The year of 1999 was marked by several events that were important to SARAIVA. We began to position ourselves strategically with a view to exploiting the potential of the Internet, using the competitive advantages developed over 85 years of outstanding performance in the publishing and book-selling market. Editora Saraiva successfully concluded the process of absorbing Editora Atual, generating significant synergy gains. Livraria Saraiva - after concluding the first phase of the company's strategic repositioning project, with the inauguration of the 10th "Mega Store" - decided that the second phase of the project should encompass the opening of 12 more shops of the same model, between 2000 and 2002. For the seventh consecutive year, our consolidated sales growth rate registered a two-digit figure. The net profit for the year amounted to R$ 8.3 million, having been strongly affected by the increase in financial expenses, which was caused by the currency devaluation that took place at the beginning of the year and which, despite the fact that it was related to long-term debt, was totally recognized in the year of 1999.

1. SCENARIO AND MARKET

From a wider perspective, it is clear that important adjustments have been consolidated in 1999, and that the changes that occurred in the scenario over the last few years have brought about favorable conditions for sustained growth.

Past Situation Present Situation Inflationary culture Stability with flexibility in relative prices Closed economy Open economy/Global competition Centralized management Free market Public investments in Priority for investments in infrastructure education

Obviously, there are still many challenges to be overcome. But there seems at last to be a consensus regarding a crucial point: education is no longer only a social question but is rather a central economic issue. It is the key to the success or failure of any nation. Fortunately, there are concrete data to show that this reality is receiving attention. One important sign is that Brazil has already surpassed the 96% mark in the rate of enrollment in basic education. Other education indicators have also shown improvement; there are, however, huge gaps yet to be bridged. In view of this scenario, which shows both the resumption of economic development and firm steps in the direction of important conquests in the educational area, we see the present moment as especially favorable for us to maximize the results of the projects that have been developed and implemented by Saraiva.

2. INVESTIMENTS

We always stress that our investment strategy is not affected by short-term fluctuations in the economic situation. What is essential is that our investment decisions should fulfill three basic principles:

• Well-defined focus on the areas in which Saraiva operates;
• Long-term perspective;
• The generation of value for shareholders through projects in which there are prospects of a return above our average cost of capital.

Thus, despite the turmoil caused by the devaluation of the Real at the beginning of the year, we kept moving forward in the direction planned.

At Editora Saraiva, the main highlights were as follows:

• The inauguration of our 14th branch, situated in Fortaleza (State of Ceará), reinforcing one of our important distinguishing features in the publishing market, that is, nationwide distribution and sales promotion;
• The approval of the project to build a central warehouse for finished products, in Guarulhos, expected to be inaugurated in May/2000. With investments budgeted at R$ 3.2 million, the construction of the central warehouse will add significant value to our distribution structure and will contribute considerable savings in logistics expenditure, because it will place products of both the Atual and Saraiva brand-names under a single, optimized management;
• Capacity expansion and logistical adaptation at several branches, with a view to giving efficient support to inventory management in relation to both Saraiva and Atual products.

For the year 2000, there are two important projects to be implemented:

1. ERP (Enterprise Resource Planning): an integrated corporate management software, which will enable a significant reduction in administrative expenses, thanks to the integration it will bring about, besides accelerating the process of strategic decisions by making management information available more rapidly and with higher quality.

2. CRM (Customer Relationship Management): an integrated system which is to maintain the record of relations between Sa-raiva and its consumer market. At first, CRM will be installed in the Saraiva Data division, where it will enable client service to be individualized and will consolidate the Saraiva Data brand as the absolute leader in electronic publishing in the legal book market.

In addition, we continue to seek new opportunities for acquisitions or associations with companies in the sector, which may provide synergies with the company's activities.

At Livraria Saraiva, two more "Mega Stores" were inaugurated at the end of 1999, completing the 1st phase of the company's strategic repositioning project:

• The "Mega Store" at "New York City Center" - a new leisure center attached to the Barra Shopping Mall, in Rio de Janeiro.
• Jardim Anália Franco "Mega Store", at the Shopping Mall of the same name, in São Paulo.

The great benefits obtained from the implementation of the 1st phase, which involved the opening of 10 "Mega Stores", were as follows:

• Tremendous acceptance of the innovative model on the part of consumers;
• We won the main commercial locations in São Paulo and Rio de Janeiro;
• The Saraiva brand-name was strengthened;
• Growth in sales and in cash-flow.

