019  107.00% of CDI  -  -  921 
13th issue of Debentures - CBD and CRA  No preference  1,012  1,012,500  12.20.2016  12.20.2019  97.50% of CDI  1,001  1,014  1,014 
14th issue of Debentures - CBD  No preference  1,080  1,080,000  04.17.2017  04.13.2020  96.00% of CDI  1,013  1,094  1,096 
15th issue of Debentures - CBD  No preference  800  800,000  01.17.2018  01.15.2021  104.75% of CDI  1,030  824  - 
16th issue of Debentures - CBD - 1st series  No preference  700  700,000  09.11.2018  09.10.2021  106.00% of CDI  1,020  714  - 
16th issue of Debentures - CBD - 2nd series  No preference  500  500,000  09.11.2018  09.12.2022  107.40% of CDI  1,020  510  - 
 
Borrowing cost                (10)  (16) 
Control/ Consolidated - short andlong term                4,146  3,015 
 
Current Liabilities                1,068  481 
Long-term Liabilities                3,078  2,534 

 

 

Finance Lease Obligations

 

Finance lease agreements, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are allocated between finance charges and reduction of lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the income statement. The leased assets are depreciated over their useful lives. However, if there is no reasonable certainty that the Company and its subsidiaries will obtain title at the end of the lease term, the asset is depreciated over its estimated useful life or lease term, whichever is lower.The capitalization of improvements and reforms made in stores is also considered.

 

The total amount recorded from lease agreements classified as financial lease are listed below:

 

    Consolidated   
  12.31.2018  12.31.2017  21.31.2016 
Financial lease liability - minimum lease payments       
Up to 1 year  35  51  41 
1-5 years  92  117  144 
Over 5 years  25  27  30 
Present value of financial lease agreements  152  195  215 
Future financing lease agreements  172  185  207 
 
Gross amount financial lease agreements  324  380  422 

 

ii.                    Other long-term relations with financial institutions

 

Currently, GPA has no relevant long-term relations with financial institutions referring to the fiscal years ended December 31, 2018, 2017 and 2016, in addition to those already described in item 10.1 (f) of this Reference Form.

 

iii.                  Level of subordination in Company’s debt

 

The Management informs that the level of subordination in GPA’s debt is determined in accordance with the provisions set forth by the legislation in force.

 

iv.                     Possible restrictions imposed on indebtedness limits and new debt contracting, the distribution of dividends, the sale of assets, the issue of new securities and the sale of controlling interest, as well as if the issuer has complied with these restrictions

 

Debentures

 


 

GPA issues debentures to strengthen its working capital, maintain its cash strategy, lengthen its debt profile and finance investments. The debentures issued are not convertible into shares, are subject to the rollover clause and hold no guarantee.

 

These debentures are amortized upon payment exclusively on maturity with semiannual interest payments (13th, 14th, 15th and 16th issues of CBD). The 13th and 14th issues  give debentureholders the right to early redemption at any time, the 15th issue as from December 15, 2018, and the 16th issue as from December 10, 2018, both in accordance with the conditions established in the indenture.

 

On April 17, 2017, CBD performed the 14th issuance of simple  debentures, non-convertible into shares, unsecured, in a single serie, which was placed privately with Ares Serviços Imobiliários Ltda., which was later assigned and transferred to Ápice Securitizadora S.A., that acquired the Debentures and the Agribusiness Credit Rights with the purpose to bind with the 7th series of the 1st issuance of Certificate of Agribusiness Receivables (CRA). The resources were used exclusively for purchasing agribusiness products, such as fruits, vegetables, dairy, and animal’s protein in natura directly from rural producers and cooperatives.

 

The amount of R$ 1,080 maturing on April 13, 2020, with interest of 96% of the CDI to be semiannually paid.

 

On January 17, 2018, CBD held the 15th issue of simple, non-convertible unsecured debentures, in a single series. The funds raised are allocated to strengthen the company’s working capital and lengthen its debt profile. The funds raised totaled R$ 800 million, maturing on January 15, 2021, with interest of 104.75% of the CDI and half-yearly payment.

 

On September 11, 2018, CBD carried out its 16th issue of simple, non-convertible unsecured debentures in two series. The funds raised are allocated to strengthen the company’s working capital and lengthen its debt profile. The total amount raised was R$ 1,200 million, with the 1st series maturing on September 10, 2021 and the 2nd series maturing on September 10, 2022, paying interest of 106.00% of the CDI for the 1st series and 107.40% for the 2nd series, with half-yearly payment.

 

Other covenants

 

Some loans agreements and financing instruments entered into by CBD and its subsidiaries envisage early maturity of the debt in the event of transfer of control, including:

 

·         loan and financing agreements in domestic and foreign currencies;

·         indenture of issue of debentures of CBD;

·         machinery and equipment financing agreements (FINAME);

·         Contract of Adhesion to System of Protection Against Financial Risks – Derivatives (swap, forwards and options).

 

The provisions applicable to BNDES contracts also forbid any changes in the effective control, whether direct or indirect, without prior express authorization from BNDES.

 

(g)           limits of the financing already contracted, percentages already used

 

Though the Company does not have any fixed financing agreement contracted, on December 31, 2018, it had loan agreements amounting to R$ 1.800 billion.

 


 

As mentioned in the financial statements disclosed by the Company in 2018, the agreements were entered into as per market practices and are valid through 2020.

 

(h)           relevant changes in each item of the financial statements

 

There are no items that significantly altered the financial statements for 2016, 2017 and 2018, except for the effects of applying CPC 31 / IFRS 5 - Non-current assets held for sale and discontinued operation, CPC 47 / IFRS 15 – Revenue from contracts with clients, and CPC 48 / IFRS 9 – Financial Instruments.

 

In 2018, the Company actively worked to sell Via Varejo to potential strategic investors, but the sale was not concluded until December 31, 2018 due to external factors beyond the Company’s control, which include the macroeconomic scenario. The Board of Directors broadened the alternatives of sale by determining that it should be concluded by December 31, 2019, including the possibility of selling a stake through stock market operations. In November 2018, the process of migrating the Via Varejo shares to the Novo Mercado segment of B3 was completed. In this new context, at the same meeting, the Board of Directors authorized the sale of 50,000,000 common shares of Via Varejo, corresponding to 3.86% of its capital, through a  Total Return Swap (TRS) transaction with a top tier financial institution (note 17.10 of Individual and Consolidated Financial Statements for the Year Ended December 31, 2018 and Independent Auditor’s Report), by which the shares were sold in daily transactions carried out by the bank. The operation does not entail any change in the control or administrative structure of Via Varejo, The agreement will expire on April 30, 2019. As such, since the sale of the Company’s investment in Via Varejo in 2019 is highly probable, the operations of the subsidiary will be presented as discontinued operations, as required by CPC 31 – Non-current assets held for sale and discontinued operations (IFRS 5).The disclosure of the net income of Via Varejo is included in a single line in the income statement, after taxes and the balances of assets and liabilities as held for sale and discontinued operations.

 

The effect of assets and liabilities available held for sale on December 31, 2018 was R$ 24.443 billion (R$ 22.775 billion on December 31, 2017) and R$ 19.412 billion (R$ 17.824 billion on December 31, 2017), respectively. The effect of the result from discontinued operations was a loss of R$ 74 million on December 31, 2018 (gain of R$ 356 million on December 31, 2017).

 

The Company adopted retroactively CPC 47 / IFRS 15 Revenue from Contracts with Customers and CPC 48 /IFRS 9 Financial Instruments as of January 1, 2016, with impacts on the statements of income for the fiscal years ended December 31, 2016 and 2017, balance sheets, statements of cash flow and statement of value added. The effects on December 31, 2017 are R$ 54 million in net income and R$ 250 in shareholders 'equity, and on December 31, 2016, R$ 69 million in net income and R$ 180 in shareholders' equity. In addition to a reclassification for purposes of CPC 47 increasing the cost of goods sold and reducing sales and administrative expenses by R$ 285 million in 2017 and R$ 279 million in 2016.

 

Income Statement

 

Fiscal Years Ended December 31, 2018, 2017 and 2016

 


 

   GPA Consolidated
 Income Statement - Consolidated 12M18 AH 2018
x 2017
12M17 AH 2017
 x 2016
12M16
R$ - Million           
Gross Sales Revenue  53,615  10.7%  48,439  7.7%  44,969 
Net Sales Revenue  49,388  10.7%  44,634  7.7%  41,454 
Cost of Goods Sold  (37,785)  12.5%  (33,592)  6.3%  (31,599) 
Depreciation (Logistic)  (49)  -9.3%  (54)  -1.8%  (55) 
Gross Profit  11,554  5.2%  10,988  12.1%  9,800 
Selling Expenses  (7,297)  3.8%  (7,027)  3.6%  (6,781) 
General and Administrative Expenses  (1,057)  2.4%  (1,032)  8.9%  (948) 
Equity Income  33  -137.1%  (89)  -523.8%  21 
Other Operating Income (Expenses)  (216)  -62.7%  (579)  2.1%  (567) 
Total Operating Expenses  (8,537)  -2.2%  (8,727)  5.5%  (8,275) 
Depreciation and Amortization  (840)  7.8%  (779)  10.2%  (707) 
Earnings before interest and Taxes - EBIT  2,177  46.9%  1,482  81.2%  818 
Financial Income  231  27.6%  181  -21.6%  231 
Financial Expenses  (705)  -22.6%  (911)  -19.7%  (1,134) 
Net Financial Income (Expenses)  (474)  -35.1%  (730)  -19.2%  (903) 
Income Before Income Tax  1,703  126.5%  752  -984.7%  (85) 
Income Tax  (449)  51.2%  (297)  1137.5%  (24) 
Net income (loss) from continuing operations  1,254  175.6%  455  -517.4%  (109) 
Net income (loss) from discontinued operations  (74)  -120.8%  356  -134.4%  (1,036) 
Net Income - Company  1,180  45.5%  811  -170.8%  (1,145) 
Minority Interest - Noncontrolling  (13)  -105.6%  231  -137.7%  (612) 
Net Income - Controlling Shareholders(1)  1,193  105.7%  580  -208.8%  (533) 
EBITDA - Earnings before depreciation, amort., interest and Taxes  3,066  32.4%  2,315  46.5%  1,580 
 
% Net SalesRevenue           
 
Gross Profit  23.4%  -1.2 p.p.  24.6%  1.0 p.p.  23.6% 
Selling Expenses  14.8%  -0.9 p.p.  15.7%  -0.7 p.p.  16.4% 
General and Administrative Expenses  2.1%  -0.2 p.p.  2.3%  0.0 p.p.  2.3% 
Equity Income  0.1%  0.3 p.p.  -0.2%  -0.3 p.p.  0.1% 
Other Operating Income (Expenses)  0.4%  -0.9 p.p.  1.3%  -0.1 p.p.  1.4% 
Total Operating Expenses  17.3%  -2.3 p.p.  19.6%  -0.4 p.p.  20.0% 
Depreciation  1.7%  0.0 p.p.  1.7%  0.0 p.p.  1.7% 
EBIT  4.4%  1.1 p.p.  3.3%  1.3 p.p.  2.0% 
Net Financial Income (Expenses)  1.0%  -0.6 p.p.  1.6%  -0.6 p.p.  2.2% 
Income Before Income Tax  3.4%  1.7 p.p.  1.7%  1.9 p.p.  -0.2% 
Income Tax  0.9%  0.2 p.p.  0.7%  0.6 p.p.  0.1% 
Net Income - Company  2.4%  0.6 p.p.  1.8%  4.6 p.p.  -2.8% 
Minority Interest - noncontrolling  0.0%  -0.5 p.p.  0.5%  2.0 p.p.  -1.5% 
Net Income - Controlling Shareholders  2.4%  1.1 p.p.  1.3%  2.6 p.p.  -1.3% 
EBITDA  6.2%  1.0 p.p.  5.2%  1.4 p.p.  3.8% 

 

HR = Horizontal Review

(1) Sums and percentages may present discrepancies due to rounding

 

Adjusted EBITDA excluding non recurring effects           
Earnings before depreciation, amort., Interest and Taxes - EBITDA  3,066  32.4%  2,315  46.5%  1,580 
Other Operating Income (Expenses)  (216)  -62.7%  (579)  2.1%  (567) 
Non recurring effects on gross margin  481  -31.6%  703  n.a.  - 
Adjusted EBITDA Excl. non recurring effects  2,801  27.8%  2,191  2.0%  2,147 

 

Comments on variations between December 31, 2018 and December 31, 2017

 


 

  Consolidated Food Business Multivarejo Assaí
(R$ million)(1)  2018  2017  Δ  2018  2017  Δ  2018  2017  Δ  2018  2017  Δ 
 
