Saraiva S.A. Livreiros Editores and Subsidiaries

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Saraiva S.A. Livreiros Editores and Subsidiaries Individual and Consolidated Financial Statements for the Year Ended December 31, 2011 and Independent Auditors Report Deloitte Touche Tohmatsu Auditores Independentes

2 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITORS REPORT To the Management and Shareholders of Saraiva S.A. Livreiros Editores São Paulo - SP We have audited the accompanying individual and consolidated financial statements of Saraiva S.A. Livreiros Editores ( Editora ) and subsidiaries, identified as Parent and Consolidated, respectively, which comprise the balance sheet as at December 31, 2011, and the income statement, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the individual financial statements in accordance with accounting practices adopted in Brazil and the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board - IASB, and in accordance with accounting practices adopted in Brazil, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conduct our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Editora s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Editora s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our audit opinion.

3 Deloitte Touche Tohmatsu Opinion on the individual financial statements In our opinion, the individual financial statements present fairly, in all material respects, the financial position of Saraiva S.A. Livreiros Editores as at December 31, 2011, and its financial performance and its cash flows for the year then ended in accordance with accounting practices adopted in Brazil. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Saraiva S.A. Livreiros Editores as at December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB and accounting practices adopted in Brazil. Emphasis of matter We draw attention to Note 2 to the financial statements, which states that the individual financial statements have been prepared in accordance with accounting practices adopted in Brazil. In the case of Editora these accounting practices differ from the IFRSs, applicable to separate financial statements, only with respect to the measurement of investments in subsidiaries by the equity method of accounting, which, for purposes of IFRS would be measured at cost or fair value. Our opinion is not qualified in respect of this matter. Other matters Statement of value added We have also audited the individual and consolidated statements of value added ( DVA ) for the year ended December 31, 2011, prepared under the responsibility of Management, the presentation of which is required by the Brazilian Corporate Law for publicly-traded companies, and as supplemental information for IFRS which does not require the presentation of a DVA. These statements were subject to the same auditing procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil. São Paulo, March 16, 2012 DELOITTE TOUCHE TOHMATSU Auditores Independentes Eduardo Franco Tenório Engagement Partner 2012 Deloitte Touche Tohmatsu. All rights reserved. 2

4 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES BALANCE SHEETS AS AT DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais - R$) Editora - Consolidated BR GAAP IFRS & BR GAAP ASSETS Note 12/31/11 12/31/10 12/31/11 12/31/10 ASSETS Cash and cash equivalents 5 84,624 58, ,609 65,991 Trade receivables 6 97,414 79, , ,908 Inventories 7 133, , , ,930 Recoverable taxes 8 8,477 6,904 81,961 63,907 Sundry receivables 13,405 11,597 20,308 15,340 Prepaid expenses Total current assets 337, , , ,455 NONCURRENT ASSETS Long-term assets: Intragroup loans 10.a) 52,310 16, Deferred income tax and social contribution 9.a) 1,897 1,776 43,044 39,015 Escrow deposits 20 15,428 16,126 28,667 28,740 Recoverable taxes ,258 17,888 Other ,665 34, ,413 85,838 Investments: In subsidiary , , In jointly-owned subsidiary Other Property, plant and equipment 12 36,930 34, , ,731 Intangible assets 13 9,518 7,167 51,993 27,621 Goodwill 14 14,596 14,596 77,267 77,267 Total noncurrent assets 407, , , ,022 TOTAL ASSETS 745, ,418 1,337,446 1,102,477 The accompanying notes are an integral part of these financial statements. 3

5 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES BALANCE SHEETS AS AT DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais - R$) Editora - Consolidated BR GAAP IFRS & BR GAAP LIABILITIES AND SHAREHOLDERS' EQUITY Note 12/31/11 12/31/10 12/31/11 12/31/10 CURRENT LIABILITIES Trade accounts payable 17 58,545 34, , ,076 Borrowings and financing 15 38,205 3, ,872 96,875 Accrued payroll and related charges 19 9,047 7,204 21,172 17,147 Taxes payable 18 5,168 5,071 7,729 9,649 Income tax and social contribution 4,254 4,161 4,254 4,161 Copyrights payable 25,057 18,117 25,768 18,828 Management profit sharing 10.b) 4,620 5,485 4,620 5,485 Dividends and interest on capital 21.c) 12,378 11,723 12,378 11,723 Deferred revenue - loyalty program ,701 7,615 Operating lease - store rentals ,367 8,727 Other payables 3,809 3,134 19,512 11,353 Total current liabilities 161,719 93, , ,639 NONCURRENT LIABILITIES Borrowings and financing 15 91,412 66, , ,137 Deferred income tax and social contribution 9.a) 17,349 15,377 47,577 37,043 Provision for contingencies 20 8,759 8,813 22,574 20,265 Taxes payable Other payables ,089 5,494 Total noncurrent liabilities 117,520 91, , ,374 EQUITY Capital 21.a) 203, , , ,978 Treasury shares 21.b) (4,923) (1,965) (4,923) (1,965) Earnings reserves 246, , , ,326 Valuation adjustments to equity 11,279 11,279 11,279 11,279 Proposed additional dividends 21.c) 9,420 7,795 9,420 7,795 Equity attributable to owners of the Company 466, , , ,413 Noncontrolling interest 21.g) Total equity 466, , , ,464 TOTAL LIABILITIES AND EQUITY 745, ,418 1,337,446 1,102,477 The accompanying notes are an integral part of these financial statements. 4

6 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais - R$, except earnings per share) Editora - Consolidated - BR GAAP IFRS & BR GAAP Note 12/31/11 12/31/10 12/31/11 12/31/10 NET OPERATING REVENUE , ,491 1,888,967 1,564,936 COST OF SALES 23 (170,176) (129,946) (1,085,598) (890,082) GROSS PROFIT 331, , , ,854 OPERATING (EXPENSES) INCOME Selling expenses 23 (166,050) (135,995) (493,301) (414,809) General and administrative expenses 23 (69,015) (60,022) (143,441) (121,206) Depreciation and amortization (5,698) (4,840) (32,961) (27,273) Equity in subsidiaries 11 5,908 4, Other operating expenses 24 (543) (1,623) (5,034) (7,243) Other operating income 25 1,117 2,210 10,960 12,961 (234,281) (195,316) (663,777) (557,570) OPERATING PROFIT BEFORE FINANCIAL INCOME (EXPENSES) 96,920 90, , ,284 FINANCIAL INCOME (EXPENSES) Financial income 26 6,418 4,097 5,365 3,337 Financial expenses 26 (18,334) (13,196) (55,298) (36,063) (11,916) (9,099) (49,933) (32,726) PROFIT BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 85,004 81,130 89,659 84,558 INCOME TAX AND SOCIAL CONTRIBUTION Current 9.b) (18,233) (18,687) (18,233) (19,305) Deferred 9.b) (1,851) (1,421) (6,505) (4,230) NET INCOME 64,920 61,022 64,921 61,023 Attributable to: Owners of the Company 64,920 61,022 Noncontrolling interest 21.g) ,921 61,023 EARNINGS PER SHARE - R$ Basic Diluted Editora does not have amounts to be disclosed as comprehensive income for the current and prior years. The accompanying notes are an integral part of these financial statements. 5

7 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2011 (In thousands of Brazilian reais - R$) Earnings reserve Attributable Total Reserve for Reserve for Valuation Proposed to the owners of shareholders' Treasury future capital stock option adjustments additional Retained Editora Noncontrolling equity Note Capital shares Legal increase plan to equity dividends earnings - BR GAAP interest - IFRS & BR GAAP BALANCES AS AT DECEMBER 31, ,978 (2,870) 21, ,424 2,206 11, , ,057 Net income ,022 61, ,023 Stock option plan 21.e) , ,234-1,234 Acquisition of noncontrolling interest 21.g) (13) (13) Sale of treasury shares 21.b) , ,656-2,656 Proposed allocation of net income: Legal reserve 21.d) - - 3, (3,051) Transfer to earnings reserve 21.f) , (35,683) Mandatory minimum dividend - interest on capital 21.c) (14,493) (14,493) - (14,493) Proposed additional dividends - interest on capital 21.c) ,795 (7,795) BALANCES AS AT DECEMBER 31, ,978 (1,965) 25, ,858 3,440 11,279 7, , ,464 Capital increase using reserves - EGM held on April 25 12, (12,675) Net income ,920 64, ,921 Stock option plan 21.e) Sale of treasury shares 21.b) , ,895-2,895 Acquisition of shares for holding in treasury 21.b) - (3,643) (3,643) - (3,643) Proposed allocation of net income: Legal reserve 21.d) - - 3, (3,246) Transfer to earnings reserve 21.f) , (36,835) Mandatory minimum dividend - interest on capital 21.c) (15,419) (15,419) - (15,419) Proposed additional dividends - interest on capital 21.c) ,420 (9,420) Additional dividends approved - EGM held on April c) (7,795) - (7,795) - (7,795) BALANCES AS AT DECEMBER 31, ,653 (4,923) 28, ,228 4,224 11,279 9, , ,207 The accompanying notes are an integral part of these financial statements. 6

8 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais - R$) Editora - Consolidated - BR GAAP IFRS & BR GAAP Note 12/31/11 12/31/10 12/31/11 12/31/10 CASH FLOW FROM OPERATING ACTIVITIES Profit before income tax and social contribution 85,004 81,130 89,659 84,558 Adjustments to reconcile profit before income tax and social contribution to net cash provided by operating activities: Depreciation and amortization (including the amount allocated to cost) 12 and 13 5,992 5,114 34,878 28,864 Allowance for doubtful accounts 6 1,509 2,759 2,351 4,060 Equity in subsidiaries less the adjustment to profit on Livraria's inventories - ICPC (5,908) (4,954) - - Gain (loss) on the sale of property, plant and equipment and intangible assets 12 and 13 (87) (32) (3,531) 146 Financial charges and inflation adjustments on intercompany balances, borrowing, financing and taxes 1,856 5,719 7,221 15,147 Stock option plan 21.e) 784 1, ,234 Other operating provisions 6,003 2,160 33,131 15,735 Decrease (increase) in operating assets: Trade accounts receivable (14,330) (18,454) (92,580) (72,637) Receivables of subsidiary from sale of goods (4,826) (1,098) - - Inventories (13,471) (17,042) (34,520) (63,212) Other operating assets (2,054) (8,561) (40,170) (56,010) Increase (decrease) in operating liabilities: Trade accounts payable 23,548 (658) 28,686 81,225 Income tax and social contribution (18,140) (15,229) (18,140) (15,847) Interest on borrowings and financing (2,149) (1,543) (15,068) (9,690) Other operating liabilities 7,482 13,466 15,277 17,526 Net cash provided by operating activities 71,213 44,011 7,978 31,099 CASH FLOW FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets 12 and 13 (9,567) (5,524) (61,745) (43,288) Contribution of capital to jointly-owned subsidiary 11 (250) Receipts from the sale of property, plant and equipment 202 6,940 3,958 7,075 Net cash provided by (used in) investing activities (9,615) 1,416 (57,787) (36,213) CASH FLOW FROM FINANCING ACTIVITIES Sale of treasury shares 21.b) 2,895 2,656 2,895 2,656 Acquisition of shares for holding in treasury 21.b) (3,643) - (3,643) - Acquisition of noncontrolling interests 11 - (35) - (35) Dividends and interest on capital 21.c) (19,450) (20,724) (19,450) (20,724) Borrowings - BNDES 15 53,483 19,758 74,650 47,514 Working capital loans ,000 30,000 Foreign currency-denominated borrowings ,000 - Loans granted to subsidiary, net of amounts returned 10.a) (63,936) (8,226) - - Borrowings from subsidiary, net of amounts paid 10.a) (461) Repayment of borrowings and financing (4,534) (10,247) (39,025) (27,068) Net cash provided by (used in) financing activities (35,646) (16,818) 85,427 32,343 INCREASE IN CASH AND CASH EQUIVALENTS 25,952 28,609 35,618 27,229 STATEMENT OF CHANGES IN CASH AND CASH EQUIVALENTS Opening balance 58,672 30,063 65,991 38,762 Closing balance 84,624 58, ,609 65,991 INCREASE IN CASH AND CASH EQUIVALENTS 25,952 28,609 35,618 27,229 The accompanying notes are an integral part of these financial statements. 7