For the 2nd phase of the Project, investments of R$ 40 million are planned, to be allocated to the opening of another 12 shops of the "Mega Store" model, from 2000 to 2002. The 1st store was inaugurated in February, 2000, and is located at the "Novo Shopping", a shopping mall in the town of Ribeirão Preto. Two other stores will already be inaugurated in April/2000:

• Rio Sul "Mega Store" - at the Rio Sul Shopping Mall, in Rio de Janeiro;
• Curitiba "Mega Store" - at the Crystal Shopping Mall, in Curitiba, Paraná.

The main objective of this 2nd phase is to speed up expansion, in order to achieve significant scale gains and obtain better profitability rates. The table below summarizes the two phases of the project:

1st Phase 2nd Phase • Period 1996 - 1999 2000 - 2002 • Number of "Mega Stores" 10 12 • Investiment High cost per sq.m. 40% reduction in investment per sq.m. • Location High values 40% Reduction • Infrastructure/back office Significant inicial investiments Dilution of fixed costs • Geographic focus São Paulo/Rio de Janeiro Opportunities in other important markets • Working capital Learning process Efficient management • Final Sales Area 15,800 sq.m. 30,200 sq.m.

Other highlights at Livraria Saraiva in 1999 were the following:

• A R$ 1.0 million investment in the installation of computerized tills in all our traditional shops, speeding up the modernization and computerization of viable shops.
• Implementation of security systems and merchandise loss prevention, with investments amounting to R$ 0.8 million. The savings to be generated are forecast at R$ 0.2 million annually.
• The excellent performance, in the second semester, of the shop located at Rua São Bento, in São Paulo, with 39% growth in sales. This performance shows that this shop captured a good part of the sales of the nearby shop (Rua José Bonifácio) that was closed down at the end of June/99 because it was not generating the expected return.
• Overall sales growth, both as a result of the opening of new units and on a same-store basis, besides additional sales by Internet.

3. INTERNET

We are at the start of great changes catalyzed by Internet. It is a new technological era, in which huge challenges and opportunities have appeared at an incredible rate. The educational and cultural areas are undergoing an unprecedented revolution due to the development of Internet.

Saraiva is paying special attention to these changes and is aware of how important Internet is within the company's growth strategy. In view of the data showing the market potential, the global tendency for Internet to become increasingly popular, and Saraiva's competitive advantages resulting from its tradition and experience in the field of education and culture, we are convinced that the timing is ideal for us to assume a position that distinguishes ourselves from the competition.

At Editora Saraiva, our view is that Internet will present many opportunities to be exploited. In this respect, during 1999, we broke new ground, making available via Internet complementary material to our books in the economics and business administration area, so that teachers and students might expand their research work. For 2000, we have a project under way with a view to introducing into Web Saraiva's know-how and brand-name recognition, using the experience and the content currently available in CD-ROMs, through the Saraiva Data division. The project is to make the content of our legal publications available via Internet, and to provide services to law professionals and others in related areas, thus creating a "community" and strengthening the company's leadership in this segment.

At Livraria Saraiva, the technological revolution brought about by the Internet gives rise to a unique opportunity to generate value. We are structuring the company with a view to reinforcing our position as national leaders in the book, CD, video, DVD and multimedia-product retail business. We invested US$ 1 million up to the end of 1999. Our focus is centered on:

1. The quality of the services rendered, distinguishing our company from the competition. Our site has special pages for specific segments of the public: "the lawyer's office", "university candidates" and "children's world";

2. Making use of our competitive advantages: our traditional brand-name, and the synergy with our network of "physical" shops.

We have projects under way to increase investments in marketing, personnel, systems structure, logistics, improving the site and the back office; in addition, we are carrying out studies to analyze the feasibility of separating our Internet operations, so that they may operate independently.

4. HUMAN RESOURCES

At the closing of 1999, our staff comprised 2,248 employees - an addition of 116 workers in relation to the previous year, mainly due to the opening of 2 new "Mega Stores". The productivity index, measured by the sales/employee ratio, recorded another improvement, rising from R$ 107,200 to R$ 112,900.