Gross Revenue  53,616  48,440  10.7%  53,616  48,440  10.7%  28,693  28,370  1.1%  24,923  20,070  24.2% 
Net Revenue Ex. tax credits(*)  49,388  44,634  10.7%  49,388  44,634  10.7%  26,489  26,195  1.1%  22,899  18,440  24.2% 
Gross Profit  11,554  10,989  5.1%  11,554  10,989  5.1%  7,390  8,037  -8.1%  4,164  2,952  41.0% 
GrossMargin  23.4%  24.6%  -120 bps  23.4%  24.6%  -120 bps  27.9%  30.7%   -280 bps  18.2%  16.0%  220 bps 
Selling, General and Adm. Expenses  (8,354)  (8,061)  3.6%  (8,354)  (8,061)  3.6%  (5,996)  (6,132)  -2.2%  (2,358)  (1,929)  22.2% 
% ofNet Revenue  16.9%  18.1%  -120 bps  16.9%  18.1%  -120 bps  22.6%  23.4%  -80 bps  10.3%  10.5%  -20 bps 
EBITDA (2)  3,066  2,314  32.5%  3,112  2,451  27.0%  1,304  1,448  -9.9%  1,808  1,003  80.3% 
EBITDAMargin  6.2%  5.2%  100 bps  6.3%  5.5%  80 bps  4.9%  5.5%  -60 bps  7.9%  5.4%  250 bps 
Adjusted EBITDA(2)(3)  3,282  2,894  13.4%  3,327  3,030  9.8%  1,512  2,001  -24.5%  1,815  1,029  76.4% 
AdjustedEBITDAMargin  6.6%  6.5%  10 bps  6.7%  6.8%  -10 bps  5.7%  7.6% -190 bps   7.9%  5.6%  230 bps 
Net Financial Revenue (Expenses)  (474)  (730)  -35.0%  (474)  (730)  -35.0%  (429)  (682)  -37.1%  (46)  (48)  -5.2% 
% of Net Revenue  1.0%  1.6%  -60 bps  1.0%  1.6%  -60 bps  1.6%  2.6% -100 bps   0.2%  0.3%  -10 bps 
Net Income - Controlling Shareholders -continuing operations  1,254  454  176.3%  1,300  591  120.1%  246  51  385.5%  1,054  540  95.2% 
Net Margin- continuingoperations  2.5%  1.0%  150 bps  2.6%  1.3%  130 bps  0.9%  0.2%  70 bps  4.6%  2.9%  170 bps 
Net Income (Loss) -continuing and discontinued operations  1,193  579  106.0%  1,271  558  127.7%  217  18 1090.0% 1,054  540  95.2% 
Net margin-continuing and discontinued operations  2.4%  1.3%  110 bps  2.6%  1.3%  130 bps  0.8%  0.1%  70 bps  4.6%  2.9%  170 bps 
 
 
Gross Profit and Adjusted Ebitda excluding non recurring effects (*)
  Consolidated Food Business Multivarejo Assaí
(R$ million)(1)  2018  2017  Δ  2018  2017  Δ  2018  2017  Δ  2018  2017  Δ 
Gross Profit Excl. non recurring effects(*)  11,073  10,286  7.6%  11,073  10,286  7.6%  7,345  7,334  0.1%  3,728  2,952  26.3% 
GrossMarginExcl.non recurringeffects(*)  22.4%  23.0%  -60 bps  22.4%  23.0%  -60 bps  27.7%  28.0%  -30 bps  16.3%  16.0%  30 bps 
Adjusted EBITDA Excl. non recurring effects(2)(3)(*)  2,801  2,191  27.8%  2,846  2,327  22.3%  1,467  1,298  13.0%  1,379  1,029  34.1% 
Adjusted EBITDA Margin Excl. non recurring effects(*)  5.7%  4.9%  80 bps  5.8%  5.2%  60 bps  5.5%  5.0%  50 bps  6.0%  5.6%  40 bps 

 

(1)   Sums and percentages may present discrepancies due to rounding. All margins were calculated as a percentage of net sales.

(2)   Earnings before interest, tax, depreciation and amortization.

(3)   Adjusted by Other Operating Income and Expenses.

(*) Excluding non-recurring effects. In 4Q18, these effects were R$145 million at Assaí comprising R$78 million in credits related entirely to 9M18 (therefore non-recurring in the quarter and recurring in the year) and R$67 million in credits from periods  prior  to 2018 (non-recurring in the quarter and in the year), which complements the amounts already recorded. In 4Q17, these effects came to R$350 million, of which R$114 million was at Assaí, composed of credits fully related to 9M17 (therefore non-recurring in the quarter and recurring in the year), and R$236 million at Multivarejo, with R$246 million related to tax credits from prior years and -R$10 million related to the impact from inventory write-offs and deductibles related to the fire at the Distribution Center in Osasco in December 2017.

 

Net sales

 

GPA’s net sales exclusively from continuing operations increased 10.7% in 2018, from R$ 44.634 billion in 2017 to R$ 49.388 billion in 2018. These sales were generated by GPA Food operations, which consist of Multivarejo and Assaí.

ü  Assaí: the banner contributed significantly, with growth of 24.2% in 2018, leveraged by the expansion plan, totaling 18 openings (16 inaugurations and 2 store conversions).

ü  Multivarejo: net sales increased 1.1% from 2017, driven by (i) the successful initiatives that brought more dynamism and business creativity, (ii) the evolution in the positioning of the banners and (iii) greater penetration of loyalty tools and personalization of “My Discount” and “My Rewards.”

 

Gross Profit

 


 

In 2018, gross profit totaled R$11.554 billion. Excluding non-recurring effects, it came to R$11.073 billion, increasing R$ 787 million (or 7.6%) from December 31, 2017.Gross margin, excluding non-recurring effects, reached 22.4%, 60 bps lower than in 2017. The highlights by business were:

 

ü Multivarejo: Gross profit, excluding non-recurring effects, came to R$ 7.3 billion, practically in line with 2017, with gross margin of 27.7% (vs. 28.0% in 2017), reflecting the level of proper competitiveness of the banners, which resulted in the resumption of revenue growth and market share gains.

 

ü Assaí: Gross profit excluding non-recurring effects came to R$ 3.7 billion, with margin of 16.3%. The 30 bps increase from 2017 reflects the maturation of the stores resulting from the expansion in recent years, as well as the return of food inflation.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased from R$ 8.059 billion in 2017 to R$

8.354 billion in 2018, or 3.7%, significantly lower than the growth in net sales. As a ratio of net sales, these expenses had a greater dilution, decreasing from 18.1% in 2017 to 16.9% in 2018.The highlights by business were:

 

Multivarejo: Operating expenses were R$ 6.0 billion, down 2.2% from 2017, despite the acceleration of inflation over the year. This reduction was driven mainly by the decrease in personnel expenses, reflecting the operational efficiency program and the labor reforms, as well as strict control of general expenses.

 

Assaí: Selling, general and administrative expenses as a ratio of revenue came to 10.3%, decreasing 20 bps from 2017, reflecting the faster maturation of stores opened in recent years.

 

Other Operating Income (Expenses)

 

In 2018, Other Operating Income and Expenses decreased substantially by 62.7% (or R$ 363 million), for a net expense of R$ 216 million, composed of: (i) tax contingencies related to litigations from prior periods, corresponding to R$ 181 million;(ii) expenses with integration and restructuring, including personnel and other costs related to the closures and conversions of stores / DCs, in the amount of R$ 147 million, and (iii) profit from divestment and write-off of property and equipment, in the amount of R$ 112 million.

 

Depreciation and Amortization

 

In 2018, depreciation and amortization amounted to R$ 840 million, up 7.8% from R$ 779 million in 2017. This increase was mainly due to depreciation and amortization of the new investments made in 2018.

Net Financial Result

 

In 2018, the Company’s financial result was an expense of R$ 474 million, or 1.0% of net sales, improving 60 bps from 2017. This reduction is mainly explained by the lower interest rate in the period (average CDI rate fell from 9.93% in 2017 to 6.5% in 2018), as well as the reduction in the adjustments of contingencies and other financial expenses.

Net Income (Loss)

 

 


 

Net income attributable to controlling shareholders, considering continuing and discontinued operations, totaled R$1.193 billion in 2018, an increase of 105.7% from 2017.Considering the food segment, net income attributable to the controlling shareholders was R$ 1.3 billion, while net margin doubled to 2.6% (vs. 1.3% in 2017).Multivarejo registered solid growth in net income, which reached R$ 218 million. Assaí practically doubled its annual net income, which reached R$ 1.1 billion.

 

Comments on variations between December 31, 2017 and December 31, 2016

 

Net sales

 

In 2017, GPA’s consolidated net sales exclusively from continuing operations increased 7.7%, from R$ 41.454 billion in 2016 to R$ 44.634 billion in 2017. These sales were generated by GPA Food operations, which consist of Multivarejo and Assaí.

 

ü  Assaí: the banner contributed significantly, with growth of 27.3% in 2017, leveraged by the expansion plan, totaling 20 openings (15 store conversions and 5 inaugurations).

ü  Multivarejo: net sales decreased 2.9% from 2017, impacted by sharp deflation in the period, in addition to the closing of 17 hypermarkets since the beginning of the year, 15 of which were converted into Assaí. This optimization of the store portfolio resulted in a contraction in Multivarejo’s sales area of approximately 5%.

 

Gross Profit

 

In 2017, gross profit totaled R$ 10.988 billion, up R$ 1.188 million or 12.1% from December 31, 2016. Gross margin reached 24.6%, increasing 100 bps from 2016. In 2017, non-recurring effects totaled R$ 703 million. Adjusted for these effects, gross profit in 2017 totaled R$10.285 billion, with margin of 21.23%.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased from R$ 7.729 billion in 2016 to R$

8.059 billion in 2017, or 4.3%, lagging the growth in net sales. As a ratio of net revenue, dilution increased from 18.6% in 2016 to 18.1% in 2017, despite the sharp food deflation that affected net sales, while the other components of expenses continued to be impacted by inflation.

 

Other Operating Income (Expenses)

 

In 2017, other Operating Income and Expenses came to an expense of R$ 579 million, up 2.1% from 2016, and were mainly related to the write-off of property and equipment due to: (i) closure of stores and conversion of Extra Hiper stores into Assaí; (ii) write-off of fixed assets related to the Distribution Center in Osasco due to the fire; and (iii) restructuring expenses due to measures adopted by the Company to adjust its structure of expenses, comprising all operating and administrative areas.

Depreciation and Amortization

 

Depreciation and amortization amounted to R$ 779 million in 2017, up 10.2% from R$ 707 million in 2016. This increase was mainly due to depreciation and amortization of the new investments made in 2017.

Net Financial Result

 


 

In 2017, the net financial result was an expense of R$ 730 million, down 19.2% from 2016. The ratio of net financial result to net revenue decreased from 2.2% in 2016 to 1.6% in 2017, or 60 bps, chiefly due to the lower cost of gross debt by around R$ 200 million on the decline in the average CDI rate from 14.0% in 2016 to 9.93% in 2017. In general, all the components of the financial result remained stable as a percentage of net sales compared to the same period the previous year.

Net Income (Loss)

 

Net income attributable to controlling shareholders, considering continuing and discontinued operations, came to R$ 580 million in 2017 reversing the net loss of R$ 533 million in 2016.