9 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES STATEMENTS OF VALUE ADDED FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais - R$) Editora - Consolidated - BR GAAP IFRS & BR GAAP Note 12/31/11 12/31/10 12/31/11 12/31/10 CREATION OF WEALTH Sales of products, goods and services 501, ,559 1,980,530 1,640,041 Allowance for doubtful accounts, less reversals 6 (1,509) (2,759) (2,351) (4,060) Other operating income 25 1,117 2,210 10,960 12, , ,010 1,989,139 1,648,942 INPUTS PURCHASED FROM THIRD PARTIES (including recoverable and non-recoverable taxes) Raw materials consumed (56,782) (46,160) (39,391) (29,711) Cost of sales and services (48) (28) (1,026,365) (848,000) Materials, power, outside services and other (247,079) (195,834) (430,372) (354,564) Other operating expenses 24 (543) (1,623) (5,034) (7,243) GROSS VALUE ADDED 196, , , ,424 RETENTIONS Depreciation and amortization 12 and 13 (5,801) (4,916) (34,688) (28,666) WEALTH CREATED 190, , , ,758 WEALTH RECEIVED IN TRANSFER Equity in subsidiaries 11 5,908 4, Financial income 26 6,418 4,097 5,365 3,337 12,326 9,051 5,365 3,337 DISTRIBUTION OF WEALTH 203, , , ,095 WEALTH DISTRIBUTED Personnel - payroll and related taxes 85,896 68, , ,265 Government- taxes, fees and contributions 26,826 26,922 83,524 80,811 Lenders - financial expenses, less IOC 26 18,023 12,971 53,984 34,609 Lessors - rentals 7,495 6,009 53,967 46,387 Shareholders - dividends and interest on capital 21.c) 24,839 22,288 24,839 22,288 Noncontrolling interests Shareholders - retained earnings/recognition of earnings reserves 21.d) and f) 40,081 38,734 40,081 38, , , , ,095 The accompanying notes are an integral part of these financial statements. 8

10 (Convenience Translation into English from the Original Previously Issued in Portuguese) SARAIVA S.A. LIVREIROS EDITORES AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2011 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. OPERATIONAL CONTEXT The Saraiva Group is engaged in book publishing, including the sale of books and contents through Saraiva S.A. Livreiros Editores ( Editora ), and the retail of cultural, leisure, and information products, through Saraiva e Siciliano S.A. ( Livraria ). Editora is the controlling shareholder of Livraria by directly holding 99.98% of its common shares. Editora is a company controlled by the Saraiva family. Editora, founded in 1914, is a Brazilian publicly-held company, with registered office at Rua Henrique Schaumann, 270, City of São Paulo, State of São Paulo, listed on BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros (São Paulo stock exchange) under ticker symbol SLED4, and in Level 2 of Corporate Governance. Editora is mainly engaged in: (a) publishing elementary and high school textbooks, supplementary textbooks, legal books and economics and management books; (b) development of digital content; and (c) development of textbook content for the Ético system for private schools and the Agora system for public schools. Editora s operations are quite seasonal as approximately 78% of its sales are concentrated in the first and last quarters, due to two factors: (a) the back-to-school period in the first quarter; and (b) the sale of textbooks to the government in the fourth quarter. Livraria is a Brazilian closely-held company, with head office in the city of São Paulo, State of São Paulo, which is mainly engaged in the retail of book, periodicals, DVDs, music, stationary, multimedia, IT, electrical and electronic products, and digital content. Distribution is made using a web-based sales platform and a chain of 102 stores, of which 47 are megastores, five are itown format stores, 19 new conventional stores and 31 are conventional stores. Franchsing activities were discontinued in November On May 23, 2011, Editora, under a joint agreement with Artmed Editora S.A., Atlas S.A. and GEN - Grupo Editorial Nacional Participações S.A., organized Minha Biblioteca Ltda. ( Minha Biblioteca ). Editora s ownership interest in the business is 25% and the entity is jointly controlled by the venturers in accordance with the Shareholders Agreement. Minha Biblioteca, a limited liability company headquartered in the City of São Paulo, São Paulo State, is engaged mainly in editing, distributing and selling digital books (e-books) and other content, in the wholesale and retail market, both in Brazil and abroad. 9

11 2. PRESENTATION OF FINANCIAL STATEMENTS 2.1. Declaration of conformity Editora s financial statements comprise: The consolidated financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ), and in accordance with accounting practices adopted in Brazil, identified as Consolidated (IFRS and BR GAAP). The individual financial statements of the parent prepared in accordance with the accounting practices adopted in Brazil, identified as Editora - BR GAAP. The accounting practices adopted in Brazil comprise the policies set out in Brazilian Corporate Law and the technical pronouncements, instructions, and interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM). The individual financial statements present the valuation of investments in subsidiaries and jointly-owned subsidiaries under the equity method, pursuant to prevailing Brazilian laws. Accordingly, these individual financial statements are not in accordance with IFRSs, which require the measurement of such investments in the parent s separate financial statements, at their fair values or at cost. As there is no difference between the consolidated equity and the consolidated profit attributable to the owners of Editora, disclosed in the consolidated financial statements prepared in accordance with the IFRSs and BR GAAP, and Editora s equity and profit disclosed in the individual financial statements prepared in accordance with BR GAAP, Editora elected to present the individual and consolidated financial statements as a single set Basis of preparation The financial statements have been prepared based on the historical cost, except for certain financial instruments measured at fair value, as described in Note 3. The historical cost is generally based on the fair value of the consideration paid in exchange for an asset Basis of consolidation and investments in subsidiaries and jointly-owned subsidiaries The consolidated interim financial statements include the financial statements of Editora, Livraria and Minha Biblioteca, on the same reporting date. Control is obtained when Editora has the power to govern the financial and operating policies of an entity to benefit from its activities. In the individual financial statements of Editora the financial information on Livraria and Minha Biblioteca is recognized under the equity method. 10

12 The financial statements of the jointly-owned subsidiary Minha Biblioteca are recognized under the proportionate consolidation method, according to its ownership interest, by combining its share in each of the assets, liabilities, revenues and expenses with the similar items, line by line, in its consolidated financial statements. The financial statements of Livraria and Minha Biblioteca are adjusted to conform their accounting policies to those adopted by Editora. All intercompany transactions, balances, revenue, and expenses are fully eliminated in consolidation. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies described below were consistently applied for all periods reported in the individual and consolidated financial statements of Editora, Livraria and Minha Biblioteca. a) General principles Revenues and expenses are recognized on the accrual basis. Sales revenues and related costs are recorded upon the transfer of risks and rewards incidental to ownership of goods and products sold. Revenue is measured at the fair value of the consideration received or receivable. Service revenue is recognized on an accrual basis according to the substance of each agreement, when it is probable that the future economic benefits will flow to Editora and Livraria and the revenue amount can be measured reliably. Sales resulting in the delivery of awards to customers of Livraria s customer loyalty program ( Saraiva Plus ) are accounted for as deferred revenue at the fair value of the consideration received or receivable, on sales date. Deferred revenue is recognized in profit or loss when credits are redeemed by the customers or obligations are settled. b) Functional and reporting currency The functional and reporting currency used to measure the items of Editora, Livraria and Minha Biblioteca in the individual and consolidated financial statements is the Brazilian real (R$). c) Foreign currency-denominated transactions and balances Foreign currency-denominated transactions are translated into the functional currency using the exchange rates prevailing on the transaction dates. Balance sheet items are translated at the exchange rates prevailing at the end of the reporting periods. Exchange gains and losses resulting from the settlement of such transactions and the translation of monetary assets and monetary liabilities denominated in foreign currency are recognized in profit or loss. 11

13 d) Financial assets The financial assets held by Editora, Livraria and Minha Biblioteca are classified according to the intention for which they were acquired into the following categories: (i) Financial assets measured at fair value through profit or loss The financial assets measured at fair value through profit or loss correspond to shortterm financial assets held for trading. Gains or losses resulting from changes in the fair value are recognized in profit or loss on an accrual basis, in line items Financial income and Financial expenses, respectively. Derivatives are also classified in this category. (ii) Financial assets held to maturity Comprise non-derivative financial assets with defined maturities acquired to be realized on maturity, initially measured at fair value, plus costs incurred to acquire them, and subsequently at amortized cost under the effective interest method to allocate revenues earned through the maturity date. Editora and its subsidiaries do not have financial instruments classified in this category. (iii) Financial assets available for sale Comprise non-derivative financial assets, such as securities and/or shares quoted in active markets, or which are not quoted in an active market but whose fair values can be reasonably estimated. These assets are initially measured at fair value, plus costs incurred to acquire them and, subsequently, at fair value as a balancing item in a specific line item of shareholders' equity. Editora and its subsidiaries do not have financial instruments classified in this category. (iv) Loans and receivables Comprise non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This category includes cash and cash equivalents, trade accounts receivable, and other receivables. Regular purchases and sales of financial assets are recognized on trading date. A financial asset is derecognized when, and only when, the contractual rights from the financial asset expire or the financial asset and substantially all the risks and rewards of ownership are transferred to another entity. 12

14 e) Financial liabilities Financial liabilities are classified as follows: (i) Measured at fair value through profit or loss Comprise liabilities held for trading initially measured at fair value and whose gains or losses are directly recognized in profit or loss. (ii) Other financial liabilities Comprise liabilities initially measured costs incurred to acquire them, and subsequently at amortized cost under the effective interest method to allocate interest expenses incurred over the contractual term. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating its interest expense over the contractual term. The effective interest rate is the rate that exactly discounts the estimated future cash flows over the estimated useful life of the financial liability or, when appropriate, for a shorter period on initial recognition of the net carrying amount. Amortized cost is the amount by which the financial liability is measured on initial recognition, less principal repayments, plus inflation adjustments and exchange rate changes and accrued interest calculated under the effective interest method, and any impairment loss. The Company derecognizes financial liabilities when, and only when, its obligations are discharged and cancelled, or when they expire. The difference between the carrying amount of the derecognized financial liability and the consideration paid and payable is recognized in profit or loss. f) Derivatives Comprise transactions with assets whose amounts change in response to changes in a specific interest rate of the underlying assets, settled in future dates. Derivative assets are recognized at fair value on inception and adjusted to fair value at the end of the reporting period. Gains and losses are recognized in profit or loss on an accrual basis. g) Current assets Cash and cash equivalents Comprise cash, bank deposits and short-term investments that can be immediately converted into a known cash amount and subject to insignificant risk of change in value. Short-term investments are carried at cost plus income earned through the end of each reporting period, which does not exceed their fair or realizable values. 13

15 Trade accounts receivable and allowance for doubtful accounts Trade accounts receivable are recorded at their original amounts, less the allowance for doubtful accounts and uncollectible receivables past due for more than 180 days. Trade accounts receivable are not adjusted to present value as they have a short-term maturity and do not materially impact the financial statements taken as a whole. Inventories Carried at average cost of acquisition or publishing, less an allowance for adjustment to net realizable value, when lower, when applicable. In the case of Livraria an allowance for losses on non-moving, excessive or unrealizable items is recognized, based on periodic analyses conducted by Management. In the case of Editora, inventories are periodically analyzed by Management and the cost of any damaged books or discontinued editions identified is charged directly to profit or loss. h) Noncurrent assets Investments Subsidiary Investments in Livraria are accounted for under the equity method. Unrealized profit arising from the sale of Livraria s products is eliminated from the calculation of equity in subsidiary on consolidation. Joint venture A joint venture is a contractual arrangement whereby the Company agrees to engage in an economic activity that is subject to joint control, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control. Editora s share in jointly-controlled assets and jointly-incurred liabilities is recognized in the jointly-controlled entity s financial statements and classified according to its nature. Investments in Minha Biblioteca are measured under the equity method in the individual financial statements and under the proportionate consolidation method, according to its ownership interest, by combining its share in each of the assets, liabilities, income and expenses with similar items, line by line, in its consolidated financial statements. 14

16 Property, plant and equipment Stated at acquisition, production or construction cost, less accumulated depreciation and, when applicable, an allowance for impairment. Depreciation is calculated on a straight-line basis at rates that take into consideration the estimated useful lives of the assets. Facilities and leasehold improvements in Editora s and Livraria s units are depreciated over the lower of the lease term or the estimated economic useful lives of the assets, as indicated in Note 12. Borrowing costs are not included in the acquisition cost of property, plant and equipment since the average time to set up and open a store is approximately three months and thus they are not qualifying assets. Assets held under finance leases are depreciated over their expected useful lives in the same manner as own assets, or for a shorter period, if applicable, under the terms of the underlying lease agreement. The carrying amount of a property, plant and equipment item is written off on disposal or when no future economic benefits are expected from its continuing use. The gain or loss arising on the disposal or write-off of a property, plant and equipment item corresponds to the difference between the amounts received on sale and the carrying amount of the asset, and is recognized in profit or loss. Intangible assets Separately acquired Separately acquired intangible assets with finite useful life are carried at cost less accumulated amortization and, when applicable, accumulated impairment losses. Amortization is recognized on a straight-line basis, based on the estimated useful lives of the assets. Expenses on goodwill paid by Livraria when commercial property leases are signed are classified as intangible assets on the date the agreements are executed and amortized on a straight-line basis over the lease term. Internally generated Expenditure on research is recognized as an expense when incurred. An internally generated intangible asset arising from expenditure on software development is recognized if, and only if, all of the following conditions are cumulatively met: (i) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (ii) the intention to complete the intangible asset and use or sell it; (iii) the ability to use or sell the intangible asset, the intangible asset will generate probable future economic benefits, and the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (iv) the ability to measure reliably the expenditure attributable to the intangible asset during its development. 15