We know that, in a competitive environment, almost anything may be copied or imitated. For a company to distinguish itself, it is necessary to create constant innovations, with a view to providing its clients with increasing services. For that reason, we seek to encourage our human resources and show our appreciation, so as to create an environment that favors innovation. In this respect, the key word that stands out is training. At Editora Saraiva, the focus in 1999 was on making available technical development courses, as well as courses in client service. At Livraria Saraiva, the main training and encouragement activities carried out in 1999 were the following:

• 97 training courses and 63 talks, with a total attendance of 3,487 (an average of 3 per worker);
• Continuation and intensification of the "Trainee Manager" and "Listening to the Client" programs;
• Prizes awarded to 94 workers under results-oriented encouragement campaigns.

5. RESULTS

EDITORA SARAIVA

Legal Books - In 1999, we reached a record level in the volume sold. The increase in relation to 1998 was 11%.

Text Books - In order to analyze the performance in this market it is necessary to separate sales to the Government from other sales (to the market). In the latter, the result was a 22% increase in the volume sold, reflecting the full participation of Atual's products in 1999, as against partial participation in 1998 (the acquisition of Atual took place in July/98).

About the sales to the Government, it is important to explain that, in accordance with the criteria for the acquisition of new books and for their replacement, the total volume of books purchased by the Government, once every 3 years, is well below that in the other years. This affected our performance in 1999, resulting in a volume of sales to the Government 42% below that of 1998.

Auxiliary Textbooks - Thanks to Atual's significant market share, the increase in the volume sold reached 100% in relation to the previous year.

Economics and Business Administration Books - In 1999 we moved another step towards important conquests in this market. The increase in the amount sold was 42%.

LIVRARIA SARAIVA

Livraria Saraiva recorded a 14% increase in net sales in 1999, in relation to the previous year. This performance is related to 3 factors:

• There were 10 "Mega Stores" at the end of 1999, as against only 8 in 1998;
• The rapid growth in sales through our Internet site, representing 1.5% of total sales in the year;
• The good performance recorded at the "Mega Stores", on a same-store basis, with 11% growth over the previous year. This performance confirms that we are right in focusing on the "Mega Store" model, since the increase in traditional same-store sales was 2% in the same period.

The gross margin remained practically stable: 36.0% in 1999 and 35.8% in 1998. Despite the impact of the rise in the COFINS contribution rate, from 2% to 3% on the gross revenue, this negative effect was offset by gains from:

• A greater proportion of sales of literary books, which carry a higher gross margin;
• Some improvement in supply conditions, through agreements with suppliers;
• Better control in preventing loss of merchandise.

The 1999 net profit amounted to R$ 0.6 million, as against R$ 1.0 million in 1998. The operating cash-flow (EBITDA) amounted to R$ 10.5 million in 1999, while the same figure for 1998 was R$ 10.1 million.

Above all, these profitability indicators demonstrate the need to achieve scale gains by opening more shops of the "Mega Store" model, with the resulting dilution of the initial investments already made. With this in mind, we are accelerating the implementation of new shops, so as to attain better profitability.

CONSOLIDATED FIGURES

Consolidated sales showed an 11% rise in relation to the previous year. If the effect of the participation of Atual's products in each year is excluded (the acquisition took place in July/98), the increase in sales comes to 7%.

The net profit for the year reached a figure of R$ 8.3 million, representing a return of 8.5% on the initial net equity restated by the IGPM inflation index. The performance of the consolidated net profit, with a 41% drop from the previous year, may be attributed mainly to:

• The impact of non-recurrent factors, especially the effects caused by the devaluation of the Real, as detailed below;
• The increase in the COFINS contribution rate, which rose from 2% to 3% on gross revenue, reducing the final result by R$ 1.3 million, net of compensation and taxes.

In the table below, we show the profit that would have been booked in 1999 if the major devaluation of the Real against the Dollar had not occurred, and also taking into consideration the effects of other non-recurrent items.

	R$ million
• Net Profit in 1999	8,3
• (+) Expense due to exchange-rate variation	11,8
• (-) Revenue from hedge operations	(1,6)
• (+) Expenses relating to the "Millenium Bug"	0,5
• (-) Net result of reversals of contingent liabilities	(2,3)
• (-) Income Tax and Social Contribution effects	(3,6)
• (=) Net profit adjusted for non-recurrent items	13,1

It should be recalled that all the expenses resulting from the exchange-rate variation was fully recognized in the year's result. At present, the liabilities that are exposed to exchange-rate variation are equivalent to US$ 15 million, and refer to the long-term (8-year) finance obtained from the IFC, which is still in the grace period.