 

Balance Sheet

 

Fiscal Years Ended December 31, 2018, 2017 and 2016

 

Balance Sheet – Consolidated Assets

 

ASSETS
 
  GPA CONSOLIDATED
      AH 2018 x      AH 2017 x     
(R$ million)  31.12.2018  AV  2017  31.12.2017  AV  2016  31.12.2016  VA 
 
CurrentAssets  36,304  68.7%  10.0%  33,016  69.2%  4.9%  31,486  69.9% 
Cash and Cash Equivalents  4,369  8.3%  15.2%  3,792  7.9%  -25.8%  5,112  11.3% 
Accounts Receivable  384  0.7%  -37.9%  618  1.3%  15.5%  535  1.2% 
Inventories  5,909  11.2%  22.5%  4,822  10.1%  3.9%  4,641  10.3% 
Recoverable Taxes  679  1.3%  13.9%  596  1.2%  -11.6%  674  1.5% 
Noncurrent Assets held for sale  24,443  46.3%  7.3%  22,775  47.7%  13.0%  20,153  44.7% 
Prepaid Expenses and Other Accounts Receivables  520  1.0%  25.9%  413  0.9%  11.3%  371  0.8% 
 
Noncurrent Assets  16,545  31.3%  12.6%  14,691  30.8%  8.3%  13,565  30.1% 
Accounts Receivables  4  0.0%  -95.0%  80  0.2%  na  -  0.0% 
Recoverable Taxes  2,745  5.2%  57.1%  1,747  3.7%  176.4%  632  1.4% 
Financial Instruments  44  0.1%  57.1%  28  0.1%  na  -  0.0% 
Deferred Income Tax and Social Contribution  207  0.4%  65.6%  125  0.3%  -28.2%  174  0.4% 
Amounts Receivable from Related Parties  34  0.1%  36.0%  25  0.1%  47.1%  17  0.0% 
Judicial Deposits  776  1.5%  1.8%  762  1.6%  15.3%  661  1.5% 
Prepaid Expenses and Others  187  0.4%  -72.7%  685  1.4%  4.3%  657  1.5% 
Investments  223  0.4%  26.0%  177  0.4%  -47.0%  334  0.7% 
Property and Equipment  9,650  18.3%  5.6%  9,138  19.2%  -0.5%  9,182  20.4% 
Intangible Assets  2,675  5.1%  39.0%  1,924  4.0%  0.8%  1,908  4.2% 
 
TOTAL ASSETS  52,849  100.0%  10.8%  47,707  100.0%  5.9%  45,051  100.0% 

 


 

Balance Sheet – Consolidated Liabilities

 
LIABILITIES
 
  GPA CONSOLIDATED
      AH 2018 x     AH 2017 x    
(R$ million)  31.12.2018  AV  2017  31.12.2017  AV  2016  31.12.2016  AV 
 
Current Liabilities  32,785  62.0%  13.1%  28,992  60.8%  5.1%  27,582  61.2% 
Trade Payables  9,246  17.5%  13.8%  8,128  17.0%  12.4%  7,232  16.1% 
Loans and Financing  948  1.8%  23.1%  770  1.6%  -67.8%  2,389  5.3% 
Debentures and promissory note  1,068  2.0%  122.0%  481  1.0%  -15.3%  568  1.3% 
Payroll and Related Charges  686  1.3%  7.2%  640  1.3%  4.2%  614  1.4% 
Taxes and Social Contribution Payable  370  0.7%  22.9%  301  0.6%  18.5%  254  0.6% 
Dividends Proposed  57  0.1%  -26.9%  78  0.2%  na  -  0.0% 
Financing for Purchase of Fixed Assets  149  0.3%  28.4%  116  0.2%  0.0%  116  0.3% 
Leasing  127  0.2%  -0.8%  128  0.3%  16.4%  110  0.2% 
Debt with Related Parties  145  0.3%  -5.2%  153  0.3%  4.1%  147  0.3% 
Advanced Revenue  250  0.5%  71.2%  146  0.3%  -34.8%  224  0.5% 
Liabilities related to non-current assets held for sale  19,412  36.7%  8.9%  17,824  37.4%  14.0%  15,632  34.7% 
Others  327  0.6%  44.1%  227  0.5%  -23.3%  296  0.7% 
 
Long-Term Liabilities  6,125  11.6%  7.9%  5,674  11.9%  12.3%  5,052  11.2% 
Loans and Financing  431  0.8%  -46.3%  803  1.7%  -20.3%  1,008  2.2% 
Debentures and promissory note  3,078  5.8%  21.5%  2,534  5.3%  33.1%  1,904  4.2% 
Deferred Income Tax and Social Contribution  581  1.1%  47.5%  394  0.8%  24.3%  317  0.7% 
Tax Installments  471  0.9%  -16.8%  566  1.2%  4.8%  540  1.2% 
Provision for Contingencies  1,235  2.3%  11.6%  1,107  2.3%  -5.9%  1,177  2.6% 
Advanced Revenue  13  0.0%  -40.9%  22  0.0%  -8.3%  24  0.1% 
Provision for negative equity  267  0.5%  36.9%  195  0.4%  441.7%  36  0.1% 
Others  49  0.1%  -7.5%  53  0.1%  15.2%  46  0.1% 
 
Shareholders' Equity  13,939  26.4%  6.9%  13,041  27.3%  5.0%  12,417  27.6% 
Capital  6,825  12.9%  0.0%  6,822  14.3%  0.2%  6,811  15.1% 
Capital Reserves  413  0.8%  16.3%  355  0.7%  7.3%  331  0.7% 
Profit Reserves  3,911  7.4%  27.8%  3,060  6.4%  15.8%  2,643  5.9% 
Other Comprehensive Results  (66)  -0.1%  34.7%  (49)  -0.1%  145.0%  (20)  0.0% 
Minority Interest  2,856  5.4%  0.1%  2,853  6.0%  7.6%  2,652  5.9% 
 
TOTAL LIABILITIES  52,849  100.0%  10.8%  47,707  100.0%  5.9%  45,051  100.0% 

 

December 31, 2018 vs. December 31, 2017

 

Assets

 

Current

 

Cash and cash equivalents

 

In 2018, cash and cash equivalents totaled R$ 4.369 billion, up R$ 577 billion from 2017, mainly due to lower disbursement for financing activities in 2018 compared to 2017.On December 31, 2018, cash and cash equivalents corresponded to 8.3% of total assets, compared to 7.9% on December 31, 2017.

Trade receivables

 

On December 31, 2018, the balance of trade receivables totaled R$ 384 million, down R$ 234 million from the balance in 2017.This reduction is mainly due to the higher volume of sale of receivables, reflecting the Company’s cash management strategy.

 

Taxes recoverable

 

On December 31, 2018, the balance of short-term recoverable taxes increased 13.9%, from R$ 596 million in 2017 to R$ 679 million. The increase of R$ 83 million, combined with the increase of R$ 998 million in long-term recoverable taxes, resulted in an increase of R$ 1.081

 


 

billion. This increase is mainly related to untimely ICMS-ST tax credits of R$ 436 million related to previous periods at Assaí, and the new level of recurring credits.

 

Prepaid expenses and other accounts receivable

 

On December 31, 2018, prepaid expenses and other accounts receivable increased 25.9%, from R$ 413 million in 2017 to R$5 20 million, up R$ 107 million, mainly due to accounts receivable from insurers, which were offset by other less significant effects.

 

Inventories

 

In 2018, inventories increased 22.5% (or R$1.087 billion), from R$ 4.822 billion in 2017 to R$ 5.909 billion, mainly due to the increase in inventories at Assaí to sustain the strong sales growth. On December 31, 2018, inventories corresponded to 11.2% of total assets, compared to 10.1% on December 31, 2017.

 

Noncurrent

 

Noncurrent assets, excluding property and equipment, intangible assets and investments, increased from R$3.452 billion in 2017 to R$ 3.997 billion in 2018.The increase of R$ 545 million is mainly explained by the growth of R$998 million in recoverable taxes. On December 31, 2018, these accounts represented 7.6% of total assets, versus 7.2% on December 31, 2017.

Investments

 

In 2018, investments increased 26.0%, from R$ 177 million in 2017 to R$ 223 million, mainly due to the equity income from FIC. On December 31, 2018, investments corresponded to 0.4% of total assets, the same level as on December 31, 2017.

 

Property and equipment

 

In 2018, property and equipment increased 5.6%, from R$ 9.138 billion in 2017 to R$ 9.650 billion. This increase of R$ 512 million is represented by additions of R$ 1.898 billion, depreciation of R$ (751) million, write-off of R$ (421) million and discontinued operations of R$ (214) million. On December 31, 2018, property and equipment corresponded to 18.3% of total assets, versus 19.2% on December 31, 2017.

 

Intangible assets

 

In 2018, intangible assets increased 39.0%, from R$ 1.924 billion in 2017 to R$ 2.675 billion. The increase of R$751 million is mainly related to the contractual conversion of an “accounts receivable” item into an “intangible asset” corresponding to the right of exploration of a group of stores. On December 31, 2018, intangible assets corresponded to 5.1% of total assets, versus 4.0% on December 31, 2017.

 

Liabilities

 

Current

 

Trade payables

 

Liabilities with suppliers increased from R$ 8.128 billion in 2017 to R$ 9.246 billion in 2018. This increase of R$ 1.118 billion was mainly due to the increase in the balance at Assaí due to

 


 

the increase in operational activities. On December 31, 2018, liabilities with suppliers accounted for 17.5% of total liabilities, including shareholders’ equity, compared to 17.0% on December 31, 2017.

 

Loans and Financing – short and long term

 

In 2018, short-term loans and financing, excluding debentures, increased 23.1%, from R$770 million in 2017 to R$ 948 million, which will be explained along with long-term loans and financing. These short-term loans and financing, excluding debentures, corresponded to 1.8%  of total liabilities on December 31, 2018, including shareholders’ equity, versus 1.6% on December 31, 2017.

 

The combined balance of short- and long-term loans and financing and debentures increased R$ 937 million related to maturities in 2018, mainly due to long-term debt contracted during the year.

 

Payroll and related charges

 

In 2018, liabilities with social and labor obligations increased R$ 46 million, from R$ 640 million in 2017 to R$686 million, mainly due to collective bargaining agreements in the year and their effects on payroll charges and provisions.

 

On December 31, 2018, social and labor obligations accounted for 1.3% of total liabilities, including shareholders’ equity, same level of December 31, 2017.

 

Taxes and contributions payable

 

In 2018, taxes, fees and contributions increased 22.9%, from R$301 million in 2017 to R$ 370 million, mainly due to the higher balance of income and social contribution taxes payable at Assaí.

 

On December 31, 2018, taxes, fees and contributions accounted for 0.7% of total liabilities, including shareholders’ equity, versus 0.6% on December 31, 2017.

 

Noncurrent

 

Deferred income tax and social contribution

 

In 2018, deferred income tax and social contribution increased 47.5%, from R$ 394 million in 2017 to R$ 581 million, due to the tax amortization of goodwill in the year.

 

On December 31, 2018, deferred income tax and social contribution corresponded to 1.1% of total liabilities, including shareholders’ equity, versus 0.8% on December 31, 2017.

 

Taxes Paid in Installments

 

In 2018, taxes paid in installments, including REFIS, decreased 16.8%, from R$ 566 million in 2017 to R$471 million, due to the payment of tax installments over the year.

 

On December 31, 2018, taxes paid in installments corresponded to 0.9% of total liabilities, including shareholders’ equity, versus 1.2% on December 31, 2017.

 


 

Provision for lawsuits

 

In 2018, the provision for lawsuits increased 11.6%, from R$ 1.107 billion in 2017 to R$ 1.235 billion, due to the provisioning of tax lawsuits, partially offset by reversals.

 

On December 31, 2018, provision for lawsuits corresponded to 2.3% of total liabilities, including shareholders’ equity, the same level as on December 31, 2017.

 

 Shareholders’ Equity

 

In 2018, shareholders’ equity increased 6.9%, from R$ 13.041 billion in 2017 to R$ 13.939 billion. The main variations were: (i) net income of R$ 1.180 billion; (ii) establishment of a reserve for options granted in the amount of R$ 65 million; (iii) dividends of R$ (56) million and; (iv) interest on equity of R$ (274) million.

 

On December 31, 2018, shareholders’ equity corresponded to 26.4% of total liabilities, including shareholders’ equity, versus 27.3% on December 31, 2017.

 

Other equity accounts

 

The equity accounts not mentioned above did registered significant variations between December 31, 2017 and December 31, 2018.

 

December 31, 2017 vs. December 31, 2016

 

Assets

 

Current assets

 

Cash and cash equivalents

 

In 2017, cash and cash equivalents came to R$ 3.792 billion, down R$ 1.320 billion from 2016, mainly due to larger volume of debt repayments in 2017 compared to 2016. On December 31, 2017, cash and cash equivalents accounted for 7.9% of total assets, compared to 11.3% on December 31, 2016.

Trade receivables

 

On December 31, 2017, trade receivables amounted to R$ 618 million, up R$ 83 million from the balance at the end of 2016. Credit card receivables increased R$ 169 million compared to 2016, due to: (i) higher sales; (ii) lower volume of sale of receivables, reflecting the Company’s cash management strategy.

 

Taxes recoverable

 

On December 31, 2017, the balance of short-term recoverable taxes decreased by 11.6%, from R$ 674 million in 2016 to R$ 596 million. The negative variation of R$78 million, associated with the long-term increase of R$1.115 billion, led to a combined net variation of R$1.037 billion. The increase is mainly related to untimely ICMS-ST tax credits of R$723 million referring to previous periods, and the new level of recurring credits.

 

Prepaid expenses and other accounts receivable

 


 

On December 31, 2017, prepaid expenses and other accounts receivable increased 11.3%, from R$371 million in 2016 to R$413 million, up R$42 million, mainly due to accounts receivable from insurance companies, offset by other less relevant effects.

 

Inventories

 

In 2017, inventories increased 3.9%, or R$181 million, from R$ 4.641 billion in 2016 to R$ 4.822 billion, mainly on the increase in Assaí’s inventory to support strong sales growth.

 

On December 31, 2017, inventories corresponded to 10.1% of total assets, compared to 10.3% on December 31, 2016.

 

Non-current

 

Non-current assets, excluding property and equipment, intangible assets and investments, increased from R$ 2.141 billion in 2016 to R$ 3.452 billion in 2017. The increase of R$ 1.311 billion is mainly explained by the growth of R$1.115 billion in recoverable taxes. On December 31, 2017, these accounts represented 7.2% of total assets, versus 4.8% on December 31, 2016.