17 The amount initially recognized corresponds to the sum of the costs incurred since the time an intangible asset met the recognition criteria above. Subsequently, assets are recognized at production cost, less amortization and, where applicable, impairment losses. Write-off of intangible assets An intangible asset is written off on disposal or when there are no future economic benefits resulting from its use or disposal. Gains or losses on the write-off of an intangible asset are calculated based on the difference between the net revenue from sale and its carrying amount and are recognized in the income statement when the asset is written off. Goodwill Beginning 2010, goodwill recorded on business acquisitions is the excess of the amount paid on the acquisition over the interest in the fair value of the identifiable assets, liabilities and contingent liabilities of acquirees recognized on acquisition date. Goodwill initially recognized at fair value is subsequently tested for impairment. In 2011 and 2010, no new acquisitions were made that would result in the application of business combination criteria. Goodwill presented in the individual and consolidated financial statements arises from the acquisition and merger of acquirees from 2003 to 2008 and was amortized on a straight-line basis at the rate of 20% per year through December 31, Beginning January 1, 2009, goodwill is no longer amortized but tested for impairment on a periodic basis. Goodwill is tested for impairment by allocating it to the cash-generating units (CGUs), i.e., the lowest levels for which there are separately identifiable cash flows, defined by Management as the stores purchased from Siciliano S.A. ( Siciliano ) and Ético s operations. If the recoverable value of a CGU is lower than its carrying amount, an allowance for impairment loss is firstly recognized to write down the amount of goodwill, and subsequently the other assets of the CGU. The impairment loss is recognized in profit or loss and cannot be reversed in subsequent periods. Goodwill is annually tested for impairment irrespective of whether there is any indication that it may be impaired. Impairment of property, plant and equipment and intangible assets, except goodwill Property, plant, and equipment items, intangible assets with finite useful lives, and, when applicable, other noncurrent assets are tested for impairment annually or whenever events or significant changes in circumstances indicate that their carrying amount may be higher than their recoverable amount. Only assets whose impairment is identified based on operational and financial performance indicators set by Management will be tested for impairment. 16

18 The carrying amount of property, plant and equipment items and intangible assets is tested for impairment by allocating it to the CGUs that represent the lowest levels for which there are separately identifiable cash flows, as defined by Management as Editora s operations, the stores and website Saraiva.com of Livraria. An allowance for impairment loss is recognized if the recoverable amount of a CGU is lower than its carrying amount. The recoverable amount corresponds to the higher of the value in use and the net sales amount of the asset. The impairment loss is recognized in profit or loss when identified. i) Current and noncurrent liabilities Borrowings and financing Initially recognized at fair value when funds are received, less transaction costs where applicable, and subsequently measured at the amortized cost under the effective interest method, corresponding to cost plus contractual charges, interest, inflation adjustments and exchange rate changes incurred through the end of each reporting period over the term of the underlying agreements. Foreign currency-denominated borrowings are translated into Brazilian reais at the exchange rate prevailing at the balance sheet dates, for which the Company has a zero basis risk swap, recorded at fair value on an accrual basis. Gains earned or losses incurred under these contracts are recognized as adjustments in financial income and expenses. Copyrights Calculated and recognized as operating expenses when sales are made and, in some cases, as production cost when the work is published. Provision for tax, civil and labor contingencies Provisions are recognized when there is a legal or constructive obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation, and its amount can be reliably estimated at the end of the reporting period. Provisions are recognized at the estimated loss amount when loss is assessed as probable, considering the nature of each contingency, based on the opinion of the legal counsel of Editora and Livraria. The bases for and nature of the provision for contingencies are described in Note 20. Contingent liabilities are not recognized but are rather disclosed, except if the likelihood of an outflow of resources to settle the underlying obligations is remote. Liabilities are periodically assessed to determine if there is evidence of a probable outflow of resources embodying economic benefits to settle the obligations. 17

19 j) Other current and noncurrent assets and liabilities Stated at their realizable values (assets) and at known or estimated amounts (liabilities), plus interest, inflation adjustments, and charges, when applicable. k) Lease Leases are classified as finance leases when lease agreement terms substantially transfer all the risks and rewards of asset ownership to the lessee. All other leases are classified as operating leases. Operating leases Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term. Contingent payments (variable portion based on sales revenue) are recognized as expenses when incurred. Finance leases Capitalized in property, plant and equipment at the inception of the lease at the lower of the fair value of the leased asset or the present value of minimum lease payments, as a balancing item of the related obligations, less financial charges, which are recognized in current and noncurrent liabilities, over the lease term. l) Current and deferred income tax and social contribution Current The provisions for corporate income tax (IRPJ) and social contribution on net income (CSLL) are calculated pursuant to the prevailing tax laws, based on the accounting profit adjusted by additions and deductions of recognized nontaxable and nondeductible expenses and income. Deferred Deferred income tax and social contribution are calculated on tax loss carryforwards of Livraria and on temporary differences of Editora and Livraria. Deferred income tax and social contribution assets are recognized at the probable amount based on which future taxable income will be sufficient to deduct all temporary differences and tax loss carryforwards, and are stated in noncurrent assets and liabilities. Deferred income tax and social contribution are calculated at the tax rates effective in the period when the asset or the liability on which they are calculated is realized or settled, respectively. Deferred taxes are recognized as income or expenses, and allocated to profit or loss. The recovery of deferred tax assets is reviewed at the end of each reporting period and, when it is no longer probable that future taxable income will be available to allow the recovery of all or part of the assets, the asset balance is adjusted based on the expected recoverable amount. 18

20 m) Deferred revenue Sales revenue obtained by the customer loyalty program is recognized in line item Deferred revenue - loyalty program at the fair value of the points accumulated and recognized in profit or loss as credits are redeemed, the right to use such credits expires, and part of the balance of the provision related to the expected expiry of the right to redeem points is amortized, calculated at the historical base of occurrences. n) Share-based compensation The share-based compensation plan of Editora and Livraria is measured at the fair value of the equity instruments on grant date. Details on the determination of the fair value are described in Note 21.e). The fair value of stock options granted set on grant date is recognized on a straight-line basis as expenses in profit or loss over the vesting period, based on estimates about which granted options will be exercised. Management reviews its estimates at the end of each reporting period and the impact compared to the initial estimates, if any, is recognized in profit or loss for the reporting period, reflecting the revised estimates. o) Dividends and interest on capital The proposed distribution of dividends, which include interest on capital paid by the Management of Editora that does not exceed the portion equivalent to the mandatory minimum dividends, is recognized as a liability in line item Dividends and interest on capital as it is considered as a statutory obligation of Editora. On the other hand, the portion of dividends exceeding mandatory minimum dividends, declared by Management after the end of the reporting period, but before the authorization for the issue of the financial statements is recognized in line item Proposed additional dividends. p) Presentation of earnings per share Earnings per share are presented as basic and diluted, as prescribed by CPC 41 - Earnings per Share (IAS 33), as described in Note 28. q) Statement of value added ( DVA ) The purpose of the statement of value added presented by Editora is to disclose the wealth created by the Company and its distribution over a certain reporting period, as required by the Brazilian Corporate Law, as an integral part of its individual financial statements, and as supplemental information to the consolidated financial statements, since this statement is not required by IFRSs. The DVA was prepared using information obtained in the same accounting records used to prepare the financial statements and pursuant to the provisions of CPC 09 - Statement of Value Added. 19

21 r) New standards, and amendments to and interpretation of standards The CPC has not yet issued the pronouncements and amendments related to the new and revised IFRSs below. Because of CPC s and CVM s commitment to keep the set of standards issued up-to-date as changes are made by the IASB, such pronouncements and amendments are expected to be issued by CPC and approved by CVM by the date they become effective. Standards effective on December 31, 2011 Interpretations of and amendments to the standards below were issued and effective as at December 31, However, they have not significantly affected Editora s financial statements: Standard Description Effective for annual periods beginning on or after Amendments to IAS 32 Classification of Rights Issues 02/01/10 Amendments to IFRIC 14 Prepayments of Minimum Funding Requirements 01/01/11 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 07/01/10 IFRIC 13 Customer Loyalty Program 07/01/10 Amendments to IAS 24 Related-party Disclosures 01/01/11 Standards, and interpretations of and amendments to standards effective beginning July 1 and which were not early adopted The following standards and amendments to existing standards below were published and are mandatory for reporting periods beginning on or after July 1, 2011, or thereafter. However, these standards and revised standards were not early adopted: Standard Description Effective for annual periods beginning on or after Amendments to IFRS 1 Elimination of Fixed Dates for First-time Adopters of IFRSs 07/01/11 Amendments to IFRS 7 Disclosures - Transfer of Financial Assets 07/01/11 IFRS 9 (as amended in 2010) Introduces new requirements for classifying and measuring financial assets 01/01/13 20

22 Standard Description Effective for annual periods beginning on or after Amendments to IAS 1 Amendments to IAS 12 Amendments to IAS 19 Package of five IFRS 13 Presentation of items in other comprehensive income 07/01/12 Deferred Taxes - Recovery of the Underlying Assets When the Asset is Measured under the Fair Value Framework of IAS 40 01/01/12 Employee benefits - eliminates the corridor approach and establishes that impacts from remeasuring the benefit plan be directly recognized in comprehensive income, and introduces other improvements. 01/01/13 IFRS 10 - consolidated financial statements (supersedes the consolidation guide of IAS 27 and SIC 12); IFRS 11 - joint ventures (supersedes IAS 31); IFRS 12 - disclosure of interest in other entities; amendments to IAS 27; and amendments to IAS 28 to align with IFRS 10, 11 and /01/13 Fair value measurement - replaces the fair value measurement guidance contained in the IFRSs with a single source of fair value measurement guidance. 01/01/13 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In preparing the financial statements, Management is required to make judgments, estimates and assumptions based on historical experience and other factors that are considered to be relevant, that affect the reported amounts of assets and liabilities. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis and the related effects are recognized in the period in which the estimate is revised. a) Impairment of assets Where there are indications that property, plant and equipment items and intangible assets with finite useful lives might be impaired, based on financial and economic factors, taking into consideration the maturity of investments, their carrying amounts are annually reviewed, through a detailed study of each CGU, by calculating discounted future cash flows and using a rate of discount to present value, to ensure that a possible allowance for impairment losses is recognized in profit or loss for the reviewed period. 21

23 b) Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill was allocated. The calculation of the value in use requires Management to estimate the expected future cash flows arising from the CGUs and an adequate discount rate to calculate the present value. c) Allowance for inventory losses of Livraria The allowance for inventory losses is estimated based on the history of losses identified during physical inventory counts of the stores and distribution centers, to cover probable losses when physical inventories are counted. d) Allowance for inventory losses The allowance for inventory losses is related to the obsolescence of inventories. In the case of Livraria, the allowance corresponds to unsellable inventories due to deterioration or turnover below estimates. In the case of Editora, the allowance corresponds to the cost of any damaged books or discontinued editions, charged directly to profit or loss. e) Allowance for doubtful accounts The allowance for doubtful accounts is estimated based on probable collection, taking into account the history of default. Uncollectible receivables past due for more than 180 days are recognized in an allowance account through the end of the reporting period in which they are identified and written off against trade accounts receivables in the subsequent year. f) Provision for tax, civil and labor contingencies Provision recognized for lawsuits that represent probable losses can be reliably estimated. The likelihood of loss is assessed based on the opinion of Editora s and Livraria s legal counsel. g) Deferred taxes Deferred tax assets and liabilities are calculated based on a study of the expected realization of future taxable income, discounted to present value and less all temporary differences, annually reviewed and approved by Management. Future earnings projections take into consideration the main performance variables of the Brazilian economy, the volume and price of sales, and tax rates. h) Livraria s customer loyalty program Under the program s regulations effective beginning April 1, 2011, a customer has the right to a R$15.00 discount in purchases in any store and website of Livraria for every 1,000 points obtained. The points can be used to purchase any product. Points expire after 12 months. All customers holding the necessary points according to the regulation effective through March 31, 2011 retained the right to the R$15.00 discount. 22

24 Saraiva S.A. Livreiros Editores and Subsidiaries Fair value is calculated based on the award credits obtained by customers when they complete a purchase, adjusted by an amount related to the expected redemption and another portion related to expected expiry, which are amortized proportionally to the actual redemption of the points. 5. CASH AND CASH EQUIVALENTS (*) Short-term investments consist of Bank Certificates of Deposit (CDBs), yielding interest at rates ranging from 100% to 102% of the Interbank Deposit Rate (CDI), can be immediately converted into a known cash amount, and are subject to an insignificant risk of change in value. 6. TRADE ACCOUNTS RECEIVABLE The average days sales outstanding of sales made by Editora ( trade notes receivable ) is 71 days and those made by Livraria is 57 days. No customer accounts for over 10% of the total balance of trade accounts receivable of Editora and receivables from credit cards are comprised mainly of the following: Cielo, Redecard and American Express. Maximum exposure to credit risk at the end of the reporting period is the carrying amount of each aging range. 23