It is important to stress the rise in the operating profit before depreciation, taxes and net financial revenues (EBITDA), which increased from R$ 31.7 million in 1998 to R$ 35.4 million in 1999.

6. CAPITAL STRUCTURE

With the objctive of carrying out our strategy of maintaining an adequate capital structure, in order to optimize the cost of financing our investment projects, we are now at an advanced stage of negotiations with the BNDES (National Economic and Social Development Bank) with a view to obtaining long-term funding. Such funds are to be allocated to:

• The 2nd phase of the investment project at Livraria Saraiva;
• The installation of the integrated corporate management software;
• The construction of the central warehouse for Editora Saraiva's finished products.

7. CAPITAL MARKET

The year of 1999 witnessed several events that were significant to Saraiva:

• The stock price recorded a cumulative appreciation of 248% in the period;
• We effected the re-purchase of 491,000 preferred shares during 1999, at the average price of R$ 2.85 per share, whereas the stock price was R$ 9.05 at the end of the year;
• We started the process of launching level 1 ADRs, with a view to increasing the visibility and liquidity of our shares, besides opening the door to future funding in the international market.

In the table below, we summarize the trading in Saraiva's shares in the last three years, as well as in January/2000.

Description	1997	1998	1999	Jan./2000
• Number of trades	770	472	445	450
• Volume traded - thousands	3.970	5.292	3.652	804
• Amount traded - R$ thousand	28.693	17.951	18.031	10.261
• Stock price - R$ at the end of the period	4,80	2,60	9,05	15,70

8. SHAREHOLDER REMUNERATION

The Board of Directors decided, on Feb. 24, 2000, to allocate R$ 10.3 million (R$ 0.39977092 per share) to the remuneration of shareholders, in the form of interest on equity, the minimum compulsory dividend already being included in this amount. It should be stressed that both the amount distributed and the percentage (125% of the year's results) are record figures, and shows our policy focused on generating value for our shareholders, as we seek to avoid building up excess capital. In the last 4 years, on average, the equivalent of 66% of the results for the period was allocated to shareholders.

9. SOCIAL ACTIVITY

In 1999, Saraiva received the title "A Company that Educates", granted by SENAC (National Trade Apprenticeship Service), as the result of the support given to the "Professional Qualification Program", whose purpose is to prepare young people for the labor market.

10. PROSPECTIVE

It is clear that certain essential factors for the success of educational and cultural development in Brazil are present in the whole scenario:

• Prospects of resumption of economic growth;
• Favorable demographic aspects;
• Increasing investments in education;
• Expectations for the development of education and culture to be multiplied by the opportunities generated by Internet.

On the microeconomic plane, our most important activity will continue to be centered on increasing generation of value for shareholders, through continuous innovations that distinguish us in the market, strengthening the penetration of our brand-name and making it possible to maintain Saraiva's growth in the most efficient manner possible. We shall therefore be focusing our efforts on:

• The increasing application of the synergies arising out of the absorption of Editora Atual;
• Studying the feasibility of new acquisitions or associations to be carried out by Editora Saraiva;
• Accelerating the implementation of the 2nd phase of investments at Livraria Saraiva;
• The installation of the integrated corporate management software, with a view to generating significant savings;
• Consolidating a strategic position in the Internet, with a view to taking full advantage of Saraiva's potential.

11. SUBSEQUENT EVENTS

On March 2, 2000, a Special Meeting of Preferred Shareholders decided to create a new class of preferred shares, called class B (sled 6), which, besides those advantages already attributed to the existing shares, will ensure holders the right to sell their shares with a 10% discount on the price paid for common shares, in the event of any transfer of shareholder control.

This is a pioneering measure in Brazil and its objective is to offer greater protection to minority shareholders, placing their interests in line with those of the company, and creating a more favorable environment for possible capital increases in the future.

12. THANKS

As we close another year, we would like to express our thanks for the collaboration of our employees, authors, suppliers, clients and shareholders.

São Paulo, March 16, 2000 The Management