 

Investments

 

Investments decreased 47.0% in 2017, from R$ 334 million in 2016 to R$ 177 million. The decrease is mainly due to dividends received from FIC. On December 31, 2017, investments accounted for 0.4% of total assets, versus 0.7% on December 31, 2016.

 

Property and equipment

 

In 2017, property and equipment was virtually stable, from R$ 9.182 billion in 2016 to R$ 9.138 billion in 2017. The decrease of R$ 44 million is represented by additions of R$ 1.367 billion, depreciation of R$ (701) million, write-off of R$ (536) million and discontinued operations of R$ (161) million, and transfer of R$ (13) million. On December 31, 2017, property and equipment accounted for 19.2% of total assets, versus 20.4% on December 31, 2016.

 

Intangible assets

 

In 2017, intangible assets increased 0.8%, from R$ 1.908 billion in 2016 to R$ 1.924 billion in 2017. The increase of R$16 million is related to changes in the food businesses. On December 31, 2017, intangible assets accounted for 4.0% of total assets, versus 4.2% on December 31,

2016.

 

Liabilities

 

Current

 

Trade payables

 

Liabilities with suppliers increased from R$ 7.232 billion in 2016 to R$ 8.128 billion in 2017. The variation of R$ 896 million was mainly due to the increase in the balance of Assaí on the higher operating activity volume. On December 31, 2017, liabilities with suppliers accounted for 17.0% of total liabilities, including shareholders’ equity, versus 16.1% on December 31, 2016.

 


 

Loans and Financing – short-term

 

In 2017, short-term loans and financing, excluding debentures, decreased 67.8%, from R$2.389 billion in 2016 to R$770 million in 2017, due to the payment of loans in 2017.

 

On December 31, 2017, short-term loans and financing, excluding debentures, accounted for 1.6% of total liabilities, including shareholders’ equity, versus 5.3% on December 31, 2016.

 

The combined balance of loans and financing and debentures, in the short and long terms, decreased R$ 1.281 billion due to maturities in 2017.

 

Debentures – short-term

 

In 2017, short-term debt represented by debentures issued by the Company decreased 15.3%, from R$ 568 million in 2016 to R$ 481 million. The decrease is primarily due to the maturity of a promissory note in 2017. On December 31, 2017, short-term debentures accounted for 1.0%  of total liabilities, including shareholders’ equity, versus 1.3% on December 31, 2016.

 

See the combined comments on short-term loans and financing.

 

Payroll and related charges

 

In 2017, liabilities with social and labor obligations increased R$ 26 million, from R$ 614 million in 2016 to R$ 640 million, mainly due to collective bargaining agreements in the year and the effects thereof on labor charges and provisions.

 

On December 31, 2017, liabilities with social and labor obligations accounted for 1.3% of total liabilities, including shareholders’ equity, versus 1.4% on December 31, 2016.

 

Taxes and contributions payable

 

In 2017, liabilities with taxes, fees and contributions increased 18.5%, from R$ 254 million in 2016 to R$301 million. The variation was mainly due to adhesions to the special tax amnesty program (PERT).

 

On December 31, 2017, taxes, fees and contributions accounted for 0.6% of total liabilities, including shareholders’ equity, the same level as on December 31, 2016.

 

Non-current

 

Loans and Financing – long-term

 

In 2017, long-term loans and financing, excluding debentures, decreased 20.3%, from R$ 1.008 billion in 2016 to R$ 803 million. The decrease was due to the issue of debentures.

 

On December 31, 2017, long-term loans and financing, excluding debentures, accounted for 1.7% of total liabilities, including shareholders’ equity, versus 2.2% on December 31, 2016.

 

Debentures – long-term

 


 

In 2017, long-term debt represented by debentures issued by the Company increased 33.1%, from R$ 1.904 billion in 2016 to R$ 2.534 billion. This increase is due to interest accrued in the year and funding through an Agribusiness Receivables Certificate (CRA).

 

On December 31, 2017, long-term debentures accounted for 5.3% of total liabilities, including shareholders’ equity, versus 4.2% on December 31, 2016.

 

Deferred income tax and social contribution

 

In 2017, deferred income and social contribution tax liabilities increased 24.3%, from R$ 317 million in 2016 to R$ 394 million, due to the tax amortization of goodwill in the year.

 

On December 31, 2017, deferred income tax and social contribution corresponded to 0.8% of total liabilities, including shareholders’ equity, versus 0.7% on December 31, 2016.

 

Taxes Paid in Installments

 

In 2017, tax installments, including REFIS, increased 4.8%, from R$ 540 million in 2016 to R$ 566 million, due to the adhesion to new tax amnesty programs in 2017.

 

On December 31, 2017, taxes paid in installments accounted for 1.2% of total liabilities, including shareholders’ equity, the same as on December 31, 2016.

 

Provision for lawsuits

 

In 2017, provision for lawsuits decreased 5.9%, from R$ 1.177 billion in 2016 to R$ 1.107 billion. The main factors were the decrease related to adhesion to tax amnesty programs.

 

On December 31, 2017, provision for lawsuits accounted for 2.3% of total liabilities, including shareholders’ equity, versus 2.6% on December 31, 2016.

 

Equity

 

In 2017, shareholders’ equity increased 5.0%, from R$ 12.417 billion in 2016 to R$ 13.041 billion. The main variations were: (i) net income of R$ 811 million; (ii) accrual of a reserve for options granted of R$ 27 million; (iii) additions of R$ 11 million to capital from the exercise of stock options; (iv) interest on equity of R$ (101) million; and (v) dividends of R$ (87) million.

 

On December 31, 2017, shareholders’ equity corresponded to 27.3% of total liabilities, including shareholders’ equity, versus 27.6% on December 31, 2016.

 

Non-controlling interest

 

In 2017, non-controlling interest increased 7.6%, from R$ 2.652 billion in 2016 to R$ 2.853 billion. The increase was mainly due to the net income of R$ 231 million.

 

Other equity accounts

 

The equity accounts not mentioned above did present have significant variation between December 31, 2017 and December 31, 2016.

 

10.2            Operating and financial result

 

 


 


(a)           results from operations, particularly:

 

(i)            description of any relevant component of our revenue

 

The Group’s revenues arise from GPA Foods’ operations, composed of Multivarejo and Assaí. Net sales are shown in the table below for the years ended December 31, 2018, 2017 and 2016.

 

Net Revenue       
(R$ million)  2018  2017  2016 
Consolidated (1)       
Food Business  49,388  44,634  41,454 
Multivarejo (1)  26,489  26,195  26,967 
Pão de Açúcar  6,860  6,659  6,711 
Extra (2)  15,792  16,110  16,776 
Proximity  1,182  1,085  1,131 
Other Businesses (3)  2,655  2,341  2,349 
Assaí  22,899  18,440  14,487 

 

(1)   Includes sales by Extra Supermercado, Mercado Extra, Extra Hiper and Compre Bem.

(2)   Includes sales by Mini Extra and Minuto Pão de Açúcar.

(3)   Includes sales by Gas stations, Drugstores, Delivery and rental revenue from commercial centers.

 

For more information on variations of net sales, see item 10.1 (h) of this Reference Form.

 

(ii)               factors affecting materially our operating results

 

For information on the factors affecting materially our operating results, see item 10.1 (h) of this Reference Form.

 

(b)   revenue variations due to changes in prices, exchange rates, inflation, changes in volume and the launching of products and services

 

For information on revenue variations, see item 10.1 (h) of this Reference Form.

 

(c)    impact of inflation, variations in the price of our main inputs and products, foreign exchange and interest rates on the Company’s operating and financial results

 

For information on the impact of deflation on net sales, inflation on costs and interest rates on the financial result, see item 10.1 (h) of this Reference Form.

 

10.3            Events with material effects occurring and expected in the financial statements

 

(a)           introduction or sale of an operating segment

 

On November 23, 2016, the Board of Directors approved the divestment of the Company’s interest in Via Varejo. As a result, the Company started disclosing the net result, after taxes, of Via Varejo in a single line in the statement of income (as of note 10.3(c)).

 

 


 

 


In R$ million:                         
 
Description Retail (a)(*)  Cash & Carry Held-for-sale
assets and
discontinued
operations 
Subtotal  Elimination/
Others 
Total 
                  (**)     
  2018  2017  2018  2017  2018  2017  2018  2017  2018  2017  2018  2017 
    Restated    Restated    Restated    Restated    Restated    Restated 
Net sales  26,489  26,194  22,899  18,440  -  -  49,388  44,634  -  -  49,388  44,634 
 
Current assets  7,680  7,187  4,218  3,090  24,557  22,996  36,455  33,273  (151)  (257)  36,304  33,016 
Non-current assets  11,532  11,150  5,029  3,569  -  -  16,561  14,719  (16)  (28)  16,545  14,691 
Current liabilities  8,245  7,966  5,248  3,414  19,459  17,897  32,952  29,277  (167)  (285)  32,785  28,992 
Non-current  5,716  4,973  409  701  -  -  6,125  5,674  -  -  6,125  5,674 
liabilities                         
Shareholders’ equity (b)  5,251  5,398  3,590  2,544  5,098  5,099  13,939  13,041  -  -  13,939  13,041 

 

(*) Retail segment includes GPA Malls & Properties.

(**) Eliminations are composed of intercompany balances. According to Management, eliminations in profit or loss are made in the segment, in addition to Company’s equity income on Luxco.

 

 


 

(b)           creation, acquisition or sale of shareholding

 

(i)        Cheftime and James Delivery

In 2018, the Company acquired control of two entities: James Delivery, a delivery company, and Cheftime, which supplies gastronomic kits. The net assets of these companies (amounting to around R$ 1.00) and the considerations for the acquisition were measured on a preliminary basis and will be completed in 2019.

 

(c)           unusual events or operations

 

(i)        Ongoing transaction for divestment of the subsidiary Via Varejo

On November 23, 2016, the Board of Directors approved the divestment of the Company’s interest in Via Varejo S.A. (“Via Varejo”), in line with its long-term strategy of focusing on the development of the food sector.

In 2018, the Company actively worked to sell Via Varejo to potential strategic investors, but the sale was not concluded until December 31, 2018 due to certain external factors beyond the Company’s control, which includes the macroeconomic scenario. The Board of Directors expanded the alternatives for sale by determining that it should be concluded by December 31, 2019, including the possibility of selling a stake through transactions in the stock market.

 

In November 2018, the migration of Via Varejo to B3's Novo Mercado segment was concluded.

 

In this new context, at the same meeting, the Board of Directors authorized the sale of 50,000,000 common shares of Via Varejo, corresponding to 3.86% of its capital, through a Total Return Swap (TRS) with a top tier financial institution (note 17.10 of the Financial Statements), through which such shares were sold in daily transactions carried out by the bank. This agreement was settled at the end of February 2019.

 

The Board of Directors approved, on February 20, 2019, the execution of a new TRS agreement, authorizing the sale of forty million (40,000,000) common shares of Via Varejo held by the Company, corresponding to 3.09% of Via Varejo’s capital.

 

The TRS agreements do not entail any change in the control or administrative structure of Via Varejo.

 

Therefore, since the divestment of Via Varejo in 2019 is highly probable, the subsidiary’s operations will be presented as discontinued operations, as required under CPC 31 – Non-current assets held for sale and discontinued operations (IFRS 5). The disclosure of net income or loss of Via Varejo after taxes is presented in a single line in the income statement and the balances of assets and liabilities as held for sale and discontinued operations.

 

10.4            Significant changes in accounting practices – reservations and emphases in the auditor’s opinion

 

(a)           significant changes in accounting practices

 

GPA prepared its consolidated financial statements pursuant to all pronouncements issued by the  Brazilian  Accounting Pronouncements  Committee  (CPC)  and  IFRS,  being  the financial

 


 

statements as of December 31, 2010 the very first financial statements prepared according to the rules mentioned herein.

 

In the fiscal years ended December 31, 2018, 2017 and 2016, there were no significant changes in the accounting practices adopted by GPA, except for the retrospective adoption of CPC 47 and CPC 48 (notes 5.1 to the financial statements of December 31, 2018 and item 10.1 of this Reference Form).

 

IFRS 16/ CPC 06 (R2) – Lease transactions – Application estimated for 1/1/2019

IFRS 16 “Leases”, which replaces IAS 17 “Leases” and the  related  interpretations from January 1st, 2019, eliminates the distinction between operating leases and finance leases; it requires recognition of an asset (the right to use the leased item) and of a financial liability representative of discounted future payments rentals for virtually all lease contracts. Operating lease expense is replaced with depreciation expense related to the right of use and interest expense related to the lease liability. Previously, the Company recognized mainly  operating lease expense on a straight-line basis over the term of the lease and recognized assets and liabilities only to the extent that there was a timing difference between actual lease payments and the period of competence of  the rent expense. Thus, performance indicators such as EBITDA and to a lesser extent current operating income will be positively impacted; conversely, the financial result will be negatively impacted. At last, consolidated net profit will also be affected because the total rental expense is generally higher at the  beginning of the lease and decreases over time, unlike a straight-line charge under the current standard. Additionally, net cash from operating activities will be higher as cash payments for the principal portion of the lease liability and the related interest  will be classified as cash flows from financing activities.