25 a) Aging list of receivables b) Changes in the allowance for doubtful accounts The amount recognized in profit or loss is as follows: 24

26 Saraiva S.A. Livreiros Editores and Subsidiaries 7. INVENTORIES The cost of inventories recognized in profit or loss is broken down as follows: 8. RECOVERABLE TAXES 25

27 (*) Beginning 2008, the reverse charge ICMS system effective in the State of São Paulo started to include most of the products sold by several companies of the retail industry, requiring the application of specific procedures so that appropriate tax records are kept, necessary for the recovery of the tax credits generated in transactions conducted outside the State of São Paulo. Part of the products sold by Livraria are subject to the reverse charge system in subsequent transactions, as follows: Audio and video products - beginning April Videogame-related products - beginning September Console-related products - beginning May Stationery and toys - beginning May IT, telephone and electrical and electronic products - beginning June Under the reverse charge system, ICMS due on Livraria s sales transactions is prepaid when merchandise is purchased and it is recognized as inventory cost assuming that the sales to non-taxpayers of ICMS will take place in the State of São Paulo. In transferring such merchandise from the distribution centers located in the State of São Paulo to stores in other states, the prepaid ICMS is claimed as a tax credit to be recovered from the State of São Paulo, as provided for by State legislation. The recovery process is provided for by the São Paulo ICMS Regulations, Decree 45490/00, and Tax Administration Board Coordinating Committee Administrative Rule 17/99, and requires the development of software to extract historical data and formatting such data into the required formats to calculate the credit. The calculation of tax credits also requires detailed certification work of the historical data currently obtained with the same data reported in other tax documentation filed for the periods when the products are subject to such system, and the preparation of reports and media containing electronic files to be submitted to the state tax authority for recovery. In 2010, Management successfully initiated the actions necessary to ensure the approval and confirmation of the credit amounts, which include: (a) discussions with trade associations and public administration agencies; (b) engagement of a specialized consulting company; and (c) investments in technology and human resources. Decree 57608, issued on December 12, 2011, sets forth the possibility of joining the Special Regime to convert the distribution centers located in the São Paulo State, which currently accumulate credits from the supply of the store chain in other states, into agents responsible for withholding and paying the State VAT (ICMS) levied on subsequent shipments. 26

28 Under the Special Regime, the supply of stores located in other states will no longer be entitled to accumulate State VAT (ICMS) credits in the distribution centers, and prior-year credits, subject to CAT Administrative Rule 17/99, may be offset in tax records within up to 36 months against the ICMS on transactions under the regular tax regime. The Special Regime requires the adoption of internal operating procedures to comply with new accessory obligations and adjustments to tax records of transactions. The procedures and adjustments necessary to enable the request to join the Special Regime in 2012 were implemented immediately after the Decree was issued. The credit estimated and recognized between January 1, 2010 and December 31, 2011 is R$46,892 and will be offset in the tax records after the date of inclusion in the Special Regime. The credit amount for transactions conducted in 2008 and 2009 is still to be determined and will be reasonable known when the calculation activities are completed. 9. INCOME TAX AND SOCIAL CONTRIBUTION a) Deferred income tax and social contribution 27

29 (*) Editora and Livraria, based on the opinion of their outside legal counsel, considered the tax incentive established by Law 10753/03, as amended by Law 10833/03, concerning the deductibility of the provision for inventory losses, as a direct adjustment to the taxable base, thus recognizing the related deferred income tax and social contribution liability. Management considers the carrying amount of the deferred tax assets recognized by Editora, realizable as final and unappealable decisions of the lawsuitss filed are issued; with respect to the deferred tax assets on tax loss carryforwards and temporary differences of Livraria, Management assesses their realization based on future taxable income, as follows: End of the reporting period December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 Realization of deferred tax asset of Livraria 5,901 9,794 6,614 9,023 9,815 41,147 b) Reconciliation of actual income tax and social contribution expense 28

30 c) Neutrality for tax purposes of the adoption of Law 11638/07 and Provisional Act 449/08 (Law 11941/09) Editora and Livraria opted for the Transitional Tax Regime (RTT) introduced by Provisional Act 449/08 (converted into Law 11941/09), whereby the IRPJ, CSLL and PIS and COFINS tax basis continue to be determined based on the accounting methods and criteria prescribed by Law 6404, of December 15, 1976, effective on December 31, Accordingly, deferred income tax and social contribution, calculated on the adjustments arising on the adoption of the new accounting policies introduced by Law 11638/07 were recorded in the financial statements of Editora and Livraria, when applicable, pursuant to CPC 32 Income Taxes (IAS 37). Editora and Livraria declared this option in their 2009 Corporate Income Tax Return (DIPJ). 10. RELATED PARTIES a) Business transactions and intercompany loans The related parties with which Editora conducts transactions are: Livraria - subsidiary. Instituto Jorge Saraiva - other related party. Related-party transactions include business purchase and sale transactions, donations, and intercompany loans. Editora s book sale transactions to Livraria are conducted at the books cover prices, less usual discounts granted to booksellers and volume discounts. Receivables are settled with the transfer of Livraria funds to Editora within the deadline set in each purchase order. Loans granted to and received from Livraria have indeterminate maturity and bear interest equivalent to 101% of CDI fluctuation. On June 1, 2011, Editora paid in the total capital increase of Livraria using funds arising from the intercompany loan. Changes in loans granted to Livraria are as follows: 29

31 Changes in borrowings from Livraria are as follows: The main balance and transactions with Livraria are as follows: Donations are made in cash to Instituto Jorge Saraiva, founded in 2004, which is engaged in social and community work. In the year ended December 31, 2011, donations totaled R$800 (R$500 as at December 31, 2010). b) Management and Board of Directors compensation The officers and directors compensation is broken down as follows: 30

32 Editora does not grant post-employment and severance benefits. Under the Brazilian Corporate Law and Editora s bylaws, shareholders are responsible for setting, at the Annual Shareholders Meeting, the overall compensation of the board of directors and the executive committee. Management is also entitled to a profit sharing of up to 10% of profit. 11. INVESTMENTS The interest held in subsidiaries and their main information are as follows: 31

33 The calculation basis of equity in subsidiaries recognized by Editora is broken down as follows: The changes in investments were as follows: The main information on Livraria and Minha Biblioteca is as follows: 32

34 Saraiva S.A. Livreiros Editores and Subsidiaries 12. PROPERTY, PLANT AND EQUIPMENT Changes in line item Property, plant and equipment were as follows: 33

35 Impairment tests are conducted on an annual basis or if there are indications of impairment, as described in Notes 3 and 4. Management did not identify any events that could indicate that assets might be impaired as at the year ended December 31, Assets pledged as collateral The obligations assumed under finance lease agreements are collateralized by the lessor s ownership of the leased assets, whose carrying amount is R$2, INTANGIBLE ASSETS 34

36 Saraiva S.A. Livreiros Editores and Subsidiaries Changes in line item Intangible assets were as follows: 35

37 Impairment tests are conducted on an annual basis or if there are indications of impairment, as described in Notes 3 and 4. Management did not identify any events that could indicate that assets might be impaired as at the year ended December 31, Assets pledged as collateral The obligations assumed under finance lease agreements are collateralized by the lessor s ownership of the leased assets, whose carrying amount is R$949 (R$1,139 in 2010). 14. GOODWILL Impairment tests are conducted on an annual basis, regardless of whether or not there are indications of impairment, as described in Notes 3 and 4. Goodwill was allocated, for impairment testing, to the following cash-generating units (CGUs): stores purchased from Siciliano and Ético s operations. 36

38 Siciliano The recoverable amount of this cash-generating unit is determined based on the calculation of the value in use by using the free projected cash flows supported by a five-year financial budget and a nominal discount rate ( Weighted Average Cost of Capital - WACC ) of 14.7% per year. The five-year projected cash flows, such as growtn in sales, costs, expenses, fixed working capital investments, are based on an annual budget approved by Management. The key assumptions used in projecting free cash flow are as follows: Revenue: projected from 2012 to 2016 in line with the CGU s growth history, as well as the estimated macroeconomic scenario for the next years. Operating costs and expenses: projected based on Siciliano s past performance and estimated revenue growth. Fixed investments: fixed investments are projected to recover the depreciation of the operating fixed asset base. Working capital investments: projected based on Siciliano s past performance and revenue growth. Cash flows subsequent to the five-year period were extrapolated at a constant annual growth rate of 4.2% that corresponds to the expected inflation rate. Ético The recoverable amount of this cash-generating unit is determined based on the calculation of the value in use by using the free projected cash flows supported by a five-year financial budget and a nominal discount rate ( Weighted Average Cost of Capital - WACC ) of 11.2% per year. Projected cash flows for the period, such as sales growth, costs, expenses, fixed investments and working capital investments, are based on an annual budget approved by Management. The main assumptions used in projecting free cash flow are as follows: Revenue: projected from 2012 to 2016 in line with the CGU s growth history and Ético s customer base growth. Operating costs and expenses: projected based on Ético s past performance and business plan, as well as on estimated revenue growth. 37

39 Fixed investments: fixed investments are projected to support the expansion of the CGU operations and also to recover the depreciation of the operating fixed asset base. Working capital investments: projected based on Ético s past performance and revenue growth. Cash flows subsequent to the five-year period were extrapolated at a constant annual growth rate of 4.2% that corresponds to the expected inflation rate. Management believes that any change reasonably possible in the key assumptions, on which the recoverable value is based, would not cause the total carrying amount to exceed the total recoverable value of the cash-generating unit. In the year ended December 31, 2011, no goodwill was written off against profit or loss. 15. BORROWINGS AND FINANCING 38

40 Summary of the characteristics of borrowings and financing 39

41 (a) The Long-Term Interest Rate (TJLP) for the year ended December 31, 2011 was 6% (6% as at December 31, 2010). (b) Benchmark rate disclosed by National Bank for Economic and Social Development (BNDES) on the date subloans are disbursed, which will correspond to the average borrowing costs of unrestricted funds and onlendings under special terms and conditions, and BNDES and BNDES Participações S.A. - BNDESPAR derivatives indexed to the Extended Consumer Price Index (IPCA). BNDES financing The agreements entered into with BNDES and the amounts released are as follows: a) Contracting b) Releases Contractual covenants for Editora and Livraria a) Agreements entered into by Editora and Livraria in 2009 Editora and Livraria are required to present their audited annual financial statements on an annual basis and over the term of the agreements. Editora, in turn, is required to maintain the following financial ratios relating to its consolidated financial statements: Current liquidity of 1.5 or higher in 2009 and 1.7 or higher beginning Capitalization ratio of 0.43 or higher. Debt ratio of 0.22 or lower. 40

42 In case Editora fails to reach the preset financial ratios it should provide, within 90 days after written notification by BNDES, collaterals acceptable by BNDES, in an amount corresponding to at least 130% of the financing or debt amount released by BNDES and personal guarantee, except if the preset minimum ratios are reached within such period. b) Agreements entered into by Editora and Livraria in 2011 Editora and Livraria are required to present their audited annual financial statements on an annual basis and over the term of the agreements. Editora, in turn, is required to maintain the following financial ratios relating to its consolidated financial statements: current liquidity of 1.65 or higher. debt ratio of 0.62 or lower. In case Editora fails to reach the preset financial ratios it should provide, within 60 days after written notification by BNDES, collaterals acceptable by BNDES, in an amount corresponding to at least 130% of the financing or debt amount released by BNDES and personal guarantee, except if the present minimum ratios are reached within such period. c) Compliance with contractual covenants as at December 31, 2011 The financial ratios presented by Editora in the consolidated financial statements for the year ended December 31, 2011 are as follows: The capitalization ratio for 2009 agreements and overall debt ratio for 2011 agreements were not reached. However, as set forth in the agreement, Editora should provide collaterals (2009 and 2011 agreements) and personal guarantees (2009 agreements) from 60 to 90 days, as set forth in the agreement, after formal notified by BNDES. Editora s management has capacity and availability to provide collaterals, if requested by BNDES, through properties, a pledge on the ownership of 99.98% of the shares in Livraria and personal guarantee represented by bank guarantee provided by a prime financial institution. Editora s management, considering the contractual covenants applicable to the noncompliance with financial ratios, continued to recognize the amounts payable to BNDES in its individual and consolidated financial statements based on the contractual terms originally agreed. 41

43 Working capital loans Livraria borrowed R$134,476 as at December 31, 2011 (R$85,424 as at December 31, 2010), whose funds are used to finance its working capital requirements resulting from the growth in sales and changes in sales terms and conditions. Financial charges are calculated based on the Interbank Deposit Rate (CDI) fluctuation, fixed rates and exchange rate changes. Foreign currency-denominated borrowings with Banco Itaú and Banco Santander (Resolution 4131/62) are subject to fluctuations in the US dollar and interest rates. Swap transactions were contracted for these borrowings in order to swap exchange rate changes for the CDI fluctuation in connection with the borrowing from Itaú and for a fixed rate in connection with the borrowing from Santander. Financial expenses The amounts recorded in financial expenses relating to borrowings and financing are as follows: 16. DEFERRED REVENUE - CUSTOMER LOYALTY PROGRAM The Saraiva Plus customer loyalty program promotes purchases made by customers at the stores and the website, which are converted into award credits (points) to be used as discounts in future purchases. Sales revenues leveraged by the loyalty program are recognized as Deferred revenue in profit or loss as described in Note 3. As at December 31, 2011, deferred revenue of the loyalty program, recognized in a specific line item in consolidated, is R$6,701 (R$7,615 as at December 31, 2010). 42

44 Saraiva S.A. Livreiros Editores and Subsidiaries 17. TRADE ACCOUNTS PAYABLE Management did not recognize any discount to present value as all transactions are short term and the effect of such discount is considered immaterial when compared to the financial statements taken as a whole. 18. TAXES PAYABLE (a) Application filed with the Federal Revenue Service in November 2007 for the payment in installments of the debt resulting from the overruling of the administrative appeal filed against the tax assessment collecting underpaid social contribution due to the deduction of interest on capital from this tax s taxable base in

45 (b) Editora s and Livraria s management joined the plan created by Law 11941/09 for the payment of taxes related to administrative and court proceedings where the likelihood of an unfavorable outcome, according to Management, based on the opinion of its legal counsel, is probable. On June 30, 2011, under the Joint Ordinance PGFN/RFB 2 of June 3, 2011, Editora and Livraria consolidated debts as set forth in Law 11941/09 and made the payments pursuant to the alternatives given. 19. ACCRUED PAYROLL AND RELATED TAXES 20. PROVISION FOR TAX, CIVIL AND LABOR CONTINGENCIES Editora and Livraria challenge at administrative level and in courts tax, civil and labor lawsuits whose likelihood of loss is assessed as probable by their legal counsel. The amounts accrued are sufficient to cover probable outflow of resources to settle the underlying obligations. The provision for contingencies and escrow deposits made to secure some of the lawsuits are broken down as follows: 44

46 Saraiva S.A. Livreiros Editores and Subsidiaries Provisions (a) Lawsuits filed in 1999 by Editora and Livraria to challenge the broadening of PIS and COFINS tax base and the increase in the COFINS tax rate. The lawsuits are secured by escrow deposits amounting to R$18,101, classified in noncurrent assets. On February 22, 2011, the lawsuit filed by Editora challenging the broadening of the PIS tax base received a final and unappealable favorable decision. The amount of the provision reversed to income (loss) was R$91. (b) Lawsuits filed in 1989 by Editora and Livraria requesting the court to annul the legal obligation of paying PIS pursuant to Supplementary Law 7/70. The lawsuits are secured by escrow deposits made from April 1989 to May 1992, which were subsequently withdrawn under court authorization. The final decision on the case matter acknowledges the validity and applicability of Supplementary Law 7/70 and, as the appeal filed by the National Treasury was upheld, the lawsuit is now at the stage of calculation of the amounts due to the Federal Government. Therefore, Editora and Livraria recognized the related amounts as a provision, based on the opinion of the legal counsel handling the case and considering the best estimate made at the end of the reporting period to calculate the disbursement necessary to settle tax credits. On February 19, 2010, Editora and Livraria were ordered to increase escrow deposits, pursuant to the final and unappealable decision, by R$99 and R$1,237, respectively. The amount that settles the tax credit is still under discussion. The provision is increased by interest calculated using a Selic rate of 11.04% as at December 31, 2011 (9.37% as at December 31, 2010). (c) Livraria s labor lawsuits substantially related to terminations in the normal course of business, in the amount of R$145; civil lawsuits substantially related to indemnity claims filed by Livraria s customers, in the amount of R$251; and Editora s civil lawsuits, whose estimaled loss amount is R$

47 (d) Livraria challenges at administrative level tax assessment notices issued in 2011, relating to State VAT (ICMS) credits taken on the acquisition from suppliers considered as inactive in the masterfile of the State Finance Department. The amount accrued is R$1,603 and corresponds to the principal and fine. The provision is increased by interest calculated using a Selic rate of 11.04% as at December 31, 2011 (9.37% as at December 31, 2010). Escrow deposits (a) Lawsuits filed by Editora and Livraria to challenge the broadening of PIS and COFINS tax base and the increase in the COFINS tax rate. (b) On May 5, 2011, escrow deposits made to guarantee the lawsuits filed by Editora to challenge the effects from the Plano Real - Law 8880/94 in the amount of R$1,439 were withdrawn. Contingent liabilities Editora s and Livraria s management challenge at administrative level and in courts tax, civil and labor lawsuits whose likelihood of loss is assessed as possible by their legal counsel, in the estimated amount of R$82,,682, of which R$60,122 for Editora and R$22,560 for Livraria (R$48,899 as at December 31, 2010, of which R$18,147 for Editora and R$30,752 for Livraria). 46

48 Social security obligations - INSS Represented by tax assessment notices issued against Editora and Livraria as a result of the non-payment of social security contributions on profit sharing, as prescribed by article 10 of Law 6404/76, and noncompliance with accessory obligations in the amount of R$3,004 (R$2,031 of Editora and R$973 of Livraria). IRPJ, CSLL, PIS and COFINS Represented mainly by administrative proceedings filed by Editora and Livraria to offset tax credits used in the payment of corporate income tax (IRPJ) and social contribution (CSLL) in the amount of R$29,357 (R$23,813 of Editora and R$5,544 of Livraria). Some proceedings are secured by escrow deposits in the amount of R$8,817 (R$6,377 of Editora and R$2,440 of Livraria). Declaratory Action , filed by Editora, which is in progress before the 23 rd Federal Court of São Paulo, 1 st lower court, assigned on June 10, 1999, to challenge the broadening of the tax basis and rate increase (from 2% to 3%) introduced by Law 9718/98 in the COFINS calculation system. The action received a final and unappealable decision by the Federal Supreme Court, which decided to acknowledge only the unconstitutionality of the broadening of the COFINS tax base. Due to problems faced to obtain a debt clearance certificate from the Federal Revenue Service, the plaintiff requested to the court the transfer of the escrow deposits made in Banco do Brasil to Caixa Econômica Federal, properly adjusted based on the Selic rate. Banco do Brasil transferred the related amounts adjusted based on the Selic rate in January 2010 but filed an appeal to challenge such adjustment. The claim is secured by escrow deposits and the estimated amount challenged is R$30,130. Declaratory action , filed by Livraria, which is in progress before the 21 st Federal Court of São Paulo, 2 nd appellate court, assigned on June 10, 1999, to challenge the broadening of the tax basis and rate increase (from 2% to 3%) introduced by Law 9718/98 in the COFINS calculation system. The action did not receive yet a final and unappealable decision, and the Brazilian government s appeal against the lower court decision is currently pending judgment by the Regional Federal Court of the 3 rd region. Due to problems faced to obtain a debt clearance certificate from the Federal Revenue Service, the plaintiff requested to the court the transfer of the escrow deposits made in Banco do Brasil to Caixa Econômica Federal, properly adjusted based on the Selic rate. The court decided on the transfer of such amounts but without the adjustment based on the Selic rate, whose amount was transferred in December The action is secured by escrow deposits and the estimated amount challenged is R$12,439. State VAT (ICMS) Tax assessment notice , which is in progress before the Tax Department of the State of São Paulo - State Finance Department - Guarulhos Unit, 1 st lower court, assigned on August 24, 2009, whose plaintiff is the Finance Department and defendant is Editora, to demand the payment of State VAT (ICMS) from 2006 to 2007, as a result of the differences identified between shipments and returns of goods for manufacturing by third parties, as prescribed by article 509 of ICMS Regulation - RICMS/00. The ICMS claimed refers to the alleged deviation of the purpose of transactions supported by the tax immunity, as prescribed 47

49 by article 7, item XIII, of RICMS/00. Editora filed a defense on September 20, On February 2, 2010, a decision was handed down, which considered with grounds the tax assessment notice issued; for this reason, an ordinary appeal was filed on March 1, On June 23, 2010, the President of the 10 th Chamber decided that the appealed decision and all subsequent actions in the search for the material facts should be reversed, and before handing down the new decision, the tax authority should issue an opinion on the reporting judge s conclusions. On November 19, 2010, a decision upholding the tax assessment notice was issued. On December 15, 2010, an ordinary appeal was filed, which is pending judgment. The estimated amount challenged is R$1,278. Civil lawsuits Indemnity claim , which is in progress before the 39 th Civil Court of the Central District os São Paulo, 1 st lower court, assigned on September 25, 2009, filed by Livraria Cultura S.A. and Fernando Faria de Castro Brandão against Editora and Livraria to challenge the alleged plagiarism of an architectonic project, unauthorized reproduction of image set and potential unfair competition. A defense was filed in February The claim is currently in the expert examination phase. The estimated cash outflow necessary to settle the obligations is R$1, SHAREHOLDERS EQUITY a) Capital As at December 31, 2011, Editora s capital is R$203,653, represented by 28,596,123 shares, of which 9,622,313 are common shares and 18,973,810 are preferred shares without par value and with the right to vote in shareholders meetings. The Extraordinary Shareholders' Meeting held on April 25, 2011 approved the increase of capital to R$203,653 using R$12,675 of the earnings reserve, without changing the number of shares. Editora s bylaws comply with the Level 2 Differentiated Corporate Governance Practices of BM&FBOVESPA. Editora is authorized to increase capital, through the issue of new shares for subscription and regardless of any amendment to the bylaws, by up to 4,000,000 shares. Of this total, up to 500,000 shares can be granted as stock options, pursuant to the bylaws. Editora s preferred shares, which cannot exceed two thirds of the total shares issued, entitle their holders to the following rights or advantages: Restricted voting rights, pursuant to the bylaws. Right to sell the preferred shares in the case of sale of Editora s control, pursuant to the bylaws. 48

50 Dividends equal to those paid on common shares. Share in the distribution of bonus shares out of capitalization of reserves, retained earnings and any other funds, under the same terms and conditions granted to common shareholders. Common shares cannot be converted into preferred shares, and vice versa. b) Treasury shares - CVM Instructions 10/80 and 298/97 Editora holds 313,250 preferred shares in treasury (250,550 as at December 31, 2010), with carrying amount of R$4,923 (R$1,965 as at December 31, 2010) and fair value of R$6,547 (R$20.90 per share - December 31, 2011 quotation). The Board of Directors meeting held on August 17, 2011 authorized, under the bylaws, the purchase of 150,000 book-entry preferred shares issued by the Editora to be held in treasury. In 2011, 150,000 shares were bought at an average price of R$24.29 per share. On October 5, 2011, the Share Buyback Program started on August 18, 2011 was concluded. In 2011, 87,300 treasury shares were sold to the beneficiaries of the 4 th Stock Option Plan, for a total of R$2,895, of which R$685 correspond to the average purchase cost and R$2,210 to the appreciation of these shares recorded in an earnings reserve. c) Dividends and interest on capital Shareholders are entitled to a minimum dividend of 25% of adjusted net income for the year. Editora cannot, unless authorized by a majority vote in a special preferred shareholders' meeting, hold, for more than four successive quarters, cash and cash equivalents in an amount greater than 25% of total assets. Cash and cash equivalents will correspond to the amounts recorded in line item Cash and cash equivalents exceeding the sum of the amounts recorded in line item Borrowings and financing in current and noncurrent liabilities. Pursuant to the bylaws, the amount of interest on capital for purposes of calculation of mandatory dividends is net of income tax. At the Meeting held on December 5, 2011, the Board of Directors approved the distribution of interest on capital totaling R$24,839 (R$ per share), to be taxed pursuant to the prevailing tax law. Payment to shareholders will be made beginning April 30, As at December 31, the amount to be distributed as dividends was separately stated and calculated as follows: 49

51 The effect of interest on the year was a reduction d) Legal reserve As at December 31, 2011, Editora recognized a legal reserve in the amount of R$3,246 (R$3,051 as at December 31, 2010), as prescribed by Article 193 of the Brazilian Corporate Law. e) Stock option plan of Editora capital on the calculation of income tax and social contribution for of R$8,296 (R$7,444 as at December 31, 2010). The meetings of the Stock Option Plan Committee held on November 24, 2011 approved the 6 th Stock Option Plan. 50

52 Saraiva S.A. Livreiros Editores and Subsidiaries The options under the plans approved by the Board of Directors were granted to officers and employees and will be exercised by means of the issuance of new shares and/or sale of treasury shares held by Editora, at the discretion of the Board of Directors at the time of exercise. The fair value of stock option plans was calculated on the grant date of each plan and based on the binomial pricing model. The effects were reflected in profit or loss, in line item Operating expenses, and in shareholders equity, in line item Earnings reserve, as follows: The table below shows the changes in stock option grants in 2011: In the period from April 29 to May 6, 2011, stock options equivalent to 87,300 shares of the 4 th Plan were exercised through the sale of treasury shares for the amount of R$2,895. In the period from April 23 to May 7, 2010, stock options equivalent to 115,200 shares of the 3 rd Plan were exercised through the sale of treasury shares for the amount of R$2,656. In determining the fair value of stock options, the following economic assumptions were used: 51