The Company mainly holds property leases of  real estate contracts  representing  a minimum annual rent expense non-cancelable of R$937 million out of a total of R$982 million for the 2018 year-end. Adoption of the standard IFRS 16 will primarily impact the recognition of  operating  leases for the Company's stores  and warehouses, particularly those associated with its Retail operations.

In 2018, the Company continued to collect and analyze the data required for the application of IFRS 16 as at January 1st, 2019. The Company is implementing computer software to ensure the fully integrated operational and financial monitoring of these leases. The implementation of the software will be finalized  in the first quarter of 2019.

The Company decided to adopt the full retrospective approach as a transition method on January 1, 2019, and prospectively from the start of the earliest practicable period. As a result, the comparative periods will be restated.

The Company has chosen to apply the two recognition exemptions proposed by the standard on the following contracts:

·         Leases of short-term property;

·         Leases of property relating to low value assets.

Rents not included in the initial valuation of the liability (for example, variable rents) are classified as operating expenses, as are charges related to short-term  and low-value leases.

The lease term will be the legally enforceable period of the contract and will take into account the options for termination and renewal, the use of which by the Company is reasonably certain.

The discount rate used to calculate the right of use and the lease liability will be determined using some historical data directly attributable to the Company and/or directly observable from the market, such as:

·         The historical borrowing rate from the Company on comparable acquisition of assets, and Company’s indebtedness.

 


 

 

·         The future risk-free curve by maturity.

The estimated impact on the opening balance sheet as of January 1, 2019 would lead to:

·         An increase in assets (mainly via the recognition of a right of use) of R$3.6 billion,

·         The recognition of a lease financial liability of R$4.8 billion,

·         An increase in the deferred tax asset of R$0.3 billion,

·         A decrease in equity (net of tax) of R$ 0.8 billion.

 

The impact on the restatement of the 2018 result would lead to:

·         A reversal of lease expenses of R$1 billion,

·         Recognize the amortization expense of the right to use of R$0.5 billion,

·         Recognize the interest expense of R$0.6 billion,

·         Recognize the net income of R$0.1 billion.

The Company opted to disclose the right of use and the financial  liability  for  lease  in separated lines in the balance sheet.

Given the complexity of  this new pronouncement, certain issues  are still being discussed in   the market. Accordingly, the amounts presented above may change until their initial adoption in the first quarter of 2019, since the Company's estimates may be impacted if certain  assumptions are altered in discussions of market adoption.

On December 31, 2018, the Company presented an off-balance sheet commitment in respect of the expected minimum lease payments on real estate and equipment leases of R$411 in accordance with IAS 17 (note 22), which mainly corresponded to real estate, such as stores and warehouses used as a tenant in its activities. The difference between the off-balance sheet commitment and the estimated IFRS 16 rental debt on real estate is mainly due to:

·         amendment of minimum cancelable criterion under CPC 06 (R1), to be reasonably certain under CPC 06 (R2).

·         calculation of the present value of rental flows at the end of CPC 06 (R2) compared to the nominal flows of CPC 06 (R1).

 

Given the lack of a regulatory position for the moment on the methods  for  applying  impairment tests, the Company has not performed any new impairment tests taking into account the effects of IFRS 16.

 

 

(b)           significant effects of changes in accounting practices

 

Not applicable.

 

(c)            reservations and emphasis in the independent auditor's report

 

There were no reservations in the report issued by Company’s independent auditor on the financial statements for the fiscal years ended December 31, 2018, 2017 and 2016.

 

10.5            Critical accounting policies

 

Judgments, estimates and assumptions

 

The preparation of GPA’s individual and consolidated financial statements requires that the Management makes judgments and estimates and adopts assumptions that affect the amounts stated of revenues, expenses, assets and liabilities and disclosure of contingent liabilities at year- end, however, uncertainties relating to these assumptions and estimates may produce results that require  substantial  adjustments  to  the  accounted  amount  of  the  asset  or  liability  in future

 

 


 

 

periods. In the process of applying GPA's accounting policies, Management has adopted the following judgments, which have the most significant effect on the amounts recognized in the individual and consolidated financial statements:

 

1)   Impairment

 

According to the method disclosed in note 4.9 of the financial statements, the Company performed test to verify that the assets might not be recoverable and the year ended December 31, 2018, based on those tests, there was no need to recognize any loss.

 

a)    Impairment test of operating assets of stores

 

The procedure for verification of non-recoverability of property and equipment consisted in allocating operating assets and intangible assets (such as Commercial rights) directly attributable to the stores. The steps of the test were as follows:

 

·      Step 1: compared the carrying amount in properties of leased stores with a multiple of sale (30% to 35%), representing transactions between retail companies. For stores with multiple valued below the carrying amount, the Company applied a more detailed method, described in Step 2.

 

·      Step 2: the Company consider the highest value among discounted cash flows using sales growth per store, averaging 4.1% (3.4% in 2017) for the next five years and discount rate of 10.1% (9.9% in 2017) or valuation reports prepared by independent experts for own stores.

 

b)   Impairment test of defined-life intangible assets

 

For the purposes of impairment testing, the goodwill and brands acquired through business combinations and licenses with indefinite duration was allocated to CGUs which are also operating segments that report information. The segments are: retail, cash and carry and e- commerce, with the latter two held for sale (Note 32).

 

The recoverable value of segments is calculated based on the value in use from cash projections deriving from financial budgets approved by Top Management for the next three years. The discount rate applied to cash flow projections is 10.1%, and cash flows exceeding the five-year period are extrapolated applying a growth rate of 5.5% for retail and wholesale (5.5% as on December 31, 2017). As a result of this analysis, GPA did not identify the need for recording provision for asset impairment.

 

The cash and carry wholesale brand refers to “ASSAÍ”, electronics and home appliance brands refer to “PONTO FRIO” and “CASAS BAHIA”. These brands were recorded upon the business combinations carried out with companies holding rights over them.

 

Via Varejo’s total consolidated net assets including Cnova Brasil, were valued as described in Note 32.

 

2)        Income taxes

 

Given the nature and complexity of the Group’s business, the differences between actual results and assumptions, or future changes to such assumptions, could result in future adjustments to already recorded tax revenue and expenses. GPA and its subsidiaries record provisions, based on reasonable estimates, for any taxes due. The amount of these provisions is based on various factors,  such  as  previous  tax  audits  and  different  interpretations  of  tax  regulations  by the

 

 


 

taxpayer and the appropriate tax authority. Such differences in interpretation may refer to a wide range of issues, depending on the conditions prevailing in the respective entity's domicile.

 

Deferred income and social contribution tax assets are recognized for all unused tax losses to  the extent that it is probable that taxable income will be available and tax credits can be offset. Significant Management judgment is required to determine the amount of deferred income and social contribution tax assets that can be recognized, based on income estimates and future taxable income, according to the strategic planning approved by the Board of Directors.

 

Company writes-off the potential deferred income tax and social contribution credits when fulfillment of the benefits cannot be justified. These losses do not expire; although their use is limited by law to 30% of taxable income for each year. The amounts relate to the Company and its subsidiaries that have tax planning opportunities for the use of these balances. Further details on taxes are disclosed in Note 20.

 

3)        Fair value of derivatives and other financial instruments

 

When the fair value of financial assets and liabilities recorded in the financial statements cannot be obtained in active markets, it is determined according to the hierarchy set by technical pronouncement CPC 46 (IFRS 13), which establishes certain valuation techniques, including the discounted cash flow model. The data for these models are obtained, whenever possible, from observable markets or from information on comparable operations and transactions in the market. The judgments include the analyses of data, such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors may affect the reported fair value of financial instruments.

 

The fair value of financial instruments actively traded on organized markets is determined based on market quotes and at the end of the reporting periods.

 

For financial instruments not actively traded, the fair value is based on valuation techniques defined by GPA and compatible with usual market practices. These techniques include the use of recent market arm’s length transactions, the benchmarking of the fair value of similar financial instruments, the analysis of discounted cash flows or other valuation models.

 

4)        Share-based Payment

 

GPA measures the costs of transactions with employees eligible to share-based remuneration based on the fair value of the equity instruments on the grant date. Estimating the fair value of share-based payment transactions requires determining the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs for the valuation model, including the expected useful life of the stock options, volatility and dividend yield, as well as making assumptions about them. The assumptions and models used to estimate the fair value of share-based payment transactions are disclosed in note 24.5.

 

5)     Provision for lawsuits

 

GPA and its subsidiaries are parties to several judicial and administrative proceedings (note 21), and provisions for legal claims are recognized for all cases representing reasonably estimated probable losses. The assessment of the likelihood of loss takes into account available evidence, the hierarchy of laws, former court decisions and their legal significance, the historical occurrence and amounts involved, and the opinion of external counsels.

 

6)     Estimated losses from doubtful accounts

 


 

 

The subsidiary Via Varejo calculates the estimated losses on the consumer financing (CDCI) portfolio using the credit analysis performed at the time of sale, as well as the subsequent portfolio maturity changes, from 60 days. Variations in unemployment are also observed in this estimate.

 

7)     Recoverable taxes

 

The Company and its subsidiaries have tax recoverable mainly related to ICMS, ICMS from Tax Substitution - ST, PIS and COFINS. The utilization of its taxes is made based on the projections prepared by Management, operational issues and the consumption of the credits by the companies in the group. Further details on credits and compensation, see note 11.

 

8)       Inventories

 

Inventories are measured by the lowest between the acquisition cost and its amount realizable, calculated by the average cost. The realizable net amount is calculated by the average sales price, deducted from: (i) taxes over sales, (ii) personnel expenses directly related to inventories,

(iii) purchase cost, and (iv) other costs necessary to bring the product in condition of sales. Inventories are reduced to its realizable value though the estimations of shrinkage, scrap, slow moving and obsolescence and estimation of merchandise that will be sold with negative gross margin, including for products displayed in the stores.

 

10.6          Material items not recorded in the financial statements

 

(a)           assets and liabilities held by GPA, directly and indirectly, not included in the balance sheet (off-balance sheet items)

 

a)  Operational lease

 

(i)      Minimum rental payments on agreement termination date

The Company analyzed and concluded that the rental agreements are cancelable during their duration. In case of termination, minimum termination payments will be due, which may vary from 1 to 12 times the monthly rental over the total amount of the remaining rental through the end of the agreement, as shown below:

 

 

Parent Company Consolidated

 

 12.31.2018

12.31.2017

12.31.2018

12.31.2017

Minimum rental payments

 

 

 

 

Minimum termination payments

367

356

411

392

Total

367

356

411

392

 

 

(ii)    Contingent payments

The Management considers additional rental payments as contingent payments, which vary between 0.1% and 4.5% of sales.

 
 

Parent Company

 

Consolidated

 

12.31.2018

 

12.31.2017

 

12.31.2018

 

12.31.2017

Expenses (revenues) in the year:

             
               

Non-contingent and contingent payments

762

 

743

 

982

 

937

Sublease agreements (*)

-177

 

-166

 

-191

 

-174

               

(*) Refers mainly to lease agreements receivable from commercial galleries.

 


 

b)             Finance lease

Finance lease agreements were as follows:

Note: The adoption of CPC 06/IFRS 16 as of January 1, 2019 is explained in item 10.4 of this reference form or note 6 to the financial statements.

 

Parent Company

 

Consolidated

 

12.31.2018

12.31.2017

 

12.31.2018

12.31.2017

Finance lease liability –minimum rental payments:

 

 

 

 

 

Up to 1 year

30

46

 

35

51

1 - 5 years

90

110

 

92

117

Over 5 years

23

25

 

25

27

Present value of finance lease agreements

143

181

 

152

195

Future financing charges

163

175

 

172

185

Gross amount of finance lease agreements

306

356

 

324

380

 

(ii)          derecognized receivables portfolios over which the entity maintains risks and responsibilities, indicating respective liabilities;

The Management clarifies that there are no receivables portfolio over which the entity maintains risks and responsibilities not provided in the Company’s balance sheet for December 31, 2018 or December 31, 2017.

(iii)        futures contracts for the purchase or sale of products or services;

The Management clarifies that there are no futures contracts for the purchase or sale of products or services not provided in the Company’s balance sheet for December 31, 2018 or December 31, 2017.

(iv)         unfinished construction agreements

The Management clarifies that there are no unfinished construction agreements not provided in the Company’s balance sheet for December 31, 2018 or December 31, 2017.

(v)           future loan agreement

The Management clarifies that there are no future loan agreements not provided in the Company’s balance sheet for December 31, 2018 or December 31, 2017.

 

 

(b)           Other items were not evidenced in the financial statements

 

There are no other items not provided in the financial statements, except those mentioned in item 10.6(a) above.