53 f) Recognition of reserve for future capital increase Of the remaining balance of net income for the year ended December 31, 2011, after the allocation to the legal reserve amounting to R$3,246, and the proposed payment of interest on capital and dividends amounting to R$24,839, R$36,835 was allocated to the reserve for future capital increase, as prescribed by the bylaws. This allocation must be approved by the Annual Shareholders Meeting. g) Noncontrolling interest 52

54 Saraiva S.A. Livreiros Editores and Subsidiaries 22. NET OPERATING REVENUE 23. EXPENSES BY NATURE 53

55 24. OTHER OPERATING EXPENSES 25. OTHER OPERATING INCOME 54

56 Saraiva S.A. Livreiros Editores and Subsidiaries 26. FINANCIAL INCOME (EXPENSES) 27. OPERATING LEASE - STORE RENTALS As at December 31, 2011, Livraria had 101 lease agreements with third parties for its stores. Management reviewed thesee agreements and concluded that they qualify as operating leases. Most of the store lease agreements provide for a variable rental expense, based on sales, or a minimum amount adjusted to inflation on an annual basis by several indexes, are effective for five years, subject to renewal, and are usually guaranteed by Editora through pledge. Rentals under lease agreements for Livraria s logistics and administrative areas and Editora s stores are fixed, with annual adjustments to inflation according to the fluctuation of the main inflation indices. 55

57 The lease amount for properties is always the higher of: (a) the equivalent to 2 to 10 percent of a store s gross monthly sales; or (b) a minimum monthly amount annually adjusted using certain inflation indices, as applicable. Said lease agreements are effective for indeterminate or determinate periods; in the latter case, these periods range from five to ten years, subject to amicable or court-ordered (renewal lawsuit) renewal. Rental expenses, net of recoverable taxes, are as follows: The balance of Operating leases - store rentals included in current liabilities as at December 31, 2011 is R$636 (R$505 as at December 31, 2010), in Editora, and R$ $10,367 (R$8,727 as at December 31, 2010) in consolidated. Future obligations (consolidated), from these agreements at December 31, 2011 values, totaled a minimum amount of R$207,002, as follows: 28. EARNINGS PER SHARE Editora s by-laws ensure preferred shareholders dividends equal to those of common shares; accordingly, earnings per share are the same for common and preferred shares. The table below shows the calculation of earnings per share pursuant to CPC 41 (IAS 33): 56

58 Saraiva S.A. Livreiros Editores and Subsidiaries 29. FINANCIAL INSTRUMENTS a) Capital risk management Editora s objectives in managing its capital are to ensure the continuity of operations to generate return to shareholders, and maintain an appropriate capital structure to minimize the related costs. Editora s capital structure comprises financial liabilities with financial institutions (Note 15), cash and cash equivalents (Note 5), and shareholders equity (Note 21). The debt ratios are summarized as follows: Periodically, Management reviews the capital structure and its ability to settle its liabilities, and monitors on a timely basis the average term of trade accounts receivable, trade accounts payable, and inventories, and takes the necessary actions to maintain them at levels considered adequate for financial management purposes. 57

59 b) Significant accounting policies Information on the significant accounting policies and methods adopted, including the criteria for recognition and measurement of income and expenses for each class of financial assets and financial liabilities, in addition to shareholders equity, is described in Note 3. c) Categories of financial instruments 58

60 Management believes that the financial instruments, which are recognized in the individual and consolidated financial statements at their carrying amounts, approximate their fair values at the end of each reporting period. The balance of line item Borrowings and financing is adjusted for inflation based on market indices (CDI and TJLP) and contractual rates (Note 15) and variable interest because of market conditions; therefore, the outstanding balance recognized at the end of each reporting period approximates its fair value. However, considering that there is no active market for these instruments, differences might arise should these amounts be settled in advance. d) Financial risks Editora s and Livraria s activities are exposed to some financial risks, such as the market risk, the credit risk, the liquidity risk, and the risk limited to the amount of the premium paid for the derivative intended to hedge against currency fluctuations. Risk management is carried out by Editora s management in accordance with the policies approved by the executive committee. Editora s treasury area identifies, measures, and hedges it against possible financial risks in cooperation with Editora s operational units. e) Interest rate risk management Editora and Livraria are exposed to usual market risks arising from changes in interest rates on borrowings. The interest rate risk management policy set by Management comprises the permanent monitoring of the economic environment to identify possible fluctuations in interest rates and, when applicable, the conduction of transactions to hedge against fluctuations in interest rates. In 2011 Management carried out fixed interest borrowing transactions to hedge against fluctuations in the interbank deposit rate (CDI). f) Currency risk management Editora s and Livraria s revenues are denominated in Brazilian reais; the currency risk arises from possible business transactions consisting mainly of product and service imports denominated in US dollars (US$). The currency risk management policy set by Editora s management requires that any import transactions be hedged by US dollar non-deliverable forwards (NDFs), used only as a value hedging instrument and never as speculative instrument, which can be carried out for transactions exposed to foreign exchange fluctuation with a financial impact on Editora, even though they are not designated as hedges. Once a material import transaction is approved, the currency price that would permit the sale of the imports in the domestic market within the expected profit margin and probable delivery terms is used as basis; subsequently, the exercise price and maturity that will be used as basis to purchase US dollar put options are defined. 59

61 In 2010 and 2011, NDF transactions were entered into with Banco do Brasil, without physical delivery of US dollars, as follows: As at December 31, 2011, there were no outstanding transactions; the last transaction was settled on November 30, g) Foreign currency borrowings Livraria raised interest-bearing foreign currency-denominated loans (US dollar) with Banco Itaú BBA and Banco Santander, for which it entered into swap transactions to hedge against currency fluctuation, swapping contracted interest rate and foreign currency exchange rate change for CDI plus fixed rate. The transaction matches a loan agreement to a swap transaction entered into on the same date, with the same maturity and counterparty and that should be settled at its net amount. The transaction is basically a local currency-denominated loan plus a specific interest rate that is fixed or determined based on the CDI fluctuation, as the case may be. The accounting treatment and respective disclosures reflect the substance of the transaction. As at December 31, 2011, outstanding swap contracts are as follows: With respect to foreign currency-denominated loan agreements entered into with Banco Itaú BBA, Livraria is only and solely subject to fluctuations in the interbank deposit rate (CDI). There are no riskss of fluctuations in exchange rates to be measured by the sensitivity analysis. 60

62 Saraiva S.A. Livreiros Editores and Subsidiaries h) Supplementary sensitivity analysis of financial instruments pursuant to CVM Instruction 475/08 The sensitivity analysis was developed based on the exposure to CDI fluctuation, which is the main index applicable to borrowings and the investments of cash surpluses. Editora presents below the additional disclosures on its financial instruments required by CVM Instruction 475 of December 17, 2008, specifically on the supplementary sensitivity analysis required by IFRSs and the accounting practices adopted in Brazil. In preparing this sensitivity analysis, Management adopted the following assumptions: identify the market risks that can result in material losses; outline a probable risk scenario (Scenario I). outline two additional scenarios with stresses of at least 25 and variable considered (Scenario II and Scenario III, respectively); 50 percent in the risk present the impact of the scenarios outlined on the fair values financial instruments. Interest rate risk (*) (*) Assets and liabilities with interest recalculated according to previously outlined scenarios. 61

63 i) Credit risk management The sales and credit policies of Editora and Livraria are subject to the credit policies established by their Management and are intended to minimize possible problems arising from the default of their customers. This objective is attained throughh a careful selection of the customer portfolio, which considers the customer ability to pay (credit rating). Editora recognizes an allowance for doubtful accounts amounting to R$2,496 and R$3,596 in consolidated (R$3,432 in Editora and R$6,915 in consolidated as at December 31, 2010), to cover credit risks. j) Liquidity risk management Management monitors the continuous estimates of liquidity requirements of Editora and Livraria to ensure it has sufficient cash to meet its operational needs. Because of the dynamics of their business, Editora and Livraria maintain a borrowing flexibility by maintaining credit facilities at some financial institutions. The table below shows in detail the maturity of outstanding financial liabilities: k) Risk concentration The financial instruments that potentially expose Editora and Livraria to concentration of credit risk consist basically of banks, short-term investments, and trade accounts receivable. The balance of line item Trade accounts receivable of Livraria is substantially distributed among credit card companies. The total balance of trade accounts receivable is denominated in Brazilian reais (R$). 62

64 Saraiva S.A. Livreiros Editores and Subsidiaries l) Credit facilities m) Fair value Interest rate swap agreements were classified as held-to-maturity financial assets and as Level 1 for calculation of their fair value based on negotiations in an active market for similar instruments, and their effects are recorded directly in profit or loss. Consolidated - IFRS & BR GAAP 12/31/11 Fair value Adjusted value Mark-to-market 59,692 58,482 1,210 n) Collaterals granted Consolidated - IFRS & BR GAAP 12/31/11 Letters of guarantee to secure the supply of goods to Livraria Letter of guarantee to secure the federal tax execution lawsuit 10,000 2,725 12,725 (*) The letters of guarantee granted generated financial expenses totaling R$ SEGMENT REPORTING The financial and operating management of the Saraiva Group business is divided into the segments called Editora and Livraria, using management reports and internal controls, with separate information on revenues, expenses, and investments. These reports are periodically reviewed by the Executive Committee and Board of Directors to assess performance and for decision-making on the allocation of resources and/or investments. 63

65 The Editora segment consists of the editing of books, production of digital content, and development of teaching systems. Distribution is carried out through 16 branches and representatives strategically located in the South, Southeast, Mid-west, North, and Northeast regions. The Livraria segment refers to the retail business of cultural, leisure, and information products. Distribution is carried out through a chain of stores located in the main Brazilian cities and the ecommerce website Saraiva..com.br. a) Assets and liabilities b) Profit or loss 64

66 Saraiva S.A. Livreiros Editores and Subsidiaries c) Origin of segment revenue 31. INSURANCE Editora and Livraria have an insurance policy that considers risk concentration and their materiality, taking into consideration the nature of their activities and the advice of insurance brokers. 65

67 As at December 31, insurance coverage is as follows: 32. SUPPLEMENTAL CASH FLOW INFORMATION Editora s management defines as cash and cash equivalents amounts maintained for the purpose of meeting short-term commitments and not for investment or any other purposes. Short-term investments can be immediately converted into a known cash amount and are not subject to significant changes in value. This line item is broken down as described in Note 5. Changes in assets and liabilities not affecting cash flows are as follows: Editora - Consolidated - BR GAAP IFRS & BR GAAP 12/31/11 12/31/10 12/31/11 12/31/10 Portion of recoverable taxes installment transferred to noncurrent assets Receivables from the sale of property, plant and equipment transferred to current assets Portion of financing transferred to current liabilities Portion of working capital loans transferred to noncurrent assets Capital increase with conversion of loans granted to Livraria Acquisition of assets under finance leases Portion of other liabilities transferred to current liabilities ,104-30, ,685 3, , ,031 49,000-3, ,022 1,685 5, , AUTHORIZATION FOR COMPLETION OF THE FINANCIAL STATEMENTS At the meeting held on March 16, 2012, the Board of Directors authorized the completion of these individual and consolidated financial statements, which comprise events subsequent to December 31, 2011, when applicable, and approved them for disclosure. 66

68 Dear Shareholders, Saraiva S.A. Livreiros Editores (Editora or Company), in accordance with corporate legislation, presents hereby the Management Report and the corresponding individual and consolidated Financial Statements for the business year ended on December 31, The Saraiva Group operates in the editorial sector through Saraiva S.A. Livreiros Editores (Editora or Company) and in the retail sector related to culture, leisure and information through Saraiva e Siciliano S.A. (Livraria or Company). The accounting information of Editora contained in this document is presented according to the accounting practices adopted by Brazil (BR GAAP) and International Financial Reporting Standards - (IFRS) and refer to the fourth quarter of 2011 (4Q11) and the 12 months ended in December 2011, with comparisons made in relation to the same periods of the previous year, except when stated otherwise. Any and all non-accounting information or information derived from non-accounting numbers has not been reviewed by independent auditors. MESSAGE FROM MANAGEMENT The year of 2011 was marked by some great achievements of Saraiva. At the same time as the Company recorded a strong performance and achieved significant growth, investment opportunities that strengthened competitiveness and contributed to the sustainable growth were identified. Saraiva's performance was boosted by the economic environment and the recovery of income with positive effects on consumption of goods and services related to education, culture, information and entertainment, combined with an increase in public investments in the educational area. Investments in new textbook collections for elementary and high school students enabled Editora to grab a significant share in the National Textbook Program (PNLD 2012) with a total contract for the supply of books to public elementary and high schools amounting to R$ million (24.6% share in new adoptions), as well as to continue developing its business in the private market, with emphasis on K12 textbooks and readers, Teaching System contents and digital content. Livraria, in turn, continued to introduce new product and service categories and to expand and strengthen its various sales channels, including the development of the digital channel. Consolidated net revenue totaled R$ 1.9 billion in 2011, up 20.7% in comparison with the previous year. EBITDA 1 (net income before financial result, social contribution, income tax, depreciation and amortization) amounted to R$ million, an all-time record, and represented a 19.4% increase in relation to that of Net income reached R$ 64.9 million and rose 6.4% in relation to the previous year. Total investments in 2011 amounted to R$ 65.3 million. The demand for content provided by Editora Saraiva is mostly related to the elementary and high schools, as well as to the Teaching Systems (through the Ético and Agora imprints). In addition, content is offered in the scientific, technical and professional segments mainly for universities. Editora s net revenue hit R$ million in 2011, 20.7% higher than that registered in the previous year. The catalogue of the federal textbook purchase program for public schools (PNLD) was efficiently promoted, leading to a 24.6% increase in new adoptions for high schools. 1 EBITDA represents net income before financial result, social contribution, income tax, depreciation and amortization. It is not a measure used according to the adopted accounting practices in Brazil or in the generally-accepted accounting principles of other countries and does not represent the cash flow for the periods shown and must not be considered as an alternative for net profit as an indicator of operational performance of the company or as an alternative for cash flow as an indicator of liquidity. EBITDA has no standard definition and our definition of EBITDA may not be comparable with that of other companies. 1

69 In private market sales, Editora registered excellent results in the sector of scientific, technical and professional books ( CTP ), as well as in the editorial line of the Teaching Systems, in customized content for Colleges, as well as in K12 textbook and reader lines. The fiction and nonfiction imprint Benvirá, created in 2010, posted a growth of 127.5% in the period. Net revenue from the private market totaled R$ million in Important achievements took place in the Private Teaching System Division throughout the year, registering an excellent acceptance of the solutions offered, with a growth of 36.5% in the number of students in the year. Moreover, in 2011, sales in the public channel were kicked off through the Agora imprint developed in 2010 with the purpose of offering to this market content of renowned editorial quality, as well as a differentiated service package for teachers. Concurrently with the investment made in educational solutions under the Teaching Systems format, Editora continued to invest in multimedia solutions for elementary and high schools by offering digital educational content and assessment tools that, together with the printed media, add value to traditional teaching-learning methods. An example of these initiatives was the Saraiva Conecte collection, a platform that integrates physical media and digital content to provide a complete solution for high school students. In recent years, the Brazilian retail sector has benefited from the favorable economic environment. Accordingly, the Saraiva Group took advantage of this opportunity and made significant investments that differentiated the company in relation to its competitors. It was no accident that Livraria Saraiva showed a significant revenue growth in recent years, with contributions from all its business channels. Livraria s net revenue totaled R$ 1.4 billion, up 20.5% in comparison with that of This performance reflects the growth of electronic retail (23.8%) as well as of the physical stores (+18.6%). In the same-store concept, revenue rose 9.5%. Seven new units were opened in 2011, including two itown stores and three others, which were previously franchised, were transferred. In electronic retail, the sales results of Saraiva.com also confirm the success of the product mix diversification strategies. New product and service categories also contributed to Livraria's sales growth, such as the Extended Warranty and Help Desk services, as well as Saraiva Digital Reader (the e-book sales platform) and new categories within the marketplace concept (where Livraria mediates the transaction between consumers and suppliers of goods for a commission). As such, the range of products and services that provide a unique experience for the customers interested in education, culture, information and entertainment is enhanced. It is worthwhile mentioning that even with the increase of other product and service categories, which enabled Livraria to grow significantly in 2011, the Books category also registered a growth of around 7.7% as a result of the ongoing effort to provide a vast library combined with excellent customer care service and the understanding of the customer s needs. Moreover, the Digital Book category, launched in 2010, registered a growth and, despite still being insignificant in Livraria s current result, it registered sales eight times greater than those of the previous year. The membership base of the Saraiva Plus program, launched in 2005 and aimed at increasing the loyalty and to understanding the needs of customers, surpassed the mark of 5.9 million customers. In 2011, Saraiva expanded and strengthened its core business lines, in addition to developing new initiatives aimed at preparing the Company for future challenges that it may face in the future. The Saraiva Group continues to be optimistic about the opportunities available in its business markets and confident in its employees ongoing capacity to overcome. 2

70 CONSOLIDATED The following table shows the major consolidated economic and financial performance indicators. Consolidated (R$ thousand) 4Q11 4Q10 Chg Chg. Net Revenue 649, , % 1,888,967 1,564, % Gross Profit 280, , % 803, , % Gross M argin 43.3% 44.0% -78 b.p. 42.5% 43.1% -59 b.p. Operating Expenses before Depreciation and Amortization Expenses 195, , % 630, , % EBITDA 84,795 79, % 172, , % EBITDA M argin 13.1% 14.7% -167 b.p. 9.1% 9.2% -10 b.p. Depreciation and Amortization Expenses 8,613 7, % 32,961 27, % Income from Operating (EBIT) 76,182 72, % 139, , % EBIT M argin 11.7% 13.4% -165 b.p. 7.4% 7.5% -10 b.p. Net Financial (Revenue) Expenses 15,549 10, % 49,933 32, % Income from Operations after Net Financial Income 60,633 61, % 89,659 84, % Net Income (Loss) 47,238 47, % 64,921 61, % Total Assets 1,337,446 1,102, % 1,337,446 1,102, % Shareholders' Equity 466, , % 466, , % Net Debt (274,126) (175,021) 56.6% (274,126) (175,021) 56.6% Net Revenue Consolidated net revenue totaled R$ million in 4Q11, up 20.3% over that of the same year-ago period. In 2011, net revenue totaled R$ 1.9 billion, up 20.7% as compared with that of The performances in the quarter as well as in the year reflect the growth registered by Editora and Livraria. Consolidated Net Revenue (R$ million) Livraria Editora 1, , , , , , % CAGR: Compound Annual Growth Rate 4Q10 4Q11 The share of retail activities in the Group s consolidated net revenue was 76% and the editorial operations contributed with 24% in 2011, as well as in Consolidated Net Revenue Mix Editora 24% Editora 24% Livraria 76% Livraria 76% 3

71 Gross Profit Consolidated gross profit amounted to R$ million in 4Q11, an 18.2% increase in relation to that in 4Q10. In 2011, gross profit reached R$ million, up 19.0% as compared with that of the previous year. Consolidated gross margin in 4Q11 was 43.3%, against 44.0% in 4Q10, down 78 basis points. The gross margin in the 12-month period reached 42.5% against 43.1% in The greater share of government sales in Editora s revenue mix account for the differences shown in the consolidated gross margins in comparison with Gross M argin (%) 4Q11 4Q10 Chg Chg. Editora 58.4% 62.9% -447 b.p. 66.1% 68.7% -267 b.p. Livraria 32.8% 31.6% 119 b.p. 32.9% 32.6% 27 b.p. Consolidated 43.3% 44.0% -78 b.p. 42.5% 43.1% -59 b.p. Operating Result The operating result before financial result (EBIT) totaled R$ 76.2 million in 4Q11, 5.5% higher than in 4Q10. It reached R$ million in 2010, up 19.0% in relation to that of Operating Expenses (R$ million) and Operating Expenses / Net Revenue (%) 33.9% 33.4% 29.3% 30.2% Q10 4Q11 Operating expenses in 4Q11 summed R$ million, above the 24.0% registered in the same period of 2010 (R$ million). In the twelve-month period, this item amounted to R$ million, up from R$ million (+19.0%) registered in The operating expense to net revenue ratio reached 30.2% in 4Q11 (29.3% in 4Q10), increasing 89 basis points in relation to the same period of the previous year. In the annual comparison, the operating expense to net revenue ratio reached 33.4% in 2011, against 33.9% in 2010, up 49 basis points. Stock Option Plan A provision of R$ thousand for expenses related to the Stock Option Plans was established in 4Q11. In the 12-month period, the amount reached R$ thousand. The fair value of these plans is calculated on the date of the respective approvals and based on the Binomial pricing model. EBITDA Consolidated EBITDA totaled R$ 84.8 million in 4Q11, against R$ 79.5 million in 4Q10. In 2010, the EBITDA totaled R$ million, against R$ million in 2010, up 19.4%. The EBITDA margin reached 13.1% in 4Q11, 167 basis points lower than that registered in the same period of the previous year, and in the 12-month period, the respective margin was 9.1% (9.2% in 2010). 4

72 Consolidated EBITDA Mix Editora 55% Livraria 45% Editora 62% Livraria 38% Capital Structure / Financial Result The consolidated financial position went from a net debt of R$ million at the end of 2010 to R$ million at the end of December The net debt to consolidated EBITDA ratio reached 1.6 times in December 2011 (1.2 times in December 2010). The increase in leverage is linked to the development and enhancement of business lines in the Group s operations, mainly Livraria's. The financial result presented net financial expenses of R$ 15.5 million in 4Q11 against R$ 10.6 million in 4Q10. Financial result for the 12-month period registered expenses of R$ 49.9 million in 2011 and of R$ 32.7 million in 2010, due to the increase in financial position mentioned earlier. It is worthwhile noting that the financial position of the year ended on December 31, 2011 represents a cash and investment position amounting to R$ million and a gross debt of R$ million, of which 63.1% was contracted from the National Development Bank (BNDES) at a very competitive rate. Net Income Net profit in 4Q11 totaled R$ 47.2 million, compared with R$ 47.1 million in 4Q10. Profit in 2011 totaled R$ 64.9 million, against R$ 61.0 million in 2010, up 6.4%. Investments Investments totaled R$ 65.3 million in 2011 (in 2010 they totaled R$ 43.3 million) and were basically aimed at information systems and the organic expansion of retail operations, through new stores or remodeled stores. 5

73 SARAIVA S.A. LIVREIROS EDITORES (EDITORA) Editora s fourth quarter, when the textbooks, under the PNLD National Textbook Program are traditionally produced and delivered to the elementary and high schools, is very representative for the year s overall result. The following table summarizes Editora s main economic-financial performance data. Editora (R$ thousand) 4Q11 4Q10 Chg Chg. Net Revenue 251, , % 501, , % Gross Profit 146, , % 331, , % Gross M argin 58.4% 62.9% -447 b.p. 66.1% 68.7% -267 b.p. Operating Expenses before Depreciation and Amortization Expenses 85,663 66, % 234, , % EBITDA 60,994 64, % 96,710 90, % EBITDA M argin 24.3% 30.9% -662 b.p. 19.3% 21.7% -240 b.p. Depreciation and Amortization Expenses 1,486 1, % 5,698 4, % Income from Operating (EBIT) 59,508 63, % 91,012 85, % EBIT M argin 23.7% 30.3% -660 b.p. 18.2% 20.5% -237 b.p. Net Financial (Revenue) Expenses 4,801 3, % 11,916 9, % Income from Operations before Equity Income 54,707 59, % 79,096 76, % Net Income (Loss) Before Equity in Subsidiaries 44,235 46, % 59,012 56, % Net Income (Loss) 47,238 47, % 64,920 61, % Net Revenue Net revenue reached R$ million in 4Q11, up 20.7% in relation to that of 4Q10 and in the 12-month period reached R$ million, 20.7% higher than in This performance reflects the results from sales to the government, as well as from investments made in the book catalogue, in multimedia solutions and in content under the teaching system format. The graph below shows Editora s net revenue evolution and the contributions of the public and private markets. Net Revenue (R$ million) % (Private Market) Privet Market Government CAGR: Compound Annual Growth Rate 4Q10 4Q11 Private Market The net revenue from the private market reached R$ million in 2011, representing a 7.0% growth as compared with that of the previous year. This growth is very positive and is important because legal textbooks were negatively impacted by the ban placed on the use of commented books in the 2 nd stage of the bar exam, where this effect was successfully mitigated over the year through several actions implemented by the commercial area in all editorial lines. 6