 

10.7            Comments on items not recorded in the financial statements

 

(a)           how these items alter or may change revenues, expenses, result of operations, financial expenses or other items of GPA’s financial statements;

 

In accordance with current accounting rules, GPA discloses in its consolidated financial statements all relevant transactions which it is part, or holds any risk in reason of any equity or agreement. There are no transactions or operations not disclosed in the financial statements that could significantly impact GPA.

 

(b)           nature and purpose of the operation;

 

Not applicable.

 

(c)            nature and amount of the obligations assumed and the rights generated on GPA’s behalf as a result of the operation.

 

Not applicable.

 

10.8            Business Plan

 

(a)           capital expenditure

 

(i)  quantitative and qualitative description of ongoing and planned investments

 

The Investment Plan for Multivarejo, GPA Malls and Assaí for 2019 amounts up to 1.8 billion for (i) conversion, opening and remodeling of stores; and (ii) infrastructure in IT, logistics and other efficiency improvement projects.

 

This amount does not include the Investment Plan for Via Varejo and its subsidiaries.

 

(ii)  sources of financing for investments

Company raised funds for its operations and investments, mainly through its operating cash flow, reserve for expansion, capital budget, bank loans, sale of receivables, financing from the BNDES and funding on the capital markets through the issue of debentures, Agribusiness Certificate of Receivables (CRA) and promissory notes.

 

(iii)  relevant divestments in progress and planned divestments

 

On November 23, 2016, the Board of Directors approved the divestment of the Company’s interest in Via Varejo, in line with the long-term strategy of focusing on developing the food sector.

 

In 2018, the Company actively worked to sell Via Varejo to potential strategic investors, but the sale was not concluded due to external factors beyond the Company’s control, which included the macroeconomic scenario. The Board of Directors expanded the alternatives for sale by determining that it should be concluded by December 31, 2019, including the possibility of selling a stake through transactions in the stock market.

 


 

(b)    provided that already disclosed, indicate the acquisition of plants, equipment, patents or other assets that may adversely affect our operating capacity

 

There are no events to disclose.

 

(c)   new products and services, indicating: (i) description of researches in progress; (ii) total amounts spent on research for development of new products or services; (iii) projects under development already disclosed; and (iv) total amounts spent on the development of new products or services.

 

Not applicable.

 

10.9          Other factors with significant influence

 

GPA is not aware of any other factors that may adversely affect its operating performance which have neither been identified nor discussed in other items of this section 10.

 

********************


 

 

II.              ALLOCATION OF INCOME FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018

 

The Company's Management proposes that the result for the fiscal year ended on December 31, 2018 should have the following destination, as detailed in accordance with Annex 9-1-II of ICVM 481/09, in compliance with the provisions of article 9, section II, ICVM 481/09:

 

Annex 3(A)II

Result for the fiscal year ended on December 31, 2018

(Annex 9-1-II of ICVM 481/09)

 

1.                  Provide the net profit of the fiscal year:

R$ 1,193,267,188.67

 

2.                  Provide the total amount and the amount per share of the dividends, including prepaid dividends and interest on net equity (i.e., this is a peculiar Brazilian type of 'interest on net equity') already declared:

 

As detailed in the table below, the total amount of interest on net equity paid up to the present proposal is of R$ 261,346,319.71. Out of this total amount, the Board of Directors approved in 2018 at meetings of April 26, September 27 and November 29, subject to a later approval by the Annual Shareholders' Meeting, the payment of interest on net equity, on account of the mandatory minimum dividend per annum, and the net amount paid to shareholders was of R$ 224,746,312.11.

 

Likewise, at the meeting held on March 25, 2019 the Board of Directors also approved a new payment of interests on net equity, subject to a later approval by the Annual General Meeting, in the net amount of R$ 165,012,463.34, also on account and order of the annual minimum mandatory dividend, thus totaling the mandatory minimum dividends of R$ 389,758,775.45 ascertained in the fiscal year ended on December 31, 2018.

 

Stated event

BDM of Apr. 26, 2018

BDM of Sep. 27, 2018

BDM of Nov. 29, 2018

BDM of Mar. 25, 2019

Earnings

Interest on net equity

Interest on net equity

Interest on net equity

Interest on net

equity

 

 

 

Amount distributed

R$ 74,907,574.37

(of which R$ 64,220,770.95 is the net amount distributed after withheld income tax was deducted)

R$ 115,000,000.00

(of which R$ 98,837,068.53 is the net amount distributed after deduction of withheld income tax)

R$ 71,438,745.34

(of which R$ 61,688,472.63 is the

net amount distributed after deduction of withheld income tax)

R$ 192,434,359.58

(of which R$ 165,012,463.34 is

the net amount distributed after deduction of

withheld income tax) 1

Gross amount per share

Common share

R$ 0.2646266644

R$ 0.405994209

R$ 0.252186044

R$ 0.679223778

Preferred

share

R$ 0.2910893309

R$ 0.446593630

R$ 0.277404648

R$ 0.747146155

Period of calculation

Q1 / 2018

Q2 / 2018

Q3 / 2018

Q4 / 2018

Shareholder base for distribution

May 3, 2018

October 2, 2018

Dec. 4, 2018

Mar. 28, 2019

 

 


 

 

 

Start Date of 'ex lege' negotiations

May 4, 2018

October 3, 2018

Dec. 5, 2018

Mar. 29, 2019

Date of payment to shareholders

June 12, 2018

Nov. 27, 2018

Dec. 13, 2018

May 22, 2019

(1) Such amount corresponds to an estimated value, as the shareholder base subject to this benefit can have some shareholders exempted from paying withheld income tax (IRRF).

 

3.                  Provide the percentage of distributed net profit for the year

35%

 

4.                  Provide the total amount and the amount per share of dividends distributed based on profit of previous years

Not applicable

 

5.                  Provide, after deducting the prepaid dividends and interest on net equity already stated:

 

a.                  The gross amount of dividends and interest on net equity, in a segregated manner, per share of each type and class

Not applicable.

 

b.                  The form and term of payment of dividends and interest on net equity

See table in section 2 above.

 

c.                  Possible interest rate for monetary updating, and interest on dividends, and interest on net equity

Not applicable.

 

d.                  Date of the statement of payment of dividends and interest on net equity considered to identify the shareholders that will be entitled to receive such amounts

See table in section 2 above.

 

6.                  In the event that there has been any statement of dividends or interest on net equity based on profits found in semiannual balance sheets or in shorter periods

 

a.                  Provide the amount of dividends or interest on net equity already stated

See the calculation period contained on the table of section 2 hereinabove.

 

b.                  Enter the date of the corresponding payments

See table in section 2 above.

 

7.                  Provide a comparative table showing the following amounts per share of each type and class:

 

a.                  Net profit for this fiscal year and the previous three (3) years

b.                  Dividends and interests on net equity distributed in the previous three (3) years

 

 


 

 

 

2016

2017

2018

Net profit for the year

n/a

R$ 618,599,356.05

R$ 1,193,267,188.67

Total dividends

distributed

n/a

R$ 146,917,347.06

R$ 389,758,775.45

Dividend referring to

the Preferred Shares

n/a

R$ 0.571136903

R$ 1.513607835

Dividend regarding

Common Shares

n/a

R$ 0.519215367

R$ 1.376007123

 

8.                  In case any profit is allocated to the legal reserve

 

a.                  Provide the amount allocated to the legal reserve

R$ 59,663,359.43

 

b.                  Detail how the legal reserve is calculated

Net profit: R$ 1,193,267,188.67

Legal Reserve (5% of Net Profit): R$ 59,663,359.43

 

9.                  In case the company holds preferred shares entitled to fixed or minimum  dividends

 

a.                  Describe the form of calculations of fixed or minimum dividends

The holders of Company's preferred shares have priority in receiving a minimum annual dividend in the amount of R$ 0.08 per 1 (one) share, not cumulative. In addition, each preferred share is assigned a 10% (ten percent) dividend higher than the one allocated to each common share, in compliance with the provisions of art. 17, paragraph 1, of Brazilian Law 6404/76, as amended, including, for the purposes of such calculation to reach the total dividend paid to the preferred shares, the amount paid as a minimum annual dividend.

 

b.                  Inform if the profit for the fiscal year is sufficient for the full payment of the fixed or minimum dividends

Yes, it is enough for that purpose.

 

c.                  Inform if any unpaid portion is cumulative

There is no unpaid portion of fixed or minimum dividends.

 

d.                  Inform the total amount of the fixed or minimum dividends to be paid to each class of preferred shares

 

 

Preferred shares

Total amount of dividends paid to holders of

preferred shares

R$ 252,598,590.46

 

e.                  Inform the fixed or minimum dividends to be paid per preferred share of each class

 

 

Preferred shares

Amount of dividends paid to each preferred

share

R$ 1.513607835

 

 


 

10.                  As regards the mandatory dividend

a.                  Describe the form of calculation provided for in the bylaws

Pursuant to Article 36, paragraph 1 of the Company's Bylaws, shareholders will be entitled to receive, in every fiscal year, as dividends, a mandatory percentage of 25% (twenty-five percent) of the Company's net profit in the corresponding fiscal year, with the following adjustments: (a) the decrease of amounts allocated, in that fiscal year, to create the legal reserve and contingencies reserve; and (b) the increase of the amounts resulting from the reversal, in that fiscal year, of reserves for contingencies previously created.

The payment of the dividend set forth by the previous paragraph may be limited to the net profit amount for the fiscal year that has been ascertained pursuant to the law, provided that such difference is recorded as a reserve of unrealized profits.

Profits recorded in the unrealized profits reserve, when realized and if they have not been absorbed by losses in subsequent years, shall be added to the first dividend stated after such profit realization.

b.                  Inform if it is being paid in full

The mandatory dividend will be paid in full in the form of interest on net equity.

c.                  Inform the amount possibly withheld

Not applicable.

11.                  If there is a mandatory dividend retention due to the Company's financial condition

a.                  Inform the amount withheld

Not applicable.

b.                  Describe, in detail, the Company's financial condition, including aspects related to liquidity analysis, working capital and positive cash flows

Not applicable.

c.                  Justify any dividends withheld

Not applicable.

12.                  If there is any profit allocation to contingencies reserve

a.                  Provide the amount allocated to such reserve

Not applicable.

 


 

b.                  Inform the probable loss and its cause

Not applicable.

 

c.                  Explain why the loss was considered probable

Not applicable.

 

d.                  Justify the creation of the reserve

Not applicable.

 

13.                  If there is any allocation of profit to the unrealized profits reserve

 

a.                  Inform the amount allocated to the unrealized profits reserve

Not applicable.

 

b.                  Inform the type of unrealized profits that gave rise to the reserve

Not applicable.

 

14.                  If there is any allocation of profits to statutory reserves

 

a.                  Describe the statutory clauses that set forth such reserve(s)

The Reserve for Expansion, described in Article 36, paragraph 2 of the Bylaws, is intended to provide funds to finance additional investments in fixed and working capital, and will be created with up to 100% of the net profit remaining after the allocations referred to in subparagraphs "a", "b" and "c" of section IV of Article 36 of the Bylaws, and the total of this reserve may not exceed the amount of the Company's capital stock.

 

b.                  Provide the amount allocated to such reserve

R$ 670,107,543.79

 

c.                  Describe how such amount was calculated

 

Expansion Reserve = Net Profit - Legal Reserve - Tax Incentives Reserve - Interest on net equity

 

In which:

Net profit: R$ 1,193,267,188.67
Legal Reserve: R$ 59,663,359.43

Tax Incentive Reserve: R$ 9,715,606.16
Interest on net equity: R$ 453,780,679.29

 

15.                  If there is any retained earnings foreseen in capital budget

 

a.                  Inform the retained amount

 


 

Not applicable.

 

b.                  Inform a copy of capital budget

Not applicable.

 

16.                  If there is any allocation of earnings to the tax incentive reserve

 

a.                  Inform the amount allocated to such reserve

R$ 9,715,606.16

 

b.                  Explain the type of such allocation

It is suggested to allocate to the Tax Incentive Reserve, pursuant to Art. 195-A of Brazilian Law No. 6.404/1976 the total amount of R$ 9,715,606.16, originated in 2018, regarding tax incentives of ICMS (tax on sales) granted by the State of Pernambuco to the Company, to foster business activities in that region.

 

********************

 


 

III.              PROPOSED GLOBAL REMUNERATION OF MANAGEMENT AND FISCAL COUNCIL MEMBERS

 

For fiscal year 2019, the Company's management proposes that the global compensation of the Management and Fiscal Council members, in case shareholders require such council to be established, in the total amount of R$ 85,610,779.96, distributed as follows:

 

I.                   Board of Executive Officers: up to R$ 64,040,550.64, highlighting that this amount includes the expenses arising from labor agreements entered into with such Officers regarding the Company's Stock Option Plans, which are not considered as compensation for the purposes of Brazilian labor laws.