74 In the educational segment, the Saraiva Conecte collection was launched, a complete high school line that combines the regular textbook with digital content, a solution that includes not only the content of the regular book itself but also of many different teaching functions and objects, creating a richer and more innovative experience for the students. Additionally, the 2 nd edition of the Prosa series was launched. This widely-accepted series includes a complete collection for elementary I students level. Government The overall contract for the supply of textbooks to public elementary and high schools (PNLD 2012) totaled R$ million and new adoptions this year, aimed at high schools, totaled R$ million (share of 24.6% in the total of new adoptions) in addition to R$ 42.5 million deriving from the replacement of books for the elementary I and II teaching levels. Gross Profit Gross profit reached R$ million in 4Q11, up 12.2% over that registered in 4Q10. The gross margin increased 447 basis points, from 62.9% in 4Q10 to 58.4% in 4Q11. In the 12-month period, gross profit amounted to R$ million (+16.0%). Gross margin registered a drop of 267 basis points, from 68.7% in 2010 to 66.1% in 2011, as a result of a greater share of government sales in Editora s revenue mix. It s important to highlight that the private market sales generate higher margins than those from government sales. Operating Expenses Operating expenses totaled R$ 85.7 million in 4Q11, 28.9% up from the amount registered in the same period of the previous year. The ratio between expenses and net revenue increased 215 basis points, going from 31.9% in 4Q10 to 34.1% in 4Q11. Operating expenses in the 12-month period totaled R$ million and its ratio with net revenue was 46.8% against 47.0% in Editora continued to invest in new editorial businesses throughout 2011, in particular in the Teaching Systems division, in the Benvirá fiction and nonfiction imprint and in Multimedia education projects. The operating expenses of these new businesses also put pressure on the Company s results in 2011, but have good perspectives of generating value in the medium and long term. Publishing activities are characterized by preliminary expenses for the formatting of content and for sales efforts and, therefore, it is usual for those new businesses to pressure the results in the initial investment stage. EBITDA EBITDA reached R$ 61.0 million in 4Q11, down 5.1% in relation to that in the same period of the preceding year. EBITDA totaled R$ 96.7 million, up 7.3% in relation to that of The EBITDA margin went from 30.9% in 4Q10 to 24.3% in 4Q11 and from 21.7% in 2010 to 19.3% in 2011 as a result of the greater share of Government sales under the scope of PNLD. EBITDA (R$ million) x EBITDA Margin (%) 22.5% 23.4% 22.2% 21.7% 19.3% 30.9% 24.3% -5.1% Q10 4Q11 Financial Result / Capital Structure Editora s financial result in 4Q11 reached R$ 4.8 million in net financial expenses, against an expense of R$ 3.4 million in 4Q10. In 2011, the financial result registered net financial expenses of R$ 11.9 million against a net financial expense of R$ 9.1 million in On December 31, 2011, Editora s net debt was R$ 7.3 million against the R$ 5.3 million registered at the end of

75 In 2011, R$ 42.1 million was disbursed by BNDES under the scope of the contract signed in 3Q11 totaling R$ 87.0 million. The funds of this credit line will be used to finance Editora s investments until December Net Income Net income before equity income of the subsidiary (Livraria) totaled R$ 44.2 million in 4Q11, against R$ 46.1 million in the same quarter of the previous year. Net income before equity income totaled R$ 59.0 million in 2011, up 5.3% over the R$ 56.1 million registered in the previous year. Net income after equity income of the subsidiary (Livraria) reached R$ 47.2 million in 4Q11, 0.4% growth in relation to that in 4Q10, and totaled R$ 64.9 million in 2011, surpassing the same period of 2010 by 6.4%. Investments Investments made in 2011 totaled R$ 10.5 million and were mostly used for information technology projects. Teaching Systems Since 2009, Editora sells complete solutions in the Teaching System format for the private network in all educational segments, from child education up to the pre-university entrance exam level. In addition, the Agora imprint launched in 2010 will be used in the public school network on This investment gives Brazilian educators another option among all those offered by Editora for the elementary and high school teaching level. The amount of students enrolled in the private system grew 36.5% in 2011, compared to The Teaching System division is available in 21 Brazilian states and in the Federal District and its educational solutions are present at 489 schools (406 schools in December 2010). The amount of students that use the private solutions reached the mark of 99.4 thousand in December In June 2011, the logistics operations of the Teaching Systems were transferred to a new area comprised of 6.0 thousand square meters in Campinas, São Paulo. This change will include the development of an automation system and logistics management in order to support the strong growth of the operations of Ético (private network) and in the future, Agora (public network). Acknowledgement Editora Saraiva was awarded the Top Education award by Educação magazine for recognition as the most remembered company in education, in the categories of best publisher of children's literature (for the 3 rd time), best textbook editor and best bookstore chain. SARAIVA E SICILIANO S.A. (LIVRARIA) Livraria operates predominantly in the retail of books, DVDs, CDs, stationery, information technology, electronic goods and digital content - books and movies. Livraria serves its customers through physical stores and the e-commerce website, Saraiva.com. The table below shows the main economic-financial performance data of the Company's operations. Livraria (R$ thousand) 4Q11 4Q10 Chg Chg. Net Revenue 415, , % 1,441,821 1,196, % Gross Profit 136, , % 474, , % Gross M argin 32.8% 31.6% 119 b.p. 32.9% 32.6% 27 b.p. Operating Expenses before Depreciation and Amortization Expenses 110,349 91, % 396, , % EBITDA 25,890 16, % 77,675 55, % EBITDA M argin 6.2% 4.8% 147 b.p. 5.4% 4.6% 75 b.p. Depreciation and Amortization Expenses 7,127 5, % 27,263 22, % Income from Operating (EBIT) 18,763 10, % 50,412 33, % EBIT M argin 4.5% 3.0% 150 b.p. 3.5% 2.8% 73 b.p. Net Financial (Revenue) Expenses 10,751 7, % 38,024 23, % Income from Operations after Net Financial Income 8,012 3, % 12,388 9, % Net Income (Loss) 5,089 2, % 7,734 6, % 8

76 Net Revenue In 4Q11, net revenue totaled R$ million, up 21.6% over that of 4Q10, and amounted to R$ 1.4 billion in 2011, 20.5% higher than that in The strong sales performance was affected by the growth of electronic retail as well as physical stores. In addition to the 9.5% net sales increase in comparable stores, Livraria s operations grew organically in 2011, when seven new stores were opened: 5 Mega Stores, 2 itown stores (in the Apple Premium Reseller model) and the transfer of three Saraiva franchises in Natal, Rio Grande do Norte state. Electronic retail posted a net revenue increase of 23.8% over 2010 and accounted for 35.9% of Livraria s total revenue. As a comparison, the electronic channel in 2010 represented 34.9% of total retail. The graph below shows the evolution of net revenue, splitting the share of physical stores and online sales, as well as its annual compound growth. CAGR (Physical Store): 32.3% CAGR (E-commerce): 38.6% Net Revenue (R$ million) 1, , % Q10 4Q11 Online Retailing Business Physical Stores CAGR: Compound Annual Growth Rate Comparable physical stores registered a growth of 11.0% in 4Q11 as compared with the growth of the same period last year. The graph below shows the quarterly evolution of growth in comparable physical store sales in Same-Stores Sales - by Quarter 10.0% 10.1% 8.3% 8.1% 11.0% Oct to Dec - 10 Jan to Mar - 11 Apr to Jun - 11 Jul to Sep - 11 Oct to Dec - 11 It is worthwhile noting that changes in the commercial policy were implemented in 4Q11, mainly in those which refers to the installment policy and free shipping, in order to address the profitability improvement in the retail operation. In the period between the acquisition of Siciliano (03/06/2008) and December 2011, all the stores were remodeled to the Saraiva service standard. Gross Profit Livraria s gross profit hit R$ million in 4Q11, up 26.2% in relation to that of the same period in Gross profit totaled R$ million in the year s total, up 21.5% over that registered in the previous year. 9

77 Gross margin in 4Q11 was of 32.8%, against 31.6% in 4Q10, up 119 basis points. In 2011, the gross margin reached 32.9%, an increase of 27 basis points in relation to The retail operation, in particular in the electronic channel, operates in an extremely fierce competitive environment. Within this context, the company offers products and services that provide a satisfying and differentiated experience to the customer, but at the same time also improve the contribution margins of the retail operation. Gross Profit (R$ million) x Gross Margin (%) 36.4% 35.5% 34.5% 32.6% 32.9% 31.6% 32.8% % Q10 4Q11 In 2011, despite the growth in the book category, the sales of non-book products contributed to more than half of the revenue mix of Saraiva s retail operations, as can be seen in the graph below. Sales Mix - Books and Other Products 47.9% 46.0% 46.0% 51.0% 56.2% 52.1% 54.0% 54.0% 49.0% 43.8% Books Other Products Operating Expenses In 4Q11, operating expenses totaled R$ million, representing a variation of 20.3% in comparison with 4Q10. In the same period, the ratio between operating expenses and net revenue was 26.5% against 26.8% in 4Q10. In the 12- month period, operating expenses totaled R$ million, greater than the R$ million registered in 2010 by 18.4%. When compared with the net annual revenue, this ratio went from 28.0% in 2010 to 27.5% in 2011, up 48 basis points. 10

78 Operating Expenses (R$ million) and Operating Expenses / Net Revenue (%) 27.6% 29.4% 30.2% 28.0% 27.5% 26.8% 26.5% % Q10 4Q11 Despite the improvement of 48 basis points in the expenses versus retail operation revenue ratio, Livraria s operating expenses continue to be pressured in 2011 by the development of new business platforms, technology projects and the strong pressure from expenses in the electronic media channel With regard to media expenses, the policy for this item was reviewed in December 2011 in order to obtain higher profits with less pressure on the margins, no longer aligned to the fierce competition of some competitors in this segment. EBITDA Livraria s EBITDA reached R$ 25.9 million in 4Q11 (R$ 16.2 million in 4Q10) and the EBITDA margin hit 6.2% (4.8% in 4Q10). In 2011, EBITDA totaled R$ 77.7 million, up 39.8% over that registered in 2010, a very positive growth, specially if considered within the context of the predatory activities of some competitors in the electronic retail. The EBITDA margin was 5.4% in 2011, against 4.6% in EBITDA (R$ million) x EBITDA Margin (%) 8.8% 6.1% 4.3% 4.6% 5.4% 4.8% 6.2% % Q10 4Q11 Financial Result / Capital Structure Net financial expenses reached R$ 10.7 million in 4Q11, against R$ 7.2 million in 4Q10. In 2011, net financial expenses totaled R$ 38.0 million as compared with R$ 23.6 million in Livraria s net debt went from R$ million at the end of 2011 to R$ million at the end of Livraria has already received the disbursement of 29.3% of the total amount contracted from BNDES in November, equal to a total of R$ 20.4 million. The funds under the scope of this line of credit will be used to finance investments in fixed assets and for working capital until December The changes in financial expenses and in net debt arise from the expansion of the physical store chain (7 new stores), the greater need for working capital due to the rapid sales growth of the e-commerce website and from investments in new platforms for the sale of digital content, in particular e-books. It is worth noting that due to the hostile actions of some competitors in electronic retail, working capital was more in demand for the expansion of the receipt turnovers, in addition to the pressure on gross margins, whether due to the pricing policy or the free shipping policy, with all these points affecting the net debt. This method was revised in 4Q11 in order for Livraria to find a commercial condition that is both suitable for the customer and profitable to Livraria. 11

79 Working Capital The working capital to net sales ratio reached 19.9% in 2011, against 18.9% in the same period of the preceding year. The graph below shows the evolution of working capital to net revenue over the past five years. Working Capital¹ / Net Revenue ² 72 days 74 days 76 days 77 days 82 days 15.3% 17.7% 17.1% 18.9% 19.9% (1) Inventory + Customers - Suppliers (monthly average in the past 12 months) (2) Net Revenue in the past 12 months Accounts Receivable reached 58 days in the 12-month period ended on December 31, 2011, against 55 days in the 12- month period ended on December 31, The average term of average inventory turnover went from 87 to 89 days in the 12-month period ended on December 31, 2010 and 2011, in that order. The supplier turnover rose to 65 days in the 12-month period ended on December 31, 2010 from 64 days in the 12-month period ended on December 31, Net Income Net income from retail operations totaled R$ 5.1 million in 4Q11 and R$ 2.0 million in 4Q10. Livraria s net profit reached R$ 7.7 million in 2011, against R$ 6.1 million in Investments In 2011, Livraria made important investments, totaling R$ 54.8 million (of which R$ 21.1 million in 4Q11 alone) mostly for the opening of seven new stores, in addition to the conversion of 3 franchises, as shown below: o itown - Goiânia Shopping mall - Goias (03/17/2011) o Mega Store - Iguatemi Alphaville mall in São Paulo city (04/28/2011) o Nova Tradicional in Tamboré Shopping mall in São Paulo city (04/28/2011). o itown - Recife Shopping mall in Pernambuco (05/03/2011) o Mega Store - Shopping Midway Mall, Natal in Rio Grande do Norte (11/04/11) - franchise absorbed o Traditional - Mossoró Shopping mall in Rio Grande do Norte (11/05/11) - franchise absorbed o Traditional - Natal Shopping mall in Rio Grande do Norte (11/05/11) - franchise absorbed o Mega Store - São Caetano Shopping mall in São Paulo city (11/09/2011) o Mega Store - Mooca Shopping mall in São Paulo city (11/29/2011) o Mega Store - Riomar Shopping mall in Aracajú, Sergipe (12/08/2011) The opening of the three stores by the company in Rio Grande do Norte (2 in Natal and 1 in Mossoró), in November 2011 resulted from the early termination of three franchise agreements that were maintained with the same franchisee, after the subsequent negotiation of new lease agreements with the owners of the points in question, as well as the subsequent absorption of these operations into the Livraria s store chain. 12