 

II.                 Board of Directors: up to R$ 20,749,429.33

 

III.              Fiscal Council: up to R$ 820,800.00.

 

In addition, pursuant to article 12, subparagraph II of CVM Instruction 481/09, the Company submits the information as set forth by section 13 of the Reference Form, pursuant to section 13, Annex 24 of CVM Instruction 480/09:

 

Annex 3(A)III

Proposed Global Remuneration of Management and Fiscal Council members

(Section 13 of the Reference Form)

 

13. Management compensation

 

13.1 - Description of compensation policy or practice, including of Non-Statutory Board of Executive Officers

 

(a)   purposes of the compensation policy or practice, informing if the compensation policy was formally approved, the body responsible for its approval, the date of approval and, if the issuer discloses the policy, the websites in which the document can be consulted

 

The purpose of our compensation policy or practice is to compensate our executives and members of committees of our Company, according the market practices, allowing the attraction and retention of qualified professionals and the engagement with our Company.

 

The compensation policy in effect was approved by the Board of Directors on April 26, 2018.

 

(b)   composition of compensation, indicating:

 

i.            description of the compensation elements and each one’s purposes

The members of our Board of Directors and committees, including the external members, as well as the members of the Fiscal Council receive a fixed monthly compensation, dissociated from the actual participation in meetings. This form of compensation is aligned with the general market practices and to the Company’s interests. The Stock Option Plans and stock-based compensation described in item 13.4 of the Formulário de Referência may be extended to the members of the Board of Directors of the Company. Exceptionally, in the year of 2016, due to

 


 

two specific extraordinary events, there was a bonus payment to certain members of our Board of Directors and committees of the Company.

 

a)      certain members of the Board of Directors established the Special Independent Committee, created pursuant to the Company’s Related Parties Transaction Policy (whose principles reflect on general guidance from the Orientation Opinion No. 35 of this CVM), with the purpose to analyze the project for potential integration of e- commerce business developed by Cnova Comércio Eletrônico S.A., which is a subsidiary of Cnova N.V., corporation controlled by the Company, for the business developed by Via Varejo, the integration occurred in October, 2016; and

 

b)      members of the Audit Committee acted on and followed up the external investigation procedure that was conducted at Cnova Comércio Eletrônico S.A., which resulted in the restatement of the ITR of the first quarter of 2016, as broadly disclosed through Material Fact of July 26, 2016.

 

Our Officers’ compensation is comprised by the following elements: (i) fixed compensation as a Base Salary, with the purpose to maintain the balance with the general market practices; (ii) profit sharing, with the purpose to encourage professionals to seek Company’s success, who benefits from these results; and (iii) a Stock Option Plan and a Compensation Plan based on stock options, which comprise an incentive to executives to ensure a long-term sustainable business.

 

The Officers also receive a benefit package aligned with the market practices, including a medical care plan, a dental expenses reimbursement plan, bi-annual medical check-up, private pension plan, food voucher, fuel voucher and parking at the workplace. Compensation policy for members of the Company’s management allows such benefits to be extended to the members of the Board of Directors.

 

ii.              proportion of each element in the total compensation

 

The table below presents the proportion of each element in the composition of the total compensation in the previous fiscal years:

 

For the Year Ended December 31, 2018

 

% compared to total compensation

 

Base Salary

Direct and

Indirect Benefits

Variable Compensation

Stock Option Plans

Total

Board of Directors

85,1%

14,9%

0,0%

0,0%

100,0%

Board of

Executive Officers

 

45,5%

 

2,8%

 

18,4%

 

33,3%

 

100,0%

Fiscal Council

100,0%

0,0%

0,0%

0,0%

100,0%

 

For the Year Ended December 31, 2017

 

% compared to total compensation

 

Base Salary

Direct and
Indirect Benefits

Variable
Compensati on

Stock Option Plans

Total

 

Board of Directors

100,%

0,0%

0,0%

0,0%

100,0%

Board of Executive

Officers

 

32,0%

 

6,0%

 

32,5%

 

29,5%

 

100,0%

Fiscal

Council

100,%

0,0%

0,0%

0,0%

100,0%

 


 

For the Year Ended December 31, 2016:

% compared to total compensation

 

Base Salary

Direct and Indirect
Benefits

Variable Compensation

Stock Option Plans

Total

Board of Directors

81.1%

0.0%

18.9%

0.0%

100.0%

Board of

Executive Officers

 

32.5%

 

7.2%

 

25.4%

 

35.0%

 

100.0%

Fiscal

Council

0.0%

0.0%

0.0%

0.0%

0.0%

 

iii.                methodology of calculation and adjustment of each element of the compensation

In order to establish the compensation of executives the Company often performs market researches, in a way to assess if the criteria and conditions that it has adopted to establish the compensation are satisfactory and if they allow the retention of its professionals, as well as to analyze the need to propose adjustments in any compensation element that may be misaligned. Such researches are annually performed by a well-known expert advisory firm hired by us, and they are based on the average value practiced in the main business groups in the country.

After the conclusion of the research, the consulting firm suggests compensation parameters and strategies, which are sent to the area responsible for establishing the compensation structure for management and key personnel, including non-statutory officers and holders of other strategic positions that do not make up statutory management.

The Company has an area dedicated to compensation-related issues, which evaluates structures and recommends the best practices. These recommendations are submitted to the Human Resources and Compensation Committee, which submits and deliberates on topics related to compensation of the Statutory and Non-statutory Board of Executive Officers.

After the compensation structure is approved by the Human Resources and Compensation Committee, the Board of Directors prepares the Management Proposal and submits it to shareholders to discuss and vote on the overall management compensation, always for each body.

The variable compensation of executive officers is mainly based on the concept of profit- sharing through the achievement and surpassing of targets. The calculation is based on indicators aligned with the Company’s strategic plan, defined based on the business plan and on the results to be achieved by the Company, such as Revenue, EBITDA, Expenses and Net Income, as mentioned in item 13.1.c. Variable compensation is, therefore, linked to the performance of the Company and the manager.

 


 

For more information on our Stock Option Plans and our stock-based compensation, see item 13.4 below.

 

iv.                reasons that justify compensation composition

 

The grounds of Company’s compensation policy composition is focus on results, which depends on the continuous pursuit of the best talents, competent, skilled, dedicated and valuable professionals for our Company.

 

When analyzing the total compensation amount of a member of the Board of Executive Officers it is necessary to point out that the Company approves the compensation policy in a form to ensure that the amount perceived by the members of the Board of Directors is aligned with the companies to which we compare ourselves (largest economic groups in Brazil) and, equivalent to the total compensation of the 10% best payers in Brazil, according to the result of the previous mentioned research.

 

v.            existence of members who were not compensated by the issuer and the reason for this fact

 

The Chairman of the Board of Directors does not receive any type of compensation, since he waived his right to receive.

 

(c)   main performance indicators that are taken into consideration in determining each element of compensation

 

Aiming to comply with the purposes of the compensation policy, which is to compensate according to the market practices (measured through Top Exec Research from Kom Ferry, which uses as compensation parameters the greatest economic groups acting in the country), making it possible to attract and retain the best talents seeking excellence, each compensation element takes into account the following performance indicators at its establishment:

 

·         Fixed compensation (Base Salary and Direct and Indirect Benefits): established based on competitive compensation structures, which take into account the know-how, problem solutions and responsibility of each position. We organize our structure by salary grids and the respective average salaries by each of such grids, seeking alignment with the market’s salary average point.

 

·         Variable Compensation: we comply with the performance indicators aligned with the Company’s strategic planning, established based on Company’s business plan and on the results to be achieved: Net Sales, Net Margin, General Administrative Expenses and Sale Expenses, EBITDA, Net Profit, Sustainability Index (% of Disabled Employees; % of Women in Leadership; Energy Consumption), Number of Tickets (transactions) and Market Share. Such indicators compose the target panel that is divided into Group targets (40%), Individual / Area Targets (40%) and Managerial Behaviors (20%).

The results of the Group's indicators and individual indicators are measured according to the minimum, target and maximum achievements, established and approved, respectively, by the Human Resources and Compensation Committee and the Board of Directors. The average of these results will define the percentage to be applied on the variable target compensation of each manager.

 

To assess and establish the Variable Compensation, the Company uses the method named Performance Score (internally aligned with the purposes outlined by Grupo Pão de Açúcar (“GPA”) and its subsidiaries), such method was also used in 2018 for all of the Company’s employees of intermediate leadership level.

 


 

·         Stock-based compensation: information on criteria and characteristics of the stock based compensation are provided in item 13.4 of the Formulário de Referência.

 

(d)   how compensation is structured to reflect the performance indicators evolution

 

The Company structures its compensation through programs monitoring the fulfillment of targets that have been previously established and the actual achieved results.

 

(e)   how the policy or compensation practice is aligned with the short, medium and long term interests of the Company

 

In order to align the Board of Executive Officers with the Company’s purposes in a short and medium-term perspective, we offer a fixed compensation (Base Salary) to Officers and, in addition, an installment of Variable Compensation, to be paid as profit sharing. Moreover, we offer to executives a Stock Option Plan and a Stock-Based Compensation Plan that, due to certain characteristics such as vesting periods and lock-up period for the acquired shares, maintain the Board of Executive Officers aligned with the Company’s purposes on a long-term perspective. It is important to point out, that the Stock Option Plan, the Stock-Based Compensation Plan and the profit sharing compose the Variable Compensation of the Board of Executive Officers.

 

The compensation of the members of our Board of Directors, Fiscal Council and committees of the Company is adjusted based on the amount that is usually paid by the market, encouraging such professional to maintain the excellence in the exercise of their duties and the continuous pursuit to improve results. The Stock Option Plans and the Stock-Based Compensation Plan described in item 13.4 may be extended to the members of the Company’s Board of Directors. In this regard, we understand that the compensation policy and practice match our short, medium and long-term interests.

 

(f)    existence of compensation supported by subsidiaries or companies under direct or indirect control

 

The compensation of managers and members of committees is exclusively supported by the Company.

 

(g)   existence of any compensation or benefit bound to the occurrence of a certain corporate event, such as disposal of the Company’s corporate control

 

There is no compensation or benefit ensured to our managers or members of our committees that are bound to the occurrence of corporate events.

 

(h)    practices and procedures adopted by the board of directors to define the individual compensation of the board of directors and the board of executive officers, indicating:

i.               the bodies and committees of the issuer participating in the decision-making process, identifying how they participate

ii.               criteria and methodology used to fix the individual compensation, indicating if studies are used to verify market practices and, if yes, the comparison criteria and scope of these studies

iii.                with what frequency and how the management evaluates the adequacy of the issuer’s compensation policy

 

As indicated in item 13.1.b.iii above, the Company conducts annual surveys through renowned specialist consulting firms to analyze the average compensation in the main economic groups

 


 

with operations in Brazil. After this information is analyzed, a compensation proposal is prepared based on the level of dedication and performance of each director and submitted to the Board of Directors of the Company’s for approval and final validation.

 

The Human Resources and Compensation Committee and the Board of Directors evaluate the adequacy of the compensation paid annually, in accordance with the survey conducted by the specialized consulting firm engaged by the Company.

 

13.2  - Total compensation of the board of directors, statutory board of executive officers and fiscal council

 

Total compensation projected for the current Fiscal Year 12/31/2019 - Annual Amounts

 

 

 

Board of Directors

Statutory Board of

Executive Officers

 

 

Fiscal Council

 

 

Total

Number of members

13.00

6.00

3.00

22.00

Number of members receiving

compensation

12.00

6.00

3.00

21.00

Annual Fixed Compensation

 

 

 

 

Salary or pro-labore

11,611,102.16

28,572,735.87

684,000.00

40,867,838.03

Direct and indirect benefits

3,244,373.82

1,596,763.82

-

4,841,137.63

Participation in committees

-

-

-

0

Other

3,458,395.35

2,740,573.68

136,800.00

6,335,769.03

Description of other fixed

compensation

INSS

INSS

INSS

 

Variable Compensation

 

 

 

 

Bonus

-

-

-

-

Profit Sharing

-

13,376,392.27

-

13,376,392.27

Participation in Meetings

-

-

-

-

Commissions

-

-

-

-

Other

-

-

-

-

Description of other variable

compensation

 

 

 

 

Post-Employment

-

-

-

-

Cessation of position

-

-

-

-

Stock-based compensation

2,435,558

17,754,085.00

-

20,189,643.00

 

 

Note

The total number of members of each body and the total number of members receiving compensation of each body has been calculated as described in item 10.2.13.b of the OFFICIAL-CIRCULAR/CVM/SEP/Nº 03/2019.

Total Compensation

20,749,429.33

64,040,550.64

820,800.00

85,610,779.96

 


 

 

 

Total compensation of the Fiscal Year as of 12/2018 - Annual Amounts

 

 

Board of Directors

Statutory Board of Executive Officers

 

 

Fiscal Council

 

 

Total

Number of members

13.33

5.42

1.00

18.75

Number of members receiving

compensation

12.33

5.42

1.00

17.75

Annual Fixed Compensation

 

 

 

 

Salary or pro-labore

9,376,179.12

37,267,214.67

228,000.00

46,871,393.79

Direct and indirect benefits

1,640,961.27

2,315,308.11

-

3,956,269.38

Participation in committees

-

-

-

-

Other

1,239,187.04

3,112,563.85

-

4,351,750.88

Description of other fixed compensation

INSS

INSS

INSS

INSS

Variable Compensation

 

 

 

 

Bonus

-

-

-

-

Profit Sharing

-

15,082,579.74

-

15,082,579.74

Participation in Meetings

-

-

-

-

Commissions

-

-

-

-

Other

-

-

-

-

Description of other variable

compensation

 

 

 

 

Post-Employment

-

-

-

-

Cessation of position

-

-

-

-

Stock-based compensation

-

29,267,000.00

-

29,267,000.00

 

 

Note

The total number of members of each body and the total number of members receiving compensation of each body has been calculated as described in item 10.2.13.b of the OFFICIAL-CIRCULAR/CVM/SEP/Nº

03/2019.

Total Compensation

12,256,327.43

87.044.666,37

228,000.00

99.528.993,79

 

Total compensation of the Fiscal Year as of 12/31/2017 - Annual Amounts

 

 

Board of Directors

Statutory Board

of Executive Officers

 

 

Fiscal Council

 

 

Total

Number of members

16.08

6.75

2.00

24.83

Number of members receiving

compensation

15.08

6.75

2.00

23.83

Annual Fixed Compensation

 

 

 

 

Salary or pro-labore

5,797,408.00

26,434,798.61

456,000.00

32,688,206.61

Direct and indirect benefits

-

4,973,165.36

-

4,973,165.36

Participation in committees

-

-

-

-

Other

-

5,286,959.72

-

5,286,959.72

Description of other fixed

compensation

 

INSS

 

INSS

Variable Compensation

 

 

 

 

Bonus

-

-

-

-

Profit Sharing

-

26,813,554.68

-

26,813,554.68

Participation in Meetings

-

-

-

-

Commissions

-

-

-

-

Other

-

-

-

-

Description of other variable

compensation

 

 

 

 

Post-Employment

-

-

-

-

Cessation of position

-

-

-

-

Stock-based compensation

-

24,405,000.00

-

24,405,000.00

 

 

Note

The total number of members of each body and the total number of members receiving compensation of each body has been calculated as described in item 10.2.13.b of the OFFICIAL-CIRCULAR/CVM/SEP/Nº 03/2019.

Total Compensation

5,797,408.00

87,913,478.37

456,000.00

94,166,886.37

 

 


 

 

Total compensation of the Fiscal Year as of 12/31/2016 - Annual Amounts

 

 

Board of Directors

Statutory Board

of Executive Officers

 

 

Fiscal Council

 

 

Total

Number of members

14.58

6.83

-

21.41

Number of members receiving

compensation

13.58

6.83

-

20.41

Annual Fixed Compensation

 

 

 

 

Salary or pro-labore

5,778,338.00

21,322,917.00

-

27,101,255.00

Direct and indirect benefits

-

4,712,181.00

-

4,712,181.00

Participation in committees

-

-

-

-

Other

-

4,488,555.00

-

4,488,555.00

Description of other fixed

compensation

 

INSS

 

INSS

Variable Compensation

 

 

 

 

Bonus

1,350,000.00

-

-

1,350,000.00

Profit Sharing

-

16,684,368.00

-

16,684,368.00

Participation in Meetings

-

-

-

-

Commissions

-

-

-

-

Other

-

-

-

-

Description of other variable

compensation

 

 

 

 

Post-Employment

-

-

-

-

Cessation of position

-

-

-

-

Stock-based compensation

-

23,112,124.00

-

23,112,124.00

 

 

Note

The total number of members of each body and the total number of members receiving compensation of each body has been calculated as described in item 10.2.13.b of the OFFICIAL-CIRCULAR/CVM/SEP/Nº 03/2019.

Total Compensation

7,128,338.00

70,320,145.00

-

77,448,483.00

 

13.3   - Variable compensation of the Board of Directors, Executive Board and Fiscal Council

 

The members of the Board of Directors and Fiscal Council, when and if established, do not receive Variable Compensation for the exercise of their positions, except for the bonus paid, on

 

 


 

an exceptional basis, to certain members of the Board of Directors and committees for their specific performance in certain extraordinary projects during the year of 2016, as described in chapter 13.1 above.

 

The table below presents the Variable Compensation of the members of the Board of Directors and Board of Executive Officers estimated for payment in 2019 and paid for the years of 2018, 2017 and 2016.

 

Amounts estimated for the year 2019:

 

(Amounts in R$, as applicable)

Board of Executive Officers

Number of members

6.00

Number of members receiving

compensation

6.00

Bonus

 

Minimum estimated amount 

0

Maximum estimated amount 

0

Estimated amount – targets

achieved

0

Profit Sharing

 

Minimum estimated amount 

0

Maximum estimated amount 

26,752,785

Estimated amount – targets

  achieved                            

13,376,392

 

Amounts paid for the year 2018:

 

(Amounts in R$, as applicable)

Board of

Executive Officers

Number of members

5.42

Number of members receiving

compensation

5.42

Bonus

 

Minimum estimated amount 

0

Maximum estimated amount 

0

Estimated amount – targets

achieved

0

Profit Sharing

 

Minimum estimated amount 

0

Maximum estimated amount 

29,976,392

Estimated amount – targets

achieved

14,988,196

        Amount effectively recognized      

15,082,580

 

 

Amounts paid for the year 2017:

 

(Amounts in R$, as applicable)

Board of Executive

Officers

Number of members

6.75

Number of members receiving compensation

6.75

 

 


 

 

 

Bonus

 

Minimum estimated amount 

0

Maximum estimated amount 

0

Estimated amount – targets

achieved

0

Profit Sharing

 

Minimum estimated amount 

0

Maximum estimated amount 

45,670,882

Estimated amount – targets

achieved

22,835,441

Amount effectively recognized

26,813,555

 

 

Amounts paid for the year 2016:

 

(Amounts in R$, as applicable)

Board of Directors

Board of

Executive Officers

Number of members

14.58

6.83

Number of members receiving

compensation

13.58

6.83

Bonus

 

 

Minimum estimated amount 

0

0

Maximum estimated amount 

0

0

Estimated amount – targets

achieved

0

0

Amount effectively recognized 

R$ 1,350,000

0

Profit Sharing

 

 

Minimum estimated amount 

0

0

Maximum estimated amount 

0

R$ 60,050,712

Estimated amount – targets

achieved

0

R$ 30,025,356

Amount effectively recognized

0

R$ 16,684,368

 

13.4  – Compensation plan based in stocks of the Board of Directors and Statutory Board of Executive Officers

 

On May 9, 2014, our shareholders approved at an Extraordinary General Meeting (i) the discontinuance of the Stock Option Plan "Shares with Sugar" ("Old Stock Option Plan"), approved at an Extraordinary General Meeting held on December 20, 2006, for new stock option grants, without loss to already granted options, which remained in effect under the same terms and conditions; (ii) the creation of the Stock Option Plan and its respective standard grant agreement (“Stock Option Plan”); and (iii) the creation of the Stock Option Compensation Plan and its respective standard grant agreement ("Compensation Plan" and, together with the Old Stock Option Plan and the Stock Option Plan, the "Plans"). The Extraordinary and Annual General Meeting held on April 24, 2015 also approved amendments to the Stock Option Plan and the Compensation Plan.

 

The section below describes the Plans that had options in effect as of December 31, 2018:

 

COMPENSATION PLAN

 

a.                  general terms and conditions

 


 

The Compensation Plan will be managed by the Company's Board of Directors, which established the Company's Human Resources and Compensation Committee to advise on the management of the Compensation Plan ("Committee").

 

The members of the Committee shall meet in order to grant stock options of the Compensation Plan series and, whenever necessary, to make decisions on issues raised with regard to the Compensation Plan.

 

Each series of granted options shall have the letter "B" followed by a number. In the fiscal year ended December 31, 2018, options granted in Series B3, B4 and B5 of the Compensation Plan were in effect.

 

The employees and executives of the Company are eligible to participate in the Compensation Plan, it being understood that the employees and executives of the companies belonging to GPA considered key executives ("Participant") may also participate, all being subject to the approval of the Board of Directors or Committee, as applicable.

 

Participation in the Compensation Plan does not affect the income to which the Participant is entitled as an employee and/or executive of the Company, such as salary, fees, pro-labore, benefits, profit sharing and/or any other compensation.

 

b.                  main purposes of the plan

 

The Compensation Plan establishes the conditions for the Company to grant stock options to its executives and employees, with the purpose of: (i) attracting and keeping as members of the Company (or, as applicable, GPA companies) executives and highly qualified professionals; (ii) facilitating the participation of the Company’s executives and employees (or, as the case may be, of GPA companies) in its capital and in the equity increases arising from the results to which said executives and employees contributed; (iii) stimulating the achievement of the Company's objectives; and (iv) aligning the interests of the Company's executives and employees or of GPA's companies with those of its shareholders, thereby encouraging the performance of these professionals and ensuring their continuity in the Company's management.

 

c.                  how the plan contributes to such purposes

 

The Compensation Plan contributes to the Company's objectives by encouraging the alignment of its long-term interests with the interests of its senior executives to achieve higher performance and appreciation of the Company.

 

d.                  how the plan is inserted in the compensation policy of the issuer

 

The Company believes that by giving the Participants the possibility to act like investors, it encourages the participation of such Participants in its management so as to create value for the Company and its shareholders.

 

e.                    How the plan aligns the interests of management and of the issuer in the short, medium and long term

 

By means of the Compensation Plan, the Company seeks to stimulate improvement in its management, in an attempt to gain commitment to long-term results. The improvement of these results and the appreciation of the shares issued by Company, in turn, maximize the profits of the Participants acting as investors together with the other shareholders.

 

f.                    maximum number of shares affected

 


 

Stock options granted pursuant to the Compensation Plan may confer acquisition rights on a number of shares not exceeding two percent (2%) of the total preferred shares issued by the Company. The total number of shares issued or to be issued under the Compensation Plan is subject to adjustments due to splits, grouping and dividends.

 

g.                    maximum number of options to be granted

 

The maximum number of options to be granted is limited to the maximum number of shares contemplated by the Compensation Plan, as described in item (f) above.

 

Each stock option shall give the Participant the right to subscription or acquisition of one (1) preferred share issued by Company.

 

h.                    conditions for acquiring shares

 

The granting of stock options will be formalized by the signature between the Company and the Participant of the Stock option agreement, which shall specify the total number of shares subject to the respective option, the term and conditions for the effective acquisition of the right to exercise the option, the conditions for such exercise, the acquisition price and its payment conditions, in compliance with the Compensation Plan ("Stock Option Agreement").

 

For the purposes of the Compensation Plan, the date of the Committee's resolution on the series of options granted shall be the date on which the options shall be considered granted to the respective Participants, provided that the Participant, even if subsequent to the date of the Committee’s resolution, agrees to join the Compensation Plan with the formalization of the Stock Option Agreement ("Grant Date").

 

The Participant who wishes to exercise their call options shall communicate to the Company, in writing and during the Exercise Period (as set forth in item (i) below), its intention to do so, indicating the number of options it wishes to exercise. Said communication shall comply with the exercise term model attached to the respective Stock Option Agreement ("Stock Option Exercise Term").

 

The Participant may exercise its call options in whole or in part, on one or more occasions, provided that for each exercise the corresponding Stock Option Exercise Term is submitted during the Exercise Period.

 

i.                    criteria for setting the acquisition or exercise price

 

The Exercise Price of each stock option granted under the Compensation Plan shall correspond to one cent (R$ 0.01) ("Exercise Price").

 

j.                    criteria to set the exercise term

 

The options granted to a Participant shall not be exercisable for a period of thirty-six (36) months as from the Grant Date ("Grace Period"), and they may only be exercised in the period beginning on the first day of the thirty-seventh (37th) month counted from the Grant Date, and ending on the last day of the forty-second (42nd) month counted from the Grant Date ("Exercise Period"), except for the early exercise events pursuant to item (n) and applicable sub items below, or as authorized by the Committee pursuant to the Plan.

 

k.                  settlement method

 


 

By the 30th day of the month in which the Stock Option Exercise Term is submitted, the Company shall inform the respective Participant in writing: (i) the total exercise price to be paid, calculated by multiplying the Exercise Price by the number of options informed by the Participant on the Stock Option Exercise Term; (ii) the date of delivery to the Participant of the shares subject to the exercise of options ("Share Purchase Date"); (iii) the number of shares to be delivered to the Participant; and (iv) the period in which the Participant shall pay the total exercise price, in local currency, through a payroll deduction, and the deadline shall be the tenth (10th) day prior to the Share Purchase Date.

 

l.                    restrictions